Wednesday, March 16, 2016

The Morning Call--Awaiting the Fed

The Morning Call

3/16/16

The Market
         
    Technical

The indices (DJIA 17251, S&P 2015) turned in another mixed day (Dow up, S&P down) on even lower volume.  Stocks are becoming less overbought and breadth is mixed.  The VIX declined slightly and still looks like it could have made a double bottom---perhaps a sign of impending weakness.  

The Dow closed [a] above its 100 day moving average for the third day, thereby reverting to support, [b] above its 200 day moving average for the third day, now resistance; if it remains there through the close today, it will revert to support, [c] above the lower boundary of a short term downtrend {16655-17386}, [c] in an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and has made a third higher high and is working on a fourth.

The S&P finished [a] above its 100 day moving average for the third day, thereby reverting to support, [b] back  below its 200 day moving average, now resistance and voiding Friday’s break, [c] within a short term trading range {1867-2104}, [d] in an intermediate term trading range {1867-2134}, [e] in a long term uptrend {800-2161} and [f] has made a second higher high and is working on a third. 

The long Treasury continued to drift higher, but remained in a very short term downtrend and below a key Fibonacci retracement level.  In virtually every other segment of the fixed income market, rates up ticked (prices down) noticeably.  I am a bit unsure what higher TLT prices and lower prices everywhere else means; but it suggests more attention is being paid to risk-off.

GLD recovered somewhat yesterday, but still finished below the lower boundary of its very short term uptrend for a second day, thereby confirming the break.  However, it closed right on another support level; so we will see if the sellers can do anymore damage.  In the meantime, it remains well above the lower boundary of its short term uptrend, as well as its 100 moving average. 

Bottom line: even though we were treated to an number of economic stats and the conclusion of the Bank of Japan’s meeting, investors still sat on their hands again, undoubtedly awaiting today’s Fed meeting results.  While the Averages’ confirmation of their break of their 100 day moving averages and the S&P’s retreat back below its 200 day moving average might have meant something under different circumstances, I think this was mostly noise waiting for today.

 I still believe that the bull market is likely over and that mean reversion is the principal risk right now.

            Update on trading in the oil ETF’s (short):

    Fundamental

       Headlines
           
            This week’s data surge got off to somewhat disappointing start.   The best number we got was a very positive March NY Fed manufacturing index.  February PPI was in line.  But it went downhill from there: February retail sales down, though in line; but January’s reading was revised down big time; month to date retail chain store sales were weaker than the prior week; January business inventories rose but only because sales were awful; and the March national homebuilders index was below forecasts.

            However, there are a lot more stats coming, among them three primary indicators.  So it is way too soon to be thinking about how this week will end.

            Overseas, February EU industrial production came in better than forecast; the Bank of Japan lowered its 2016 growth estimates.

            ***here we go again, OPEC is scheduling another meeting to discuss a production freeze, this time in Qatar on April 17, but apparently without the participation of Iran.  Looks like we are set up for another round trip in oil and stock prices.  You know, they will keep doing this until it doesn’t work anymore.

Central bank are receiving equal time this from investors.  Yesterday, the Bank of Japan surprised most observers by doing nothing.  It declined to push rate cuts further into negative territory though it stayed with its projections of accelerated monetary growth. 

***overnight, a Japanese official said that further rate cuts into negative territory were still a real possibility.

John Mauldin has a very interesting thesis on the Japanese hesitancy to cut rates further; the bottom line of which is that the Chinese told all the central bankers at the recent G20 meeting that if they (the central bankers) didn’t lay off the currency devaluation measures, they (the Chinese) would unpeg the yuan from the dollar---which would likely be followed by a significantly lower yuan.  Nobody wants that, trust me.  It would also explain both the Bank of Japan and last week’s ECB actions, i.e. focus on stimulating internal demand by pouring more money into the banks versus stimulating foreign demand by currency devaluation.

Letter to the President from John Mauldin (a long but a must read):



If John is correct, then one would expect the Fed to be very circumspect in its comments with respect to raising rates in the future

In addition, the Bank of China reported that it was considering a tax on currency transactions---a form of capital control (supporting the yuan valuation).  Here are some comments from more knowledgeable Street experts (medium):

Bottom line:   so far the ECB and the Bank of Japan have delivered more QE and faded additional rate cuts; and the Markets seem fine with that.  In addition, the Bank of China is scrambling to keep control of an economy spinning out of control (proposing [1] cramming down nonperforming debt owned by the banks and then lending them more money and [2] a tax that would hamper the exit of wealth from China).  And, so far, investors seem fine with that also.  But if you think about what these measures are intended to accomplish, maybe ‘fine’ is not the appropriate reaction. 

Today is the Fed’s turn.  Hilsenrath said to not expect a rate hike.  Mauldin is suggesting that the Fed is likely to demure on the timing of further hikes.  Investors will almost surely be fine with that also.  

Fed forecasts losing credibility (short):

The question is, how much of all of this in the Market?  Even if the Fed is surprisingly more dovish than expected and stocks take another leg up, nothing has happened different than what has already occurred time and again---more central bank money printing.  Therefore, I see no reason to assume that the results will be any different; that is, no economic improvement but more asset misallocation and mispricing. 

I have been saying for the last three years that sooner or later, the price will likely be paid for this ineffective policy that has no known exit strategy.  Clearly, I have been wrong, at least on the ‘sooner’ part.  However, I remain of the opinion that stocks won’t reach record valuations in a deteriorating economic environment in which every monetary trick known to man has been tried and failed and there remains little chance of fiscal stimulus in the next year, if at all---in the absence of some extraordinarily positive exogenous event. 

In my opinion, the current rally represents an excellent opportunity to raise cash reserves by selling either a portion of your profitable investments and/or sell your losers.

            More on buybacks (short):

       Investing for Survival
   
            More on the benefits of diversification.


    News on Stocks in Our Portfolios
·         Oracle (NYSE:ORCL) has used its FQ3 report (revenue missed, EPS beat) to announce its adding $10B to its buyback authorization. The new funds are good for repurchasing 6% of shares at current levels. $8.5B was spent on common stock repurchases over the first 9 months of FY16, with over $2B spent in FQ3 (boosted EPS).
·         The software giant has also declared its regular $0.15/share quarterly dividend (1.5% yield). The next dividend is payable on April 28 to shareholders on record as of April 14.
·         Top-line performance: Op-premised software + cloud revenue fell 1% Y/Y in FQ3, and rose 3% in constant currency (within a 3%-4% guidance range). On-premise software revenue fell 4% to $6.3B, a smaller decline than FQ2's 7%. Cloud revenue rose 40% to $735M, an improvement (thanks to strong prior bookings) from FQ2's 26%. Hardware revenue fell 13% to $1.1B, and other services revenue fell 7% to $793M. Forex had a 400 bps impact on revenue growth (-3% Y/Y vs. +1%)

Within on-premise, new software license revenue (hurt by cloud adoption) fell a steep 15% Y/Y to $1.7B. Software license update/product support revenue (driven by past license deals) was flat at $4.7B. Within cloud, SaaS/PaaS (cloud apps and app platforms, an Oracle priority) revenue rose 57% to $583M; IaaS (cloud infrastructure, faces tough competition from Amazon and others) revenue fell 2% to $152M. SaaS/PaaS bookings rose 77% Y/Y in constant currency. Mark Hurd and Larry Ellison once more trash-talk Salesforce and Workday.
·         Financials: Lifting EPS: GAAP costs/expenses rose just 1% Y/Y to $6B, thanks partly to a 23% drop in amortization expenses to $408M. Sales/marketing spend rose 3% to $1.9B, R&D 4% to $1.4B, and G&A 15% to $290M. Oracle ended FQ3 with $51B in cash/investments (much of it offshore) and $40B in debt.


Economics

   This Week’s Data

            Month to date retail chain store sales grew less than in the prior week.

            January business inventories rose 0.1% versus expectations of being flat; however, sales fell 0.4%.

            The March National homebuilder index came in at 58 versus forecasts of 59.

            Weekly mortgage applications fell 3.3% while purchase applications were up 0.3%.

            February CPI fell 0.2% versus projections of -0.3%; ex food and energy, it rose 0.3% versus consensus of up 0.2%.

            February housing starts were up 7.2% versus estimates of up 4.2%.

   Other

            The Atlanta Fed lowered its first quarter GDP growth outlook to +1.9% from +2.2%.

Politics

  Domestic

The pain that the American consumer would feel if Trump has his way (medium and a must read):

            Note to Republicans: Merkel’s defeat---what happens when you don’t listen to your citizens?

           

   International War Against Radical Islam
           





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