Friday, April 22, 2016

The Morning Call---It is the same old song

The Morning Call


The Market

Yesterday, the indices (DJIA 17982, S&P 2091) showed that they really and truly could go down, at least for a day.  Volume was flat and breadth weaker.  The VIX was up 5%, leaving it below its 100 day moving average but above the lower boundary of its short term trading range.  I continue to monitor this situation for the correct timing for our Aggressive Growth Portfolio to Add to its VXX holding.

On breadth:

                On the VIX

On large cap leadership:

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {17480-18435}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5471-19343}.

The S&P finished [a] above its 100 day moving average, now support, [b] above  its 200 day moving average, now support, [c] within a short term uptrend {2075-2177}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {830-2218}. 

More on why the stock market is so strong (medium):

The long Treasury experienced further weakness, remaining below a key Fibonacci level.  That is a bit concerning on a near term basis; although it remained within a short term uptrend and above its 100 day moving average. 

GLD rallied a tad, ending within a short term uptrend and above its 100 day moving average and a key Fibonacci support level.  

Bottom line: the Averages finally had a bad day, but not enough to suggest the current up move is over.   My technical outlook: (1) stocks are at a level of heavy congestion and so going is likely to get a bit tougher, (2) but the technical strength is sufficient to maintain the assumption that the Averages will challenge their all-time highs.

            I am paying closer attention to the long Treasury which broke some minor support levels.  However, it is much too soon to cause worry.       



            Another poor numbers day: weekly jobless claims were down, the March Philly Fed manufacturing index was abysmal, the March Chicago Fed National Activity index was worse than expected and the March leading economic indicators rose less than estimates.  Of course, the goldilocks are trumpeting that employment is the ultimate measure of economic performance, so a good week of jobs numbers offset two months’ worth of lousy data from various economic sectors.  Yeah, that sounds right.

An optimist’s view

            Overseas, the German government reduced its 2017 GDP growth estimate and March UK retail sales fell more than anticipated.

In central bank related news, the Bank of Sweden stepped up its bond buying program; and the ECB started off a three major central bank trifecta by leaving rates unchanged but increasing its asset purchase program.  Just what the doctor ordered---double up on a remedy that to date has done nothing to cure the disease.
            The ECB meet, leaving rates unchanged but continuing its asset purchase program.
            Visualizing negative interest rates (short):

            ***overnight: speaking of negative interest rates, the Bank of Japan is apparently considering an even deeper dive into this cesspool.

Bottom line: does it get boring to read me say that ‘nothing has changed’?  In truth, I am bored saying the same thing.  It would be much more interesting for me if there was something different to comment on.  But the consistency of both poor US and global economic numbers as well as central banks’ response is palpable.  And for better or worse, the only thing that counts to the Market is the latter.  So the gap between reality and fantasy continues.  My only point has been and remains that sooner or later the economic outlook has to improve or valuations will become too stretched for even the lemmings.

My thought for the day remains on the previous discussions of a Buy/Sell Discipline.  One of the primary drivers of upward prices today is the push by, at least, some investors to chase yield largely in the absence of any other investment consideration.  With Fed policy crushing the yield on the normal savings instruments, it is understandable that an investor would want to stretch risk in order to achieve the return he/she needs to pay the bills.  My word of caution in pursuing this strategy is that even if you know what you want to buy/own (higher income) and why you need to own it (to get the return that you need to live on), focusing too much on obtaining a high yield can fall victim to the cold hard math facts of life.   

And the primary fact is that no one, especially the Market, gives a s**t if you need to a high return in order to pay day to day expenses, no matter how much you need it.  If you buy a stock or ETF today just because it yields 3% in this low rate environment, what happens tomorrow when economic conditions normalize and it yields 4%, the price of that asset will be down 25%.  (And don’t fool yourself, this time it is not different.)

How much better off would you have been to take 1% (or less) on a cash equivalent investment today and wait to buy that stock or ETF at a 4% yield?  It takes a long time for difference between a 1% and 3% yield today to pay for a price decline of 25% tomorrow.  Those numbers are even worse if you are looking at high risk yield investments like junk bonds whose price volatility are more akin to stocks than bonds. 

The message here is that it is dangerous to chase yield (Buy stocks that you know) for its own sake if you are paying too much for it (Buy Discipline).  And if you just can’t help yourself, then have realistic Stop Loss Prices so you don’t take that 25% loss (Sell Discipline).

    News on Stocks in Our Portfolios

Schlumberger (NYSE:SLB) declares $0.50/share quarterly dividend, in line with previous.
Forward yield 2.49%

Microsoft (NASDAQ:MSFT): FQ3 EPS of $0.62 misses by $0.02.
Revenue of $22.1B (+1.7% Y/Y) in-line.

  Kimberly-Clark (NYSE:KMB): Q1 EPS of $1.53 beats by $0.02.
Revenue of $4.48B (-4.5% Y/Y) misses by $60M.

Caterpillar (NYSE:CAT): Q1 EPS of $0.67 misses by $0.01.
Revenue of $9.46B (-25.5% Y/Y) beats by $70M.

McDonald's (NYSE:MCD): Q1 EPS of $1.23 beats by $0.07.
Revenue of $5.9B (-1.0% Y/Y) beats by $80M.


   This Week’s Data

            March leading economic indicators were reported up 0.2% versus expectations of up 0.5%; the February number was revised from up 0.1% to down 0.1%.


            With gold and other commodities rallying, my first response was to assume that inflation expectations were on the rise.  Little do I know. (short):

            Concerns about government debt (short):



Obama once again pontificates to the detriment of all (medium):


            A look at the meaning of a Brexit (medium):

            EU immigration dilemma just got worse (short):

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