Wednesday, April 6, 2016

The Morning Call--The political risks are rising

The Morning Call


The Market

The indices (DJIA 17603, S&P 2045) had their worse day in a while as volume rose and breadth weakened.  They also broke their very short term uptrends; if they remain there through the close today, those trends will be negated.  The VIX was up another 9%, breaking above the upper boundary of its very short term downtrend; if it remains there through the close today, that trend will voided.  However, it remained below its 100 day moving average. 

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] back below the upper boundary of its short term trading range {15431-17758}, negating Friday’s break, [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 trading range {1867-2081}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {800-2161}. 

The long Treasury was up 1%, closing within a very short term uptrend, above its 100 day moving average and above a Fibonacci support level.  It continues to strengthen its support base.

GLD rose 1.3%.  However, it still has some work to do get out of its consolidation mode.   While it did recover above a key Fibonacci support level, it is still in a very short term downtrend.

Bottom line:  yesterday’s pin action was the first sign that the current recovery is losing its mojo.  Not that it has; but as I noted previously, stocks are at a level of heavy congestion and so it makes sense that some momentum would be lost.  But it will take a lot more than one poor day of price performance before I will question the assumption that the Averages will challenge their all-time highs.

            Why sell in May is crucial this year (short):



            Yesterday’s economic data was mixed: month to date retail chain store sales were quite poor, the March Markit services PMI was up versus its February reading, while the March ISM services index was slightly better than anticipated.  In addition, the Atlanta Fed lowers its first quarter GDP growth estimate again.

            Overseas, February German factory orders declined, most major EU countries’ March services PMI declined and the IMF was out talking about slowing global growth.  On the monetary front, the Bank of India lowered key rates and a governor of the Bank of Japan reiterated the potential for further monetary ease.

                ***overnight, the March Chinese services PMI was better than expected; and Kuwait and Russia suggested that an agreement on an oil production freeze could be reached at the upcoming OPEC meeting---now undoubtedly poised to begin selling their longs and going short.

            There were also two Market related news stories:

(1)   the so called Panama Papers, a list of shell companies domiciled overseas that were seemingly used to hide money of the rich, were released.  To be clear, most of those individuals outed in these documents are foreigners; and those Americans that are listed are not prominent business or political figures.  However, I count this as Market related because a major underlying political theme in the US of late has been how the rich are getting richer and not paying their fair share of taxes.  This is the kind of news that can be seized upon by populists politicians and can potentially lead to shoot-from-the-hip  economically inefficient tax policies---which is the last thing the US needs when already saddled with a complicated, special interest oriented tax code,

The Panama Papers: all you wanted to know but were afraid to ask.

The US: all you wanted to know but were afraid to ask about the globe’s largest TX haven.  This isn’t going to help the political discourse.  (medium):

(2)    the US Treasury markedly changed the tax laws related to tax inversion merger activity [a US company gets acquired by a foreign company headquartered in a country with a much lower corporate tax rate than the US].  There is no doubt that many of these transactions are for tax related purposes.  However, the reason for trying to avoid taxes is because the US’s tax rates are high relative other countries, making it economically uncompetitive as a domicile for many corporations.  

And just to be clear, Obama and all the other headline seeking politicians are wrong when they call the practice un-American and insidious.  That is a load of crap.  These companies are operating within the rules set by congress and the treasury.  All they are doing is dealing with an antiquated US tax system within the legal bounds of that system.  However, as with the Panama Papers, there is a big political element to this issue which has the risk of being solved by legislation/regulations that only makes doing business in the US all the more difficult.

                ***overnight, Pfizer and Allegan called off their merger.  In additional blows to the risk arb community (1) the US Justice Department is rumored to be about to file a lawsuit to stop Haliburton’s acquisition of Baker Hughes and (2) the chairman of the house transportation and infrastructure committee has come out against the Canadian Pacific/Norfolk southern merger.

Bottom line:  the US economy continues to limp along while the global economy continues to drop like a rock.  Meanwhile the central bankers pursue a series on policies that haven’t worked in eight years.  Plus, we now may have to deal with the potential political/economic fallout from the Panama Papers and tax inversions. 

How central bank policies drive asset mispricing and misallocation (medium):

With the Averages a short hair away from their highs, what is an investor to do?  Lots and lots of financial advisors insist that Market timing doesn’t work, so the best strategy is to continue to buy/stay long because in the long run stocks go up.  And if you want to play golf and not be bothered by price fluctuations or if you think that you can day trade, that is a decent strategy.

However, it doesn’t take a rocket scientist to construct a simple valuation model or look at a long term chart of the S&P or a stock to know when valuations/prices are at extremes.  I am not talking about switching between investment strategies or market sectors or companies within a market sector on the assumption that you discern relative value---I certainly can’t do that.

 But I do think that you can discern valuation/price extremes.  Notice I didn’t say pin point.  Can a Market that is at 24 times earnings go to 26 times?  Sure.  But if the historical mean valuation of the Market is 18 times; and the Market always mean reverts, why should you care if you sell at 24 times or 26 times earnings, if you know that you ultimately will have the chance to buy at 18 times or lower---and avoid the anxiety inherent in stocks going from 24 times to 18 times?   

That is unless you can’t stand the thought of not selling at top---in which case you should follow the advice to go play golf and never look at your portfolio.  Because you haven’t learned that investing is a business of being wrong.  The key is being less wrong.  Yes, if you sell a stock at 24 times earnings and it goes to 26 times, you are wrong.  But if goes to 26 times, you don’t sell and it then goes to 18 times, you are more wrong.  The question is how wrong do you want to be?

That is all I am trying to do.  I am suggesting selling stocks that have reached valuation extremes.  Not the entire positions.  But enough to provide some stability of principal to your portfolio and cash reserves to buy more attractive stocks when valuations mean revert.

       Investing for Survival
            Managing your equity curve.

    News on Stocks in Our Portfolios
·         MSC Industrial Direct (NYSE:MSM): FQ2 EPS of $0.80 beats by $0.02.
·         Revenue of $684.1M (-3.2% Y/Y) misses by $2.57M.


   This Week’s Data

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

            The March Markit services PMI was up versus its February reading.

            The March ISM services index was reported at 54.5 versus forecasts of 54.0.

            In a reversal of last week’s data, weekly mortgage applications rose 2.7% but purchase application fell 2.0%


            Atlanta Fed lowers its first quarter GDP growth estimate to 0.4%, down from 0.7% and the fourth decrease in as many weeks.

            More unemployment data (short):

            Was The Donald wrong about recession (medium)?

            Update on auto loan market (medium):




Unemployment not a low wage rate is what causes poverty (short):


            Greece: when the end justifies the means (medium):
            From Iran with love (medium):

            From the US with love (medium):

Visit Investing for Survival’s website ( to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.

No comments:

Post a Comment