Tuesday, May 3, 2016

The Morning Call---Apparently, no one believes the Treasury

The Morning Call


The Market

The indices (DJIA 17891, S&P 2081) bounced back after the sorry end to the prior week. Volume increased.  Breadth was mixed.  While the VIX was down 7%, it continues to act as if it has made a bottom.

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {17716-18670}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5541-19413}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] below the lower boundary of its short term uptrend for the third day, resetting to a trading range {2039-2110}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {830-2218}. 

The long Treasury continued to struggle, trading down to a key Fibonacci level which is the lower boundary of a level of congestion dating back to early February.

GLD was down, but remained above its recent high.  It also finished above its 100 day moving average and within a short term uptrend.

Bottom line:  the S&P reset to a short term trading range while the Dow bounced off of the lower boundary of its short term uptrend.  While the net effect is a mixed technical picture, there hasn’t been a sufficient enough deterioration in the technicals to warrant altering my assumptions: (1) upward progress will continue though it will be a struggle and (2) the Averages will challenge their all-time highs/upper boundaries of their long term uptrends and fail.

            A good look at stock performance by month (medium):

            More on Sell in May (short):

            A study on the length and magnitude of past bull and bear markets (medium):



            US economic data continues to come in below forecasts: both the April manufacturing PMI and the April ISM manufacturing index came in below expectations; while March construction spending grew less than anticipated, though the February number was revised up.

Listening for the next recession (medium):

                In other news, Puerto Rico missed a $422 million bond payment.  The island’s problem is the same as other mainland government entities, i.e. making too many promises to too many constituencies, thinking that it could borrow forever to meet those commitments and being faced with the grim reality that that is not a workable formula.  At the risk of sounding too callous, I am not so much worried about the citizens of that island; after all, they believed the bulls**t from and voted in the morons that led them down path on which they find themselves.  I am concerned that (1) the US taxpayers are to be forced to bailout them out, as well as (2) the financial fallout could spread to other entities.

            Global stats were even worse: April Japanese domestic manufacturing, Chinese flash manufacturing PMI and the EU composite flash PMI came in below expectations.  This is a complete reversal from last week global dataflow and suggests that those numbers were an aberration.  That said, when we get this kind of yo yoing in the stats, it is time to sit back and wait for follow through. 

            The global growth funk (medium):

            ***overnight, the European Commission lowered its 2016 EU growth and inflation forecast; the Bank of Australia lowered key interest rates (I guess it is not on the Treasury’s ‘threatee’ list); and the April Caixin (China) manufacturing PMI fell for the 14th month in a row.

In addition, a major troubled Italian bank was unable to raise equity capital, meaning the recently formed Italian bank bailout fund will have to be used.  This short fall was not expected and will chew up a much larger chunk of that bailout fund than originally anticipated.  I am not sure of the exact impact on the salvaging of the Italian banking system; but it is clearly not a good sign.

Bottom line: the economic numbers remain a problem, everywhere.  Focusing for the moment to the global economy, I noted in last week’s Closing Bell the recent Treasury ‘threat’ to Japan, China and Germany to institute trade measures if they engaged in anymore currency devaluation ploys.  And that along with the rumored Chinese threat at the recent G20 meeting could have put all further QE moves from the major economies on hold.  That would explain the BOJ’s decision to take no more monetary easing steps the prior week. 

However, for those ‘threats’ to work, the Japanese, Chinese and Germans would most likely have to believe that their economies could continue to improve without any additional QE.  Given yesterday’s data which merely reflects the trend of the last four or five months, one has to wonder whether any of the ‘threatees’ will alter policy because the US said to.  Especially given this administration’s sorry record of backing up any threats.

My point here is that the Markets took yesterday’s lousy global numbers in the same vein as they always have, i.e. poor data = more easy money = higher stock prices.  Which suggests that one or more actors in this little play don’t believe the Treasury will follow through.  More sympathetic I could not be.  But if the Treasury’s threat is real, then the currency war is going to degenerate into a trade war.  I am not saying that this is going to happen.  My conclusion is same as in the Closing Bell---this is important enough to be watched closely.

In the meantime, stocks remain very overvalued, not just by my measure (see below).  It makes sense, in my opinion, to continue to sell a portion of any stock that has done well for you and all of any loser.

                Update on valuation:

            My thought for the day:  I don’t know about you but I get calls, letters, offers for free dinners all the time from financial advisor wanting to manage my money, all claiming to have superior track records.  A couple of things to remember when reading/listening to their pitch:

(1)   they have something to sell and whatever it is, there are fees and commissions attached.  All of these you pay.  Take a look at their financial statements---all that revenue and fee income is your money,

(2)   they all claim to have superior performance.  Every study I have ever seen indicates that only a very small percentage of advisors have consistently superior performance.  In fact, one study shows that if an advisor can achieve just average performance each year for ten years, then its cumulative performance for that ten year period will be in the top 10% of all advisors.  Think about that one,

(3)   most have conflicts of interest, that is, their parent/affiliate creates other products [for which they get paid] for the advisor to sell [for which he gets paid].  Everybody’s’ REIT, annuity, bond fund by definition can’t be the top performer in its asset class.
            Why $19 trillion in debt is a problem (medium):

            Investing advice from Super Mario (short):

            Where investment money is flowing (medium):

       Investing for Survival
            One habit ultra successful people have in common.

    News on Stocks in Our Portfolios
Boeing (NYSE:BA) declares $1.09/share quarterly dividend, in line with previous.

Cummins (NYSE:CMI): Q1 EPS of $1.87 beats by $0.09.
Revenue of $4.29B (-8.9% Y/Y) misses by $10M

Emerson Electric (NYSE:EMR): FQ2 EPS of $0.66 beats by $0.03.
Revenue of $5.4B (flat Y/Y) beats by $510M.

AmeriGas Partners (NYSE:APU): FQ2 adj. net income of $206.9M.
Revenue of $827.4M (-24.8% Y/Y) misses by $76.8M.


   This Week’s Data

            The April manufacturing PMI came in at 50.8 versus expectations of 51.0.

            The April ISM manufacturing index was reported at 50.8 versus estimates of 51.5.

            March construction spending was up 0.3% versus forecasts of up 0.5%; however, the February reading was revised from -0.5% to +1.0%.


            The economics of the Trans Pacific Partnership (medium):

            Treasury urges congress to bail out Puerto Rico (medium):

                        Munger on debt and Buffett on Wall Street (medium):



Obamacare is bankrupting America (medium):

More on the timing of the next rate increase (medium):

  International War Against Radical Islam

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