Friday, June 24, 2016

The Morning Call---Free at last, free at last, great God Almighty free at last

The Morning Call


The Market

The indices (DJIA 18011, S&P 2113) did a moonshot yesterday as investors decided that the UK would remain in the EU (Oooops).  Volume was up but remained low.  Breadth improved.  The VIX sank 18%---all those investors that were hedging themselves on Wednesday apparently unwound those trades.  However, it closed above its 100 day moving average and well above the lower boundary of its short term trading range.

The Dow closed [a] above its rising 100 day moving average, now support, [b] above its rising 200 day moving average, now support, [c] within a short term trading range {17498-18726}, [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 rising 100 day moving average, now support, [b] above its rising 200 day moving average, now support, [c] above the upper boundary of its  short term trading range {2037-2110}; if it remains there through the close next Monday, it will reset to an uptrend, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {830-2218}. 

The long Treasury fell 1%, pushing below a key Fibonacci level---which is a bit concerning.  Nonetheless, it remained above its 100 day moving average and within very short term, short, intermediate and long term uptrends.

GLD (120.1) was down, continuing its recent erratic behavior.  The good news is that it remains above its 100 day moving average.

Bottom line: the S&P is back challenging the upper boundary of its short term trading range; clearly a sign that the bulls are flexing their muscles.  However, there is still a lot to overcome to assume that there much upside from here: (1) the DJIA has to reset its short term trading range to an uptrend, (2) both indices have to reset their intermediate term trading ranges and (3) once that is done, both will be nearing the upper boundaries of the long term uptrends which should be formidable resistance.  This is not to say that none of this will occur; indeed I have opined that my assumption is that momentum is up until the short term trading ranges are broken to the downside.   I am just pointing out how much resistance lies nearby.



            Lots of data was reported yesterday: weekly jobless claims declined and the June Markit flash manufacturing PMI was fractionally higher while the May leading economic indicators, the May Chicago national activity index and May new home sales were disappointing.  Not good, especially with two negative primary indicators (leading economic indicators and new home sales).

            Overseas, only one release in what has been a very slow week for international data: the June Japanese Markit flash PMI came in flat with May’s report.

            As of last night, I had my analysis written on the UK remaining in the EU.  The bottom line of which was that it wasn’t as positive as the Market seemed to think because: ‘the EU economy remains on the verge of recession if not already in one.  Draghi is chasing Japan down the QE/ZIRP rabbit hole.  The fiscal/regulatory structural problems have not gone away. Greece is still a basket case.  Spain and Italy are not doing that well.  The immigration issue is not going away; and it could get worse if the level of terror doesn’t subside.’
            That is now all irrelevant.  First, let’s focus on the fundamentals.  My bottom line is, how can it be negative when a country retakes its sovereignty?  Remember, I have of late noted the multiple challenges to the policies of the central banks.  Brexit is a huge step two in the recognition that the political class has made a total mess of our world.  In the long term, the UK will be much better off for the decision it has made.  Indeed, I think the EU will be better off because hopefully other countries will follow suit, kick out the current regime and find a more practical way of dealing with one another.  Not that there will be anarchy; just a rethinking of how the intercountry relationships will work.

            All of the doomsday predictions I believe are hyperbole.  We know that the global banking system is well prepared for the eventuality, so I see no Lehman Brothers kind of financial collapse.  Further, I suspect that if the eurocrats have already started working on a plan to detach the UK from the EU with a minimum of bloodshed.  And if they haven’t, they have two years before the separation actually occurs.  So they can piss and moan for a while and still have plenty of time to minimize any pain or disruption.

            What about the Market?  Well, as I write this the Dow is off 500 points.  But I would emphasize something that I have been repeating for the last 18 months---the Market is overvalued, at some point in time investors are going to figure that out and react accordingly.  That has nothing to do with the underlying fundamentals.  If this is our ‘emperor’s new clothes’ moment, so be it.  Our portfolios own 50% cash for exactly this reason.  To be sure, this may not even be the exogenous event that drives stock prices back to fair value.   But if it is, this will be the great buying opportunity for which we have been patiently waiting.
Bottom line: at first plush, the Market seems to have decided that the Brexit is major negative---which may be true for the Market.   But it is a plus for the UK.  Hopefully, it is the first step in throwing our all the ‘trust me, we know what is best for you’ bureaucrats that are responsible for the global economic malaise in the first place.  Hopefully, Draghi, Yellen and Abe will be among the first to go.

That said, this could be the trigger that returns equity valuations to more reasonable levels.  If so, good for us.
            My thought for the day: yesterday I received an inquiry about the performance of our Dividend Growth Portfolio.  In response, I sent a chart showing its performance along with comparative stats on the DJIA and S&P.  As required by regulations, I am required to include the caveat that ‘past performance is no guarantee of future results’. 
I am not complaining about this rule; indeed, I think it a good one.  The problem is that investors routinely ignore it just as smokers disregard the same type warning on every pack:  ‘Caution, cigarettes can be harmful to your health’---and with equally disastrous results. 
How many ads do you see on CNBC or read in the financial press, extolling the virtue of this or that fund/fund manager, hyping the record and followed by the rapid talker or tiny print that you can’t read with a microscope, mentioning the past performance is no guarantee of future results.  And how many times have you bought the hype and discovered later that the warning was right.
Here are the results of three studies:
(1)   a performance measurement company did a study in which it concluded that if a fund only achieved average performance for ten years, it would be in the 10% top performing funds for that ten year period.

(2)   it was shown that a fund with an above average performance for a given year was more likely to underperform than over perform in the subsequent year [can you say mean reversion?].

(3)   a fund’s performance is more accurately predicted by its expense ratio [a familiar theme] than its prior performance.
In short, chasing performance is a nonoptimal strategy.
   Investing for Survival
            Why the next decade will foil many financial plans
    News on Stocks in Our Portfolios

   This Week’s Data

            The May leading economic indicators fell 0.2% versus expectations of a 0.2% increase.

            The June Markit manufacturing flash PMI came in at 51.4 versus forecasts of 51.0.

            May new home sales declined 6.3% versus estimates of an 8.7% decrease; however, April’s number was revised down 5.3%.

            May durable goods fell 2.2% versus consensus of -0.7%; ex transportation, they were down 0.3% versus expectations of 0.0%.



            Quote of the day (short):


Government, arrogant ignorance and the power of incentives (medium):

Political instability (short):

  International War Against Radical Islam

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

No comments:

Post a Comment