Thursday, June 2, 2016

The Morning Call--the Market acts right despite poor data

The Morning Call

The Market

The indices (DJIA 17789, S&P 2099) repeated Tuesday’s pin action, selling off early in the day, then recovering later.  Yesterday, they rebounded sufficiently to close up on the day.  Volume fell while breadth continued weak.   The VIX was up fractionally, finishing between the lower boundary of its short term trading range and the 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] within a short term trading range {17498-18736}, [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] in a short term 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 was up again, challenging but failing to penetrate the upper boundary of a very short term downtrend.  However, it ended above its 100 day moving average and a key Fibonacci level.  It is encouraging that TLT seems little impacted by the threat of a coming Fed rate hike.  However, it still has much work to do on the upside in order to break out of the current trading range.

GLD fell slightly, dropping back below the level of its 100 day moving average. But it remained above the lower boundary of its short term trading range.  It remains on the edge of a significant breakdown. 

Bottom line: the Averages appear to be digesting recent gains.  Both Tuesday’s and Wednesday’s intraday recoveries are positive signals that there could be a further move higher.  At this point, my assumption is that the indices will at least challenge the upper boundaries of their short term trading ranges. 

A break in GLD below its 100 day moving average and the lower boundary of its short term trading range will likely lead to a paring of the Aggressive Growth  Portfolio’s position in GDX.

            For the bulls (short):

            For the bears (short):

            Update on NYSE margin debt (medium):



            Yesterday’s US economic news was more upbeat than Tuesday’s: weekly mortgage and purchase applications were down, the March/April construction spending combo was flat and May light vehicle sales were in line (though down year over year) but month to date retail chain store sales, the May Markit PMI and the May ISM manufacturing index were better than anticipated.  In addition, the latest Fed Beige Book was released and it reflected modest economic growth since its last report (medium):

                Overseas, the numbers were a bit more dicey: May Japanese manufacturing PMI declined; May Chinese manufacturing PMI was unchanged while the services PMI slowed in growth and the Caixin manufacturing PMI fell for the 15th consecutive month; the EU manufacturing PMI was flat; and the Swiss first quarter GDP was below expectations.

Also, Abe made it official---no sales tax hike till mid-2019.  Not exactly a resounding endorsement of the Japanese economy.  Adding insult to injury, an official of the Bank of Japan predicted that the Japanese economy will not achieve the government’s growth objective.

            And in yet another vote of confidence for an improving global economy, the ECB left rates unchanged and said that it will begin additional bond purchases on June 8.

            In sum, a mixed performance and nothing to warrant the everything-is-awesome story line now being peddled by the Fed.  That is not say that the Fed won’t raise rates anyway; although I believe the odds are less than consensus opinion.  June seems completely out because it is right in front of the Brexit vote---which if negative, could result in economic turmoil that would make a rate hike seem ill conceived.   July could be on the table; but that is a long time in Market action terms (the only piece of data on which the Fed is dependent).

Bottom line: the economy continues to stumble along.  Whether it is stumbling on an upward or downward path may become an issue if there is more improvement in the data.  Whatever occurs, it will still be stuck in a stagnant growth environment.  In other words, nothing that would warrant optimism regarding corporate profitability.  Meanwhile the Fed is threatening higher rates---which the last time I checked usually results in a higher discount factor (lower P/E).   That is not a winning formula for higher stock prices. And it totally ignores the ultimate unwinding of asset mispricing and misallocation.

            I continue to believe that every portfolio should own more than a token cash position.

            The latest from John Hussman (medium):

            The same return for three times the risk (short):
My thought for the day: many may view my current focus on equity overvaluation as making me some sort of doomsayer.  But that is not accurate.  I simply want to buy stocks that offer attractive returns given the current risk/reward equation defined by the underlying company’s fundamentals in the economic/political environment.  Advocating a large cash position in the current environment is ultimately a matter of value, that is, what is received in return for capital invested.  In that context, downward price volatility is not something to be avoided.  In fact, it brings prices to attractive buying levels.  But does it an investor no good if he/she doesn’t have the financial resources to buy equities when that occurs. 

This is why our Price Disciplines are so important because they instill patience and focus as invaluable assets to an investor.  In addition, they keep to a minimum the risk associated with paying too much for an investment.  Adverse markets come and go, as do market liquidity and confidence, but it is a universal truth that long-term investments are better made in adverse markets than in euphoric markets because good values are more pervasive. 

In the end, what makes a good investment is its price. Price is everything. You need to receive value (i.e. the cash return delivered to you in the future) in excess of the price paid.  But since value is an imprecise measurement, the best one can do is to build in a margin of safety by buying investments that are at deep discounts to a reasonable estimated value.

       Investing for Survival

            Animal spirits in the real estate market.         
    News on Stocks in Our Portfolios
General Dynamics (NYSE:GD) declares $0.76/share quarterly dividend, in line with previous.

Donaldson (NYSE:DCI): FQ3 EPS of $0.43 beats by $0.04.
Revenue of $571.3M (-0.7% Y/Y) beats by $20.51M


   This Week’s Data

            The May Markit PMI came in at 50.7 versus expectations of 50.5.

            The May ISM manufacturing index was reported at 51.3 versus estimates of 50.6.

            April construction spending fell 1.8% versus forecasts of +0.6%; however, the March reading was revised upwards significantly.  Net, net, spending was flat for those two months.

            May light vehicle sales were in line with forecasts, though down on a year over year basis.

            The May ADP private payroll report showed job gains of 173,000 versus consensus of 175,000.

            Weekly jobless claims fell 1,000, in line.


            How companies are planning on spending their money this year (short):

            The death of the virtuous cycle (medium):



  International War Against Radical Islam

            US strategy in the Middle East---there is none (medium):

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