Thursday, August 4, 2016

The Morning Call--Self inflicted wounds

The Morning Call


The Market

The indices (DJIA 18355 S&P 2163) leveled off yesterday.  Volume was down and breadth strengthen just a tad.  The VIX fell 4 ½%, but remained above the lower boundary of its former short term trading range.   I remain (confused and) on the fence on this directional call. 

The Dow closed [a] above rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {17447-19193}, [c] in an intermediate term uptrend {11277-24107} and [d] in a long term uptrend {5541-19431}.

The S&P finished [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2044-2283}, [d] in an intermediate uptrend {1912-2514} and [e] in a long term uptrend {862-2246}. 

The long Treasury rose fractionally, ending above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends. 

                And, the existential question:

The bond market is no longer reacting to economic data (medium):

Why negative interest rates will fail (medium and a must read):

GLD declined, ending above its 100 day moving average and within very short term, short term and intermediate term uptrends. 

Bottom line:  the indices couldn’t generate any follow through from Tuesday’s decline, which is another plus in the pin action of the last couple of weeks.  The technical evidence continues to point to more upside.

That said, I remain bothered by the simultaneous volatility in the VIX and the bond, gold, oil and currency markets.  Something seems amiss.
            The positive oil/equity correlation is back (medium):



            Yesterday’s economic data were mixed: the July ADP private payrolls report was upbeat, the July Markit services PMI was in line, weekly mortgage and purchase applications and the July ISM services index were disappointing.

            Economy.  Five things to focus on (medium):

            I try to stay clear of too much political commentary aside from developments that directly impact the economy; however, for the last two weeks both political parties have been doing their best to impose the most self-inflicted wounds as humanly possible.  I believe that The Donald/RNC is winning this unsavory race if for no other reason than the mainstream media form a proactive barrier around Hillary/Obama/DNC.   But that is beside the point---that being that if this keeps up then sooner or later the risk is that it will start impacting the electorate/investor psychology via an increasing unwillingness of consumers to spend and businesses to invest.  These are problems the economy already has (witness the poor numbers) which will only be made worse.

            Overseas, this week’s solidly negative flow continued: the July UK and Chinese services PMI’s declined.  In addition, The EU banking system continues under pressure (short):

            ***overnight, the Bank of England lowered key interest rates by 25 basis points and doubled down big time on QE (medium):

Bottom line: ‘the economies both here and abroad are struggling.  But even if they weren’t, it would make little difference with respect to Market overvaluation. Stocks are very expensive by almost any fundamental metric; and a ten percent correction won’t solve that problem.  

The single most important factor sustaining current valuations is the unquestioning faith the Markets have in the central banks’ ability to continue to push prices even higher.  It is possible that this proposition could become an eternal truth; but I doubt it for no other reason than that all good things must come to an end (and logic). 

Stocks are grossly overvalued.  Investors should accept as a gift the current opportunity to take some money off the table, be it from banking some profits from winners or getting rid of their losers.’

                Earnings season update: two thirds of the S&P companies have reported; earnings in aggregate are down 2.8%.

            The latest from Bill Gross (medium):

            The ultimate fate of the quants (short):

            My thought for the day:  Many times a big win early in your career or as an investor can be the worst thing that ever happens to you.  You are young, bullet proof, devoid of humility and blind to role luck plays in your life and investment decisions.  I have seen countless investors get really lucky when they were young/new to investing (and not ready to get lucky).  That made them even more over confident in their abilities, more blind to the role luck played in their decision making and they give all back and, more often than not, even more.
            When you get lucky, thank God, your lucky stars, the Force, whatever.  But recognize that you are not Albert Einstein and that you have been blessed with good fortune---which does not last forever.  Humility is key in investing.  Diversification and discipline get over the finish line in the long run.

       Subscriber Alert

            I can’t stand it any longer.  Philip Morris (PM-$99) which has been a big winner for our Portfolios and to which I have given more leeway, fundamentally speaking, than is our Discipline, just keeps adding more and more debt.  It makes no sense to me to be going into a fragile economy owning the stock of a company carrying that much debt ($2.4 billion and a negative net worth) and a dividend payout of 92%.  Accordingly, at the open this morning, the Dividend Growth and High Yield Portfolios are Selling their positions.  

    News on Stocks in Our Portfolios
CF Industries (NYSE:CF): Q2 EPS of $0.33 misses by $0.35.
Revenue of $1.13B (-13.7% Y/Y) in-line.

General Dynamics (NYSE:GD) declares $0.76/share quarterly dividend, in line with previous.

Becton, Dickinson (NYSE:BDX): FQ3 EPS of $2.35 beats by $0.14.
Revenue of $3.2B (+2.2% Y/Y) misses by $10M.


   This Week’s Data

            The July Markit services PMI was unchanged from June.

            The July ISM nonmanufacturing index was reported at 55.5 versus expectations of 56.0.

            Weekly jobless claims rose 3,000 versus forecasts of down 1,000.


            Vehicle sales per capita (short):


Quote of the day (short):

  International War Against Radical Islam

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