Tuesday, January 24, 2017

The Morning Call--Off to a running start

The Morning Call


The Market

The indices (DJIA 19799, S&P 2265) were off yesterday, but continued to trade within the tight range dating back to mid-December.  Volume fell, but remains at elevated levels; breadth was mixed.   The VIX (11.8) rose 2%, closing below the upper boundary of a very short term downtrend, near its 100 and 200 day moving averages (now resistance) and in a short term downtrend.  

The Dow ended [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18523-20563}, [c] in an intermediate term uptrend {11708-24558} and [d] in a long term uptrend {5730-20318}.

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 uptrend {2165-2508}, [d] in an intermediate uptrend {2028-2629} and [e] in a long term uptrend {881-2435}.

The long Treasury rallied, remaining in a five week uptrend; however, it closed in a very short term downtrend, in a short term trading range and below the 100 day moving average (now resistance), falling further below its 200 day moving average (now resistance).

GLD rose, ending in a short term downtrend and below its 100 day moving average (now resistance) which continues to push further below its 200 day moving average (now resistance)---but also finished in a very short term uptrend.

The dollar fell, finishing above its 100 or 200 day moving averages (now support) and in a short term uptrend.   However, it continues to develop very short term downtrend and is approaching its 100 day moving average.

Bottom line: the Averages continued their aimless meandering of the last five weeks, ending within the recent very tight trading range.  There does seem to be some cognitive dissonance creeping into the Market narrative, questioning the rapidity and magnitude of any Trump fiscal/regulatory reforms.  However, that isn’t generating a lot of selling, suggesting that, at least to date, investor optimism has yet to be dampened.    My assumption that the indices will challenge the 20000/2300 level remains intact.


            There were no economic releases either here or abroad yesterday.

            ***overnight, the January Japanese Markit flash manufacturing PMI was up versus its December reading; the Turkish lira continues to crash.

            As expected, the Donald got busy issuing executive orders.  The two most impactful being---the freeze on federal hiring and action on TPP and NAFTA (medium):

Bottom line: the Donald got off to a decent start in implementing the promised change, although one of his three executive orders dealt with a more protectionist US trade policy---which, as you know, I think is economically unsound and not pro-growth.  In addition, the Secretary of Treasury tried to talk down the dollar.  So I am not particularly impressed with this start.  Of course, this was only one day; so it is hard to draw conclusions.    

Longer term, what I want to know is how new fiscal/regulatory policies will impact corporate profits and P/E’s (interest rates).  My task is to quantify the effect of Trump’s (hopefully) new economy and build it into our Models.  Unfortunately, at this time, when I plug in many of the optimists’ assumptions about the impact of Trump policies on corporate earnings, our Valuation Model doesn’t produce a Fair Value that comes close to current price levels. Hence, I will continue to Sell Half of any stock that reaches its Sell Half Price and any company that fails to meet the minimum fundamental criteria for inclusion in our Universe.

            The latest from Mohamed El Erian (medium):

            My thought for the day: I spend a lot of time and energy analyzing economic and political developments.  But at no time have I ever concluded than one or a series of factors was a reason to trade a stock or alter our Portfolios holdings.  The purpose is to provide increased understanding on how the world/equity valuations work. 

Our Buy/Sell parameters are determined by our Valuation Models which are, in turn, heavily influenced based on historical relationships and change very slowly over time.  All you have to do is read my comments to know that the 24 hour news cycle has little impact on our investment strategy.  Indeed, I could summarize all the daily notes from the last two years in one sentence:  the economy is sluggish but stocks are getting ahead of themselves as a result of irresponsible central bank monetary policy.  That was all you needed to know.

       Investing for Survival
Averaging down.

    News on Stocks in Our Portfolios
Becton, Dickinson (NYSE:BDX) declares $0.73/share quarterly dividend, in line with previous

3M (NYSE:MMM): Q4 EPS of $1.88 beats by $0.01.
Revenue of $7.33B (+0.4% Y/Y) in-line

Kimberly-Clark (NYSE:KMB): Q4 EPS of $1.45 beats by $0.03.
Revenue of $4.54B (flat Y/Y) misses by $10M

Johnson & Johnson (NYSE:JNJ): Q4 EPS of $1.58 beats by $0.02.
Revenue of $18.11B (+1.7% Y/Y) misses by $170M.


   This Week’s Data

            The January Markit flash composite PMI came in at 54.3 versus December’s reading of 54.4.


            Why inflation won’t last (medium):

            And why the growth rate of GDP is unlikely to increase (medium):

            World trade has grown less than 1% annually since 2007 (short):

            The cost of regulatory compliance (medium):

            Update on auto loans (short):



  International War Against Radical Islam

            Iran caught smuggling anti-tank missile systems in direct violation of numerous agreements (short):

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