Friday, July 21, 2017

The Morning Call--How long will investors buy this routine?

The Morning Call

7/21/17

The Market
         
    Technical

The indices (DJIA 21611, S&P 2473) drifted lower on day filled with good news.   Volume was up, but remained at a low level; and breadth continued weak.  The Averages remain firmly in uptrends defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (9.6) was down 2%, finishing below the lower boundary of its long term trading range for the fifth day, resetting it to a downtrend.  It is now in downtrends across all timeframes.
               
The long Treasury was up on volume, ending well above its 100 and 200 day moving averages as well as the lower boundary of its very short term uptrend.    

The dollar was hammered, pushing it to within a short hair of the lower boundary of its short term trading range.  UUP is also below its 100 and 200 day moving averages, within a very short term downtrend and its chart is getting uglier by the day.

GLD was up slightly, closing above its 200 day moving average (if it remains there through the close today, it will revert to support) and is nearing its 100 day moving average.  So clearly, this chart is improving.

Bottom line: on Wednesday stocks were up on disappointing news (which has been par for the course for the last year and half), but yesterday were down (though admittedly not by much) on very good news.   I am not suggesting that there has been a sudden change in investor psychology.  More likely, all that good news simply was already in the price of stocks.  Nonetheless, the juxtaposition of the two trading days is somewhat curious. 

Meanwhile, TLT, UUP and GLD reacted as you would have expected on a day where two major central banks chirped dovishly.
           
    Fundamental

       Headlines

            Yesterday’s news flow was upbeat.  The US economic numbers were positive: weekly jobless claims fell more than expected, the June leading economic indicators were better than forecast.  On the other hand, the July Philly Fed index was disappointing.  Overseas, the stats were mixed: the June Japanese trade balance shrunk while June UK retail sales beat estimates.

            ***overnight, the IMF finally agreed ‘in principle’ to join in the latest Greek bailout.

            However, the big news of the day was the BOJ and ECB meetings; and both left policies unchanged but provided more dovish narratives than had been anticipated.  Given the Fed’s recent dovish back peddling on its own policy initiatives, we have easy money unanimity.   I am not going to torture you with my usual asset mispricing and misallocation rant, but………..

            Draghi’s confusion

            Bill Gross on Fed policy (medium):

Bottom line: if liquidity is driving this market, then look out above.  Three major central banks have made dovish statements in the last two weeks.  Yes, the Fed said that it would began unwinding its balance sheet later this year; but virtually every statement regarding a ‘normalization’ of monetary policy that it has made over the last two years has turned out to be more hawkish than its ultimate action.  Indeed, it has never in its history acted as hawkishly as its rhetoric anticipating monetary tightening. 

The Market question is, how long will investors buy the current central bank narrative before it once again realizes these guys have wrecked price discovery as a resource allocation mechanism and that they have never, don’t and likely never will manage a smooth transition from easy to normal monetary policy.  Sooner or later, the price is going to be paid for the gross mispricing and misallocation of assets.  I just don’t know when.  I do know that I want to own cash when it happens.

            The easy money is being made.  Enjoy it while it lasts. (short):

            My thought for the day: No one buys a stock expecting to lose money.  But it happens; and unfortunately many investors end up ignoring stop losses or, even worse, throwing good money after bad as part of a post trade rationalization process.  Good investors know how to make money; great investors know how to take a loss.

       Investing for Survival
   
            Ten rules for catching a bottom.
           
    News on Stocks in Our Portfolios
 
Genuine Parts (NYSE:GPC): Q2 EPS of $1.29 misses by $0.02.
Revenue of $4.1B (+5.1% Y/Y) beats by $60M.

BlackRock (NYSE:BLK) declares $2.50/share quarterly dividend, in line with previous.

Microsoft (NASDAQ:MSFT): Q4 EPS of $0.98 beats by $0.27.
Revenue of $24.7B (+9.1% Y/Y) beats by $430M.

Coca-Cola (NYSE:KO) declares $0.37/share quarterly dividend, in line with previous.

Schlumberger (NYSE:SLB): Q2 EPS of $0.35 beats by $0.05.
Revenue of $7.46B (+4.2% Y/Y) beats by $220M.


Economics

   This Week’s Data

            The June leading economic indicators rose 0.6% versus forecasts of up 0.4%.

   Other

            CBO projections are worse than useless (medium and today’s must read):

            David Stockman on the upcoming debt ceiling vote.  I usually like his analysis but I think this dire prediction a bit over the top.  Nonetheless, I include as a worst case scenario as our political class moves toward D day.

            Quote of the day (short):

            Government pension funds aren’t the only ones that are underfunded (short):

Politics

  Domestic

Another ill effect of power (short):

Mueller expands probe into Trump business activities (medium):

  International

            The US apparent diplomatic strategy towards North Korea and China (medium):

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Thursday, July 20, 2017

The Morning Call--The BOJ and ECB remain dovish

The Morning Call

7/20/17

The Market
         
    Technical

The indices (DJIA 21640, S&P 2473) had a strong up day.  Volume was up slightly, but remained at a low level; and breadth continued weak.  They remain firmly in uptrends defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (9.8) was down 1%, finishing below the lower boundary of its long term trading range for the fourth day (if it remains there through the close today, it will reset to a downtrend).  It is now in a short term and intermediate term downtrend.

The long Treasury was up fractionally, ending well above its 200 day moving average as well as the lower boundary of its very short term uptrend.    

The dollar rebounded modestly, but did little to correct an ugly chart.  UUP is below its 100 and 200 day moving averages, within a very short term downtrend and is nearing the lower boundary of its short term trading range.

GLD was down slightly, but still closed above its 200 day moving average (if it remains there through the close on Friday, it will revert to support) and is nearing its 100 day moving average.  So clearly, this chart is improving.

Bottom line: stocks resumed their upside momentum despite continuing disappointing news.  Relax and watch for a potential challenge of the upper boundaries of the Averages long term uptrends.  But be sure to initiate or build your cash position using a portion of your winners as a source of funds (remember sell high, buy low).
           
    Fundamental

       Headlines

            Wednesday’s economic data releases finally provided some upbeat numbers: weekly mortgage and purchase applications rose and housing/permits were strong.  There were no global data points; but officials from both the Bank of Japan and the ECB provided some commentary ahead of their meetings today.  The ECB’s narrative had a dovish tone to it which followed earlier more hawkish comments (sound familiar?); ***overnight, indeed, it left all policies in place and offered to keep them in place until its inflation objective is met (which maybe never).


; while the BOJ remarks suggested that it would abandon its 2% inflation objective.  ***overnight, it didn’t abandon the objective, but simply delayed the date to achieve it---likely meaning more QE longer. 

The GOP was out in force providing hopeful rhetoric about:

(1) the continuing effort to repeal and replace with Trump pressing members of the senate and McConnell promising a vote on outright repeal next week.  However, the CBO weighted in with a scoring of that [outright repeal] effort; the highlights being [a] over the next ten years, it will result in a $473 billion savings but it will double premiums  and [b] 32 million insureds will lose coverage.

                ***overnight, another attempt at compromise failed.

(2) talking up tax reform and infrastructure spending.  Of course, if the GOP can’t come together, then no more progress will be made on these issues than has been made on healthcare.  However, it does seem likely that there is more consensus on those issues.  Unfortunately, the GOP leadership spent the time and capital on healthcare in order to create tax savings that could be used on tax reform.  Without that savings, my principal concern remains any nonrevenue neutral tax reform/infrastructure spending will exacerbate the already out of control growth in the deficit/debt.  My hope is on hold.

            More problems for the house budget proposal (medium):

The good, the bad and the ugly of Trumponomics (medium):

            ***overnight, the US and China ended trade talks on steel without issuing a statement, suggesting that problems remain and the odds of a US tariff imposition is high.

Bottom line: we learned a lot today about one of the sources of stock euphoria---liquidity provided by the ECB and BOJ will continue apace.  Sooner or later, the price is going to be paid for the gross mispricing and misallocation of assets.  I just don’t know when.  I do know that I want to own cash when it happens.

            Thoughts from an optimist.  Note two things: (1) he gives four presumably invalid reasons for the Market nearing a top but only addresses one and (2) the one he does address is valuation but [a] his metric is forward earnings which have never been a good measure of valuation and [b] he then gives two examples where he says there is overvaluation, ascribes it to analysts not being able to get a handle on the right valuation but somehow assumes all the other analysts in all the other industries/companies are correct in their judgments.

       Investing for Survival
   
            Lessons from the financial crisis.

                       

    News on Stocks in Our Portfolios
 
Sherwin Williams (NYSE:SHW): Q2 EPS of $4.52 misses by $0.05.
Revenue of $3.74B (+16.1% Y/Y) beats by $70M.


Sherwin Williams (NYSE:SHW) declares $0.85/share quarterly dividend, in line with previous.

C.H. Robinson Worldwide (NASDAQ:CHRW): Q2 EPS of $0.78 misses by $0.12.
Revenue of $3.7B (+12.1% Y/Y) beats by $70M.

Qualcomm (NASDAQ:QCOM): Q3 EPS of $0.83 beats by $0.02.
Revenue of $5.3B (-12.1% Y/Y) beats by $40M.


Economics

   This Week’s Data

            Weekly jobless claims fell 15,000 versus expectations of a 1,000 drop.

            The July Philadelphia Fed manufacturing index came in at 19.5 versus estimates of 22.0.

   Other

            Private debt growth and GDP (short):

Politics

  Domestic


Trade war games (and he never mentions Smoot Hawley) medium:

US military study on the American ‘empire’ (medium and today’s must read):


  International War Against Radical Islam

            Apropos of the above link, here is another example of the quagmire our political class has gotten us in (medium):

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Wednesday, July 19, 2017

The Morning Call--If first you don't succeed

The Morning Call

7/19/17

The Market
         
    Technical

The indices (DJIA 21574, S&P 2460) closed mixed yesterday (Dow down, S&P up) but neither by much.  Both remained above the upper boundary of their recent one month trading range.  Volume was flat, remaining at a low level; and breadth was weak.  They remain firmly in uptrends defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (9.9) was up slightly, but still finished below the lower boundary its intermediate term trading range for the fourth day (resetting to a downtrend) and the lower boundary of its long term trading range for the third day (if it remains there through the close Thursday, it will reset to a downtrend). 

The long Treasury was up again on volume, ending well above its 200 day moving average as well as the lower boundary of its very short term uptrend.  The move was sufficient that I am leaving both trends positive. 

The dollar got smacked, making its pin action more ugly than ever.  UUP is below its 100 and 200 day moving averages, within a very short term downtrend and is nearing the lower boundary of its short term trading range.

GLD was up, closing above its 200 day moving average (if it remains there through the close on Friday, it will revert to support) and is nearing its 100 day moving average.  So clearly, this chart is improving.

Bottom line: stocks turned in another flattish day, holding above the recent trading range despite multiple sources of bad news and providing continuing evidence that investor optimism prevails whatever the news flow.  TLT, UUP and GLD are all reflecting an expectation of a weaker economy/lower rate environment---which the stock boys apparently aren’t worried about.  Relax and watch for a potential challenge of the upper boundaries of the Averages long term uptrends.  But be sure to initiate or build your cash position using a portion of your winners as a source of funds (remember sell high, buy low).

            How an Elliott wave analyst looks at the current market (short):

            How the Stock Traders’ Almanac looks at the current market (short):

    Fundamental

       Headlines

            The economic stats were again disappointing: both import and export prices were down, month to date retail chain store sales lower and the July housing index below estimates.

            ***overnight, a member of the ECB governing council said that monetary accommodation was still needed, suggesting the narrative that will forthcoming at tomorrow’s  ECB meeting. 

Further the Bank of Japan appears ready to abandon its 2% inflation target.  That ought to mean that it will also abandon its QE Infinity policy since it was adopted to push inflation up; but it ought to have abandoned QE long ago.  So you never know what these guys will do.

            Add in the failure of the senate healthcare proposal and some earnings reports coming in below expectations and the result was a discouraging day.  On the other hand, the house released a goldilocks FY2018 budget plan which appears to be a bit long on hope.  Of course, this is just the opening salvo, so expect more changes.

            Goldman on the failed healthcare bill, the new house budget proposal and the upcoming debt ceiling debate (medium):

Bottom line: it was poor news day; so why shouldn’t stock prices be up?   Probably because the ECB and BOJ continue to pump up global liquidity.  Sooner or later, the price is going to be paid for the gross mispricing and misallocation of assets.  I just don’t know when.  I do know that I want to own cash when it happens.
           
ECB balance sheet now bigger than the Fed’s (short):

            Willful blindness (medium):

            My thought for the day: one of the reasons behind my focus of dividend paying stocks is evidence that expected future earnings growth is faster when current payout ratios are high and slowest when payout ratios are low---contradicting the commonly held belief that substantial reinvestment of retained earnings fuel faster future earnings growth.  The primary reason behind this seeming contradiction is the tendency of managements to misallocate excess capital toward empire building, value destructive acquisitions and stock buy backs.

       Investing for Survival
   
            Perceived versus real risk tolerances.

    News on Stocks in Our Portfolios
 
International Business Machines (NYSE:IBM): Q2 EPS of $2.97 beats by $0.23.
Revenue of $19.29B (-4.7% Y/Y) misses by $160M.

W.W. Grainger (NYSE:GWW): Q2 EPS of $2.74 beats by $0.09.
Revenue of $2.62B (+2.3% Y/Y) misses by $10M


Economics

   This Week’s Data

            Month to date retail chain store sales grew slower than in the prior week.

            The July housing index was reported at 64 versus consensus of 68.

            Weekly mortgage and purchase applications rose.

            June housing starts were up 8.2% versus expectations of up 7.1%; permits increased 7.3% versus estimates of up 3.2%.
           
   Other

            Update on student loans (medium):

            The quiet demise of austerity (medium):

            Update on social security solvency (medium):

            Brief update on China’s economy (short):

Politics

  Domestic

Swampland’s ten commandants (medium):

  International War Against Radical Islam


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Tuesday, July 18, 2017

The Morning Call--Healthcare dead, OPEC dead, NAFTA ?

The Morning Call

7/18/17

The Market
         
    Technical

The indices (DJIA 21629, S&P 2459) meandered around the flat line most of day, closing down slightly but still above the upper boundary of their recent one month trading range.  Volume was up fractionally but remains at a low level and breadth was unimpressive.  They remain firmly in uptrends defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (9.8) rose 3 ¼ %, but remained below the lower boundary its intermediate term trading range for the third day (if it remains there through the close today, it will reset to a downtrend) and the lower boundary of its long term trading range for the second day (if it remains there through the close Thursday, it will reset to a downtrend). 
               
The long Treasury was up again; this time ending above its 200 day moving average as well as the lower boundary of its very short term uptrend.  As you know, TLT has been toying with both levels for the last few trading days, giving one false signal after another.  There remains too much uncertainty to make a directional call. 

The dollar was unchanged; meaning that its chart remains ugly.  UUP is below its 100 and 200 day moving averages and within a very short term downtrend.

GLD was up.  It finished above the upper boundary of its very short term downtrend for a second day (negating that trend) and right on its 200 day moving average.  Could its pin action possibly be on the verge of improving?

Bottom line: stocks turned in another snoozer of a day.  But importantly they continue to track higher.  And they will continue to do so until they don’t.  Given the current positive investor psychology, I have no idea when that will be.  In the meantime, sit back and watch for a potential challenge of the upper boundaries of their long term uptrends.  But be sure to initiate or build your cash position using a portion of your winners as a source of funds.

    Fundamental

       Headlines
           
            Only one US datapoint yesterday: the July NY Fed manufacturing index turned in a dismal reading.  On the other hand, China continued its string of upbeat numbers, reporting better second quarter GDP, consumer spending and factory output.  If this trend continues, I will start considering removing it from our ‘muddle through’ international economic forecast.

            China still facing problems (medium):

            Very little news flow on macroeconomic/political issues; but here are some articles addressing them:

Yellen has no idea what she is talking about (short):

            Liquidity conditions still loose (medium):

            Fiscal policy dreaming (medium):

            Oil skeptics a little less skeptical (medium):

            But lots of news overnight:

            Senate scraps healthcare reform.  You know, I was hopeful that they could reach an agreement.  Still, the first try was DOA; the second try had more supporters; I remain hopeful that this legislation can ultimately be improved to point that consensus is reached.  In the meantime, Obamacare will remain a burden to the economy.


                Trump released his negotiating strategy for improving NAFTA.  I don’t see anything unreasonable in its proposed reforms.

            Ecuador announced that it would not abide by the OPEC production cut agreement.  Who would have thunk?

            Second quarter UK CPI came in flat versus expectations of up 0.2%.

Bottom line: nothing is happening that would alter our forecast: the NY Fed number was lousy, healthcare reform is on life support, at least temporarily, tax reform is gleam in the GOP eye, debt ceiling will soon be an issue and the Fed remains down the rabbit hole.  But nobody cares which means that as of today our Model is wrong on valuations.  But I have been there before.  Our Valuation Model is not perfect but once is starts flashing overvaluation, the worst decision I could have made was increasing equity exposure or not following our Sell Half discipline.  

            Remain aware that we are in earnings season and this week will be a big one.

            The rise of algo trading (medium):

            Mirror, mirror on the wall, who is the biggest buyer of all (medium):

            My thought for the day: there are some unique psychological pitfalls following my Valuation Model---I feel like an idiot a lot of the time.  The good news is that I have years of experience in the field of idiocy.  While I get somewhat desensitized to that feeling, it is never easy.

       Investing for Survival
   
       Ned Davis’ four basic traits of successful investors:
  1. They use objective indicators;
  2. They are Disciplined;
  3. They have Flexibility;
  4. They are Risk adverse.
      
    News on Stocks in Our Portfolios

Johnson & Johnson (NYSE:JNJ): Q2 EPS of $1.83 beats by $0.03.
Revenue of $18.84B (+1.9% Y/Y) misses by $110M.
 
Johnson & Johnson (NYSE:JNJ) declares $0.84/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            June import prices fell 0.2%, in line; export prices declined 0.2% versus estimates of 0.00%.

   Other

            Update on auto loans (medium):

Politics

  Domestic

Beware of the upcoming debt ceiling debate (medium):

  International War Against Radical Islam


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Monday, July 17, 2017

Monday Morning Chartology

The Morning Call

            7/17/17

The Market
         
    Technical

            The S&P (and the Dow) moved through the upper boundary of its recent one month trading range.  Volume was low and breadth unimpressive.  But price is truth; and price says stocks are going higher.



            TLT rose just enough on Friday to close on its 200 day moving average and the lower boundary of its very short term uptrend.  That leaves me on the sideline on trend and on exactly what bond investors are thinking.  A hopeful sign is that most other segments of the fixed income complex performed well on Friday.



            The dollar’s chart is starting to remind me of GLD---sick.  It is a bit confusing that bond investors seem uncertain about the economy while the dollar is so pronounced in its pessimism.



            GLD was the mirror image of the dollar, popping above the upper boundary of its very short term downtrend and nearing its 100 and 200 day moving averages.  Typically, gold and the dollar are negatively correlated, so Friday’s pin action is not surprising.  What is surprising was TLT Casper Milquetoast performance.



            The VIX is challenging the lower boundaries of its intermediate and long term trading ranges for the eighth time.  If it remains there through the close on Tuesday the intermediate term trend will reset to a downtrend; if it remains there through the close on Thursday, the long term trend will reset to a downtrend.



    Fundamental

       Headlines

            ***overnight, strong economic data out of China (short):

            On the other hand (medium):

            The latest from John Mauldin (medium):

       Investing for Survival
   
            Simple beats complex.
           
    News on Stocks in Our Portfolios
 
PepsiCo (NYSE:PEP) declares $0.805/share quarterly dividend, in line with previous.

BlackRock (NYSE:BLK): Q2 EPS of $5.24 misses by $0.15.
Revenue of $2.97B (+6.1% Y/Y) misses by $40M.


Economics

   This Week’s Data

            The July NY Fed manufacturing index was reported at 9.8 versus expectations of 15.0.

   Other

Politics

  Domestic

  International

            Countries that trust their government the most/least (short):


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