Tuesday, March 11, 2014

The Morning Call---Incredible resiliancy

The Morning Call

3/11/14

The Market
           
    Technical

            The indices (DJIA 16418, S&P 1877) had a volatile day, ending down only slightly.  The S&P confirmed the break out of its short term trading range, re-setting to a short term uptrend (1775-1950).  It is also in intermediate term (1730-2530) and long term uptrends (739-1910).   

            A couple of observations: (1) the Dow and the S&P are now out of sync on both their short and intermediate term trends which leaves the Market trendless and (2) the upper boundaries of the S&P’s short and long term uptrends are extremely close.  That suggests a lot of resistance in the 1910-1950 zone which is 2-3% higher---not that attractive of an upside.

            The Dow finished within short (15330-16601) and intermediate (14696-16601) trading ranges and a long term uptrend (5050-17400).

            Volume was down to an even more anemic level than last week; breadth deteriorated.  The VIX rose a few cents, leaving it in a short term trading range and an intermediate term downtrend.

            March sentiment summary (medium/long):

            And this from the Wall Street Journal:

In a scramble reminiscent of the 1990s Internet heyday, companies are going public at the fastest pace in years, hoping to take advantage of booming share prices and investor demand while they last.  In the first two months of this year, 42 companies went public in the U.S., raising $8.3 billion and tying 2007 for the busiest start to a year for initial public offerings since 2000.  In some respects, the IPO market is even hotter now than it was in 2007, on the eve of the financial crisis and, like 2000, a year in which the stock market peaked. By one key measure, investors are bidding more aggressively for newly minted shares this year than they have in more than a decade, paying a median 14.5 times annual sales, compared with six times in 2007.   So far this year, nearly three-quarters of companies that have gone public are unprofitable.

            The long Treasury was up slightly, but still confirmed the break of that very short term uptrend (a negative for bond prices).  It remained within a short term trading range and an intermediate term downtrend.

            GLD rose fractionally, closing within a very short term uptrend but within short and intermediate term downtrends.

Bottom line:  stocks had every excuse possible to have a terrible day: a plunge in the Chinese market, no diminution of tensions in Crimea, poor economic overseas data and the recent tendency to be down on Mondays.  Granted, Monday started off a bit rough, but prices then recovered slowly throughout the afternoon---and on absolutely abysmal volume.   So investors continue to ignore the lousy news flow and to keep the upward price momentum intact.  Given this relentless euphoria, it seems difficult to imagine the indices not attacking the upper boundaries of their long term uptrends. 

Meanwhile, there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.
 
            Midterm year trading pattern (short):

  Fundamental
    
     Headlines

            There was no US economic data releases yesterday; but we did get some stats from overseas:  February Chinese exports plunged 18.1%, the Japanese government lowered its fourth quarter estimates for GDP growth, Italian industrial production was above consensus but French and Spanish were below. 

            None of the above is encouraging:

(1)   weak EU industrial production does not help our economic outlook for that area.  In addition, Europe is very dependent on Russian natural gas piped through Ukraine---and there was no improvement in that situation over the weekend.  Indeed, Russian troops appear entrenched in the Crimea and the Crimean parliament set to vote on secession from Ukraine and re-uniting with Russia remains on schedule.  The Western governments, our own included, are flailing helplessly to do something to reverse the likely Russian annexation of Crimea and prevent further moves into eastern Ukraine---‘failing helplessly’ being the operative words. 

Short term, I see nothing that can be done.  More important, I worry the US will do something stupid and get a bloody nose for the effort.  My guess is that our Markets would not receive that scenario very well.   That is not to say that there is nothing that can be done; but it is all long term in nature: reverse the current nonsensical Russian policy ‘re-set’, reverse the military co-operation with Poland and Romania that were abandoned in that Russian ’re-set’, develop our natural gas infrastructure, increasing our ability to export to Europe thereby lessening their dependency on Russian gas, kick Russia out of the G8---to name just a few.

(2)    China allowed that solar corporation to go into default.  As I noted last week, taken by itself, it is not that big a deal.  However, if it is a sign of a new policy that will allow other, larger defaults, then it has negative implications economically [slower growth] and for the Markets [carry trade].  With respect to the former, the nose dive in exports doesn’t generate a lot of faith that there is sufficient internal strength to allow the Chinese economy to maintain a 7%+ growth rate in the midst of a string bankruptcy.   

                 And (medium):

(3)    as you know, I have forever been worried that a recession in Europe could play merry hell with that continent’s banking system.  Not only do both of the above factors play to that concern: [a] a shut off or diminished flow of energy would surely negatively impact Europe’s economic growth prospects and [b] China is a major trading partner of the EU’s.  Economic malaise there would almost certainly be felt in Europe.  On top of that, we got those lousy industrial production numbers yesterday.

Bottom line: it seems that no amount of bad news is enough to derail this Market.  However, that bad news is not meaningless.  If China’s economy slows down that will ultimately be reflected in production and consumption activity globally; and if the Ukrainian crisis gets worse, it is bound to impact risk premiums used to value all assets.  I am not saying that either will happen; I am saying that I don’t know if they will and neither does anybody else.  So any advance in equity prices has to be on the presumption that all will end well.  Actually, it would have to incorporate even more than a goldilocks outcome because prices would be rising from an already overvalued condition.

With the re-set of the S&P, we now have two visible upside targets, at least on a technical basis:  1910 and 1950.  To be making a bet that stocks may increase 2-3% when the downside is 30% (S&P Fair Value) doesn’t make a lot of sense to me. 

I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            Bear in mind, this is not a recommendation to run for the hills.  Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

            It is a cautionary note not to chase this rally.

            The illusion that the Fed created (medium):

            A warning from Seth Klarman (medium):

            The latest from John Hussman (medium):
            




Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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