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):
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