The Morning Call
3/20/14
The Market
Technical
The
indices (DJIA 16222, S&P 1860) gave back some recent gains yesterday. However, the S&P remained within uptrends
across all timeframes: short (1779-1956), intermediate (1734-2534) and long
(739-1910). The Dow finished within
short (15330-16601) and intermediate (14696-16601) term trading ranges and a
long term uptrend (5050-17400). So they
continue out of sync in their short and intermediate term trends---which leaves
the Market trendless.
Volume
rose slightly; breadth was terrible. The
VIX rose, staying within its short term trading range and the intermediate term
downtrend and closed above its 50 day moving average---continuing to provide
little help determining Market direction.
The
long Treasury fell, finishing within its short term trading range, its
intermediate term downtrend and above its 50 day moving average.
GLD
got seriously whacked, closing right on the lower boundary of its very short term
uptrend, within short and intermediate term downtrends and above its 50 day
moving average. If it holds above the
lower boundary of the very short term uptrend, our Portfolios will likely start
to nibble again.
Bottom line: most markets (stocks, bonds, gold) sold off
yesterday as comments from Yellen suggested that the Fed would start to raise
interest rates sooner than most investors expected (more on that below). My take is that this incident does little to
alter the technical landscape; that is, weak volume, deteriorating breadth and
a growing number of divergences are not likely stop an assault on the upper boundaries
of the Averages long term uptrends but could very well strangle any challenge
of those barriers.
My intent is to use
any price strength (1) that pushes one of our stocks into its Sell Half Range,
to act accordingly or (2) as a gift allowing us to eliminate a stock that fails
to meet its quality criteria.
Fundamental
Headlines
We
got two US economic datapoints yesterday, though they were of little
consequence: weekly mortgage and purchase applications were down and the fourth
quarter US 2013 trade deficit declined more than expected.
The
real news was the FOMC meeting and its accompanying policy statement and a
comment Yellen made in the subsequent press conference.
Let’s
deal with the FOMC statement first---and there really was not that much
surprising in it: (1) the economy is improving, (2) tapering is proceeding, (3)
and as expected, the 6.5% unemployment rate was dropped as guidance and
substituted with an amalgam of other employment related data (‘qualitative
guidance’---their words).
Hilsenrath
(the Fed’s mouthpiece) summary of the FOMC statement (medium):
Goldman’s
take on the FOMC statement (medium):
FOMC
projections:
In
Yellen’s the question and answer session, she stated that interest rates would
likely begin to rise a ‘considerable period after the end of QE’ (officially slated
to be over in October of this year) which she subsequently defined as six
month. In other words, sometime in the
second quarter of 2015. The key here is
that no one has heretofore dared mention a start date to increasing interest
rates and her statement shocked investors whose initial interpretation was that
Yellen had become more hawkish. So that
little tidbit sent the Markets into a tizzy.
Three points:
(1) I
have long contended that if history repeated itself, the Fed would bungle the
transition from easy to tight money. In
my opinion, the switch from the easily understood and followed unemployment
rate to some officious technocratic obfuscating malarkey [‘qualitative guidance’]
is a major step forward in the bungling process. This will only cause confusion among
investors and indeed was probably to mask uncertainty within the Fed
itself.
Apologists are
arguing that the Fed had to alter their employment guidance because the participation
rate of the working population has fallen dramatically rendering the
unemployment rate useless as a guidepost.
To which I respond---bullshit: [a] the universe knew a year or more ago that the participation rate was
distorting the real value of the unemployment rate and the Fed chose to do
nothing and [b] there are a slew of other employment metrics that could be
singled out and substituted for unemployment rate just like there are a multitude
of inflation stats compiled and reported [CPI, PPI, both with ex food and
energy components, the GDP deflator, etc.] if the Fed decided the current
number being utilized was not the best reflection of inflation.
In my opinion,
this is an indication that the Fed is now ‘winging it’ in the transition
process, that it will only raise the level of anxiety among investors and that if
the odds weren’t already high enough that the Fed would bungle the transition process,
they just increased.
(2) on
a slightly more tolerant note, the comment defining a ‘considerable period’ as being
six months was made in answer to a longer more involved question. My
thought is that this was Yellen’s first news conference as Fed chief, she got
her first taste of having every single word that she speaks parsed by the
universe and she misspoke. Who knows
where ‘six months’ came from; certainly there was no addition information as to
such. Hence, [a] I would be surprised if
there isn’t a battalion of Fed officials out walking back that statement---soon
and [b] I would argue that anyone believing that Yellen is more hawkish than previously thought would be
making a mistake,
(3) as
you know, I have long held the belief that the transition from easy to tight
money would have a greater impact on the Markets than on the economy. Heartburn arose when Bernanke uttered the
word ‘taper’ and it has happened again. Indeed,
the more I read and think about it, the more I believe that tightening might
actually be a plus for the economy.
Bottom line: I
think that the whole Yellen ‘six months’ comment is much ado about
nothing. It is unlikely that she has
turned more hawkish; she is just a freshman in a senior job and she made a
freshman mistake. However, I do believe
that the change to qualitative guidance is a sign of weakness, a heightened uncertainty
within the Fed ranks that likely raised the already substantial probabilities
that it will bungle the transition process.
On a short term
basis, I am much more worried about what is going on in Japan and China than I am
about a more confused monetary policy---I have been expecting this all along. Furthermore, we have not likely seen the end
to political/military turmoil in Ukraine.
And most importantly, stocks are priced for perfection; and goldilocks
is nowhere in sight.
Latest news from
China (must reads):
And:
And:
***overnight the
Chinese government announced acceleration of construction projects to expand
and stabilize economic activity.
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
latest from Doug Kass (medium):
The
problem with using forward earnings (medium):
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