The Morning Call
5/22/14
Just a reminder. I go in for cataract surgery this
morning. No Friday Morning Call or
Closing Bell.
The Market
Technical
The
roller coaster, schizophrenic pin action continues with the indices (DJIA
16533, S&P 1888) rallying big yesterday.
The Dow recovered above its 50 day moving average and remained within its
short (15330-16601) and intermediate (14696-16601) term trading ranges and
within a long term uptrend (5055-17405).
The S&P closed above its 50
day moving average and finished within uptrends across all timeframes: short (1840-2007),
intermediate (1793-2593) and long (739-1910).
They remain out of sync in their short and intermediate term trends.
Volume
remained anemic; breadth improved. The
VIX fell 10%, ending below the lower boundary of its short term trading range. That starts the clock on our time and
distance discipline. If it remains below
this support level by the close next Tuesday, the short term will re-set to
down and would be a strong positive for stocks.
Meanwhile it remains below its 50 day moving average and within an
intermediate term downtrend.
The
long Treasury fell, finishing within a short term uptrend, above its 50 day
moving average and within an intermediate term downtrend.
GLD
declined. It remains within short and
intermediate term downtrends and below its 50 day moving average. In addition, it closed fractionally below the
tip of that pennant formation I have been watching. The move was so slight, I hesitate to make a
call. But if there is follow through to
the downside, it is likely that GLD is in for another leg down.
http://www.zerohedge.com/news/2014-05-21/russia-dumps-record-amount-us-treasurys-here-what-it-buying
Bottom line: the
back and forth bull/bear battle continues.
Despite the schizophrenic price action and the growing number of
divergences, the Averages are holding their major trends and the challenge of
the VIX to the lower boundary of its short term trading range is a potential
positive sign. Therefore, I am sticking
with my assumption that the indices will most likely assault the upper
boundaries of their long term uptrends. Our
strategy remains to do nothing save taking advantage of the current momentum to
lighten up on stocks whose prices are pushed into their Sell Half Range or
whose underlying company’s fundamentals have deteriorated.
Finally,
we are a short hair away from GLD starting another leg down. Be careful.
Update
on market breadth (medium):
The
latest from Stock Traders’ Almanac (short):
Update
on margin debt (medium):
Update
on sentiment (short):
Fundamental
Headlines
Another
day with a single US secondary datapoint: weekly mortgage applications rose but
the more important purchase applications were down. Overseas, the Bank of Japan left interest
rates unchanged while its trade balance improved; the Bank of England also left
rates unchanged and retail sales were better than anticipated.
***overnight,
May Japanese, EU and Chinese flash PMI’s were down though the Chinese figure
was at least better than expected.
The
more important news was:
(1) more
retailers [TIF, LOW] reported much improved earnings and more optimistic forward
guidance than those on Tuesday; hence, settling concerns about a weakening
consumer,
(2) the
minutes from the last FOMC meeting were released. The bottom line was that we learned nothing
new; but its wide ranging discussion provided support for both hawks and doves. So with no change in conclusion, it once
again managed to keep the policy waters muddied---notwithstanding its own
proffered intent to the contrary.
Fed mouthpiece, Jon Hilsenrath,
parses the minutes (medium):
And Goldman’s analysis (medium):
Bottom line: when
I read the FOMC minutes yesterday, I couldn’t help thinking of a Monty Python
skit in which two intellectuals are discussing a critical world event making
inane comments then drawing the exact opposite of the obvious conclusion. Clearly, it did nothing to alter my opinion
that the Fed was going to (is) bungle the transition from easy to tight money,
the longer the current circle jerk goes on the more damaging the consequences
and the really damaging consequences will be to the Markets.
My
bottom line is that for current prices to hold, it requires a perfect outcome
to the numerous problems facing the US and global economies AND investor
willingness to accept the compression of future potential returns into current
prices.
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.
Interest
rate scenarios and stock market performance (medium):
Investing for Survival
What
kills you and your investments (medium):
Company Highlight
Lorillard Inc.
produces and markets Newport ,
Kent
(1) increasing
market share,
(2) product
innovation, including investment in tobacco alternatives
(3) improved
pricing,
(4) a stock buyback
program.
Negatives:
(1) governments
around the world are imposing restrictions on tobacco use,
(2) a highly
competitive industry,
(3) the industry
is not allowed to advertise.
Lorillard is rated
A by Value Line, has a 600% debt to equity ratio but is working hard to reduce
this figure. Its stock yields 4.7%
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2008
LO 4.7% 11% 68% 6
Ind Ave 4.4 8 62 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2006 Margin Rating
LO 600% NA 0 18 A
Ind Ave 63 56 NA 14 NA
Chart
Note:
LO stock made great progress off its January 2009 low, quickly surpassing the downtrend
off its December 2007 high (straight red line) and the November 2008 trading
high (green line). Long term, the stock
is in an uptrend. The wiggly red line is
the 50 day moving average. The High
Yield Portfolio owns a 75% position in LO.
The upper boundary of its Buy Value Range is $56; the lower boundary of
its Sell Half Range is $83.
The
stock has been on the High Yield Buy List.
However, last night rumors circulated that LO would be acquired by
Reynolds American and the stock popped 10%, taking it above $56. Hence, it is being Removed from the High
Yield Buy List. The High Yield Portfolio
will continue to Hold LO.
5/14
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