The Morning Call
The Market
Technical
The
indices (DJIA 17083, S&P 1987) had another mixed performance (Dow down,
S&P up) yesterday. They remained above
their 50 day moving averages and within uptrends across all time frames: short
(16232-17711, 1916-2082), intermediate (16593-20891, 1858-2658) and long
(5083-18464, 762-1999).
Volume
fell; breadth worsened. The VIX rose,
finishing below its 50 day moving average and within short and intermediate
term downtrends.
The
long Treasury fell. While it reset to a
short term uptrend Wednesday, it dropped enough to place it back below the
upper boundary of its former short term trading range. This is a continuation of the recent
schizophrenic TLT pin action. I want to
see some follow through before reversing the re-set call. Whether that happens or not, clearly bond
investors currently lack certainty regarding the economic outlook. As you know, this is the same affliction that
we experienced in our recent abortive GLD trade.
GLD
declined big, closing below its 50 day moving average for the first in over a month. It remains within a short term trading range
and an intermediate term downtrend.
Bottom line: the
confusion we have witnessed in the gold and now the Treasury markets goes hand
in hand with the growing divergences within the equities market. However, I don’t have to tell you that to
date that has meant nothing with regard to the performance of the Averages. In the end though, it doesn’t matter. If a majority of stocks are declining, then
the overall market is reflecting the aforementioned confusion and
divergences.
The $64,000 question
is, will an exogenous event occur that suddenly pushes all valuations back to
more normal levels or will it dissipate the confusion and divergences allowing
the rest of stock market to catch up with the Averages. You know my answer; but so far, that opinion has
been worth zip.
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.
Another
divergence (short):
More
on junk bond price action (medium):
Update
on sentiment (short):
Fundamental
Headlines
Yesterday’s
US dataflow held some really good news---weekly jobless claims and the Kansas
City Fed manufacturing index---and some really bad news---the Markit flash PMI
and new housing starts. Of the four
stats, the jobless claims and new housing starts were the most
important---which still leaves us with a mixed picture. However, I remind you that employment is a
lagging indicator; so it is not inconsistent to have improving employment as
the economy is rolling over. On the
other hand, this series of datapoints could just be more of the same erratic
flow that has characterized this entire recovery. So I am not making a recession call; I am
suggesting that these stats can be explained by two dramatically different
scenarios.
Overseas,
we got more good news: the flash PMI’s of both China and the EU were above
expectations; and they were quite welcome after a long string of subpar economic
reports. Offsetting that was another
terrible trade number out of Japan. I would
like to see some follow through in improving Chinese and European economic data
before getting too jiggy.
Two
additional news items are worth mentioning:
(1) the
former CEO of Banco Espirito Santo has been detained on allegations of money
laundering. Another example that the
regulatory environment in the EU is just as promiscuous as it is here, reinforcing my concerns about some
kind of financial calamity within an overleveraged banking system (medium):
(2) Russian
oligarchs are reacting to the threat of UK sanctions by pulling their money out
of London---ooops. Whether or not this
gives British or the rest of the EU pause in following Obama’s lead in imposing
sanctions on Russia remains to be seen (short):
Accusations flew in both
directions overnight (short):
Bottom line: while
yesterday’s better employment numbers were welcome, they could have a perverse
impact---since (1) it is the employment stats that Yellen says that she is focused on
and that will have a significant effect on the decision to raise interest rates
and (2) historically, markets have not reacted positively to Fed tightening.
On the other
hand, new housing starts are another in a string of poor reports out of the
primary sectors on the economy. That
keeps alive the risk of our recovery becoming even weaker than it already
is. If that were to happen, it raises
the possibility of the Fed raising rates based on better employment while the
economy is rolling over which would only make any downturn worse.
Of course,
everything could just keep coming up roses and stocks could reach new historic
highs while the unicorns frolic with the nymphets. Oh to be there, fully invested, with a fifth
of Glenmorangie and adorned with only a fig leaf (and single and 30 years
younger).
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.
Update
on Buffett’s favorite valuation metric (short):
The
Fed keeps the bubble expanding (short):
The
latest from Lance Roberts (medium):
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