Thursday, July 3, 2014

The Morning Call---Macroprudential is elitist BS

The Morning Call

7/3/14

The Market
           
    Technical
           
The indices (DJIA 16976, S&P 1974) inched higher yesterday, getting ever closer to the upper boundaries of their long term uptrends.  They remain above their 50 day moving averages and within uptrends across all time frames: short (16145-17624, 1895-2062), intermediate (16416-20781, 1835-2635) and long (5081-18193, 757-1974). 

            Volume declined again---though to be fair, we are approaching a big holiday weekend; plus most investors were awaiting today’s nonfarm payrolls number.  Breadth was mixed.  The VIX fell finishing within very short term, short term and intermediate term downtrends and below its 50 day moving average.

            Update on sentiment (short):

            The long Treasury (111.08) took in the snoot for a second day.  It closed below the lower boundary of its short term uptrend, also for a second day.  If it ends there today, the short term trend will re-set to a trading range.  It also broke below the 50 day moving average.  I noted in a prior Morning Call that when TLT turned down, it established a lower high.  If it moves below the 110.5 level, it will create a lower low and re-set the short term trend to down.

            GLD was unchanged, thereby remaining above its recent trading range and its 50 day moving average.  It is now in a short term trading range and an intermediate term downtrend.

Bottom line: after a quiet day, the Averages remain on the doorstep of the upper boundaries of their long term uptrends; and so far, nothing appears to stand in the way of more upside.  The question now is, will they be able to confirm the break above those boundaries? Further, can they take out those ‘round’ numbers (17000/2000)?  Momentum says yes; multiple divergences says no. 

We got a bit more clarity from the bond and gold markets.  The gold market continues to confirm the stronger economy, higher interest rate/inflation scenario; while the bond market inched closer to supporting it.  As I mentioned above, if TLT breaks the 110.5, it will re-set the long bond in a short term downtrend which I will take as a decent sign that investors outlooks are shifting.

If the bond and gold markets confirm the improving economic growth/easy Fed outlook, our ETF Portfolio will likely lighten up on its bond position and all Portfolios will start adding to GLD.   I would much rather own GLD which is near a four year price low than stocks that are near or at all-time highs. 

 As far as stocks are concerned, 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.

    Fundamental
    
     Headlines

            Yesterday’s US economic news included some bad news.  Weekly mortgage and purchase applications and May factory orders both down.  However, the stat that got investor attention was a strong June ADP private payroll report.  While I think that improving employment is a plus, I would point out that (1) the ADP number always plays second fiddle to the nonfarm payroll data.  That comes out today; and if it is at odds with the ADP figure, then that stat will be quickly forgotten, and (2) employment is a lagging indicator.  So it says little about the near term course of the economy.

            ***overnight, the ECB left interest rates unchanged and continued to hold off on its own version of QEInfinity.  Chinese and Japanese service PMI’s fall.  Japanese wages decline the most since Lehman Bros.

            The highlight of the day was a speech made by Yellen to the IMF, followed by an interview with Christine LaGuard.  In those presentations, Yellen repeated the familiar Fed themes of ‘no bubbles’ and ‘steady as she goes’ monetary policy.   However, her most noteworthy comment (I thought) was that monetary policy is not an effective tool in controlling financial stability---this after two rounds of massive Fed easing (2000 & 2007) that led to extreme financial instability and, dare I mention, its current historically unprecedented expansion of monetary policy. 

No, her preferred method of insuring financial stability is ‘macroprudential’ policies (increasing bank capital requirement, tighter loan policies, etc.).  Macroprudential being the kind of smug, we-know-best because we are all knowing and all powerful, faux intellectual bullshit term that clueless, elitist ruling class bureaucrats use to dazzle the unwashed masses.  Policies which, dare I also mention, the Fed completely and utterly failed to follow in both of the two aforementioned financial crises.

Bottom line: with the indices approaching long term trend highs as well as psychologically big ‘round’ numbers, they got a minor boost from the Yellen as she reiterated the Fed’s tapering for pussies policy.  To state the obvious, as long as current investor euphoria persists, stock prices are going higher.  This despite historically rich valuations.  At some point this will end, likely as not from some exogenous event versus any of the multiple risks I keep harping on---because investors are already ignoring them.  On the other hand, any one of them could still materialize and negatively impact those rich valuation based as they are on some very rosy projections.

As I noted above, if equity investors euphoria about growth and easy money are confirmed by the bond and gold markets, our Portfolios will likely add GLD which I think has a much better risk/reward ratio than stocks.

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.


          Subscriber Alert

            On our latest review of Sonoco Products (SON), it failed to meet the fundamental financial criteria for inclusion in the High Yield Universe.  Accordingly, it is being Removed from that Universe.  The High Yield Portfolio will Sell its position in SON at the Market open.


            United Parcel Service (UPS) has traded above the lower boundary of its Sell Half Range.  Therefore, at the Market open, the High Yield and Dividend Growth Portfolios will reduce their UPS positions to 50% of normal.

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