The Morning Call
7/16/14
The Market
Technical
The
indices (DJIA 17060, S&P 1973) meandered about yesterday, finishing with
mixed results (Dow up, S&P down).
They remained above their 50 day moving averages and within uptrends
across all time frames: short (16185-17664, 1912-2078), intermediate (16514-20872,
1851-2651) and long (5083-18464, 762-1999).
Volume
was considerably more than has been the recent norm; breadth was mixed. The VIX rose, closing back above the upper boundary
of its very short term downtrend. I am
interpreting this as a re-confirmation of the break above that boundary---though
given the recent schizophrenic behavior, I am not sure this is more than a one
day call. In short, the chart at this
point is confusing, but seems to be suggesting that volatility is about to pick
up (and stock prices weaken).
The
long Treasury declined again and finished below the upper boundary of its
former very short term downtrend two days after a confirmation of a break above
that boundary. Like the VIX and GLD, it
has vacillated up and down through this boundary---the only difference being
that it is one day behind. It remains
above its 50 day moving average and within short and intermediate term trading
ranges. TLT’s chart continues to create
uncertainty for me and, judging by the pin action, for many other fixed income
investors.
GLD
took in the chops again, negating the break above the upper boundary of a very
short term downtrend and confirming the break below the lower boundary of a
very short term uptrend. It closed right
on its 50 day moving average and within short and intermediate term downtrends. Our Portfolios cut their losses in the gold
related positions established on Monday.
Bottom line: given
Monday’s pin action, I wouldn’t have been surprised if yesterday’s performance
was neutral, i.e. any enthusiasm about more dovish cooing from Yellen was
already discounted on Monday. I didn’t
expect the slightly more hawkish tone of her comments (see below); and so given
that, I thought that stocks might sell off more than they did. In other words, I thought equity prices
acted just fine in light of Yellen’s comments on the market.
That said, the
schizophrenia in the VIX, TLT and GLD markets suggests that investors in other
markets are not as certain as the straight stock guys. Coupled with other divergences, this all
suggests that the Averages may have to work very hard to get to 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.
Our gold related
investments initiated on Monday are history.
Institutional
versus individual investors. Who is
right? (short):
Stocks
historical trading pattern in years in which they were basically flat the first
half of the year (short):
The
impact of Fed interest rate hikes on the economy and the market (medium and a
must read):
Fundamental
Headlines
Yesterday’s
US economic news was mixed: the July NY Fed manufacturing index was better than
expected, weekly retail sales were OK, May business inventories and sales were
slightly below estimates and May retail sales fell short of consensus. Nothing here.
Overseas,
the news was centered back on Espirito Santo holding company (major stake
holder in that insolvent Portuguese bank) in which another related entity may
be filing bankruptcy---emphasizing again how intertwined the EU banks are.
The latest from
the Portuguese bank default (it’s getting worse) (medium):
This
article focused on US financial institutions; however, as I constantly emphasize,
the problems are worse in Europe. Financial
interconnectedness and systematic risk at our major banks are a big problem (medium
and today’s must read):
***Overnight,
there were rumors that Espirito Santo would do a capital raise. In addition, Chinese GDP and industrial
production beat expectations, retail sales were up but a bit short of estimates
and housing prices fell. It appears that
most of the improvement in China came as a result of a return to rising credit
levels---a sign that the Chinese government just couldn’t resist the temptation
to join the rest of the world in QEInfinity.
Yesterday’s
leading headline was, of course, Yellen’s testimony before congress in which
she reiterated most of her past macroeconomic talking points, i.e. the US
economy is improving, enough to allow an end to tapering, but not enough to
raise interest rates. The surprise was
that she chose to point to certain markets that could be getting frothy; and
that came across as a tad more hawkish than investors had expected.
Goldman’s
take on Yellen’s testimony (medium):
Yellen’s
comments on the frothy market (short):
Bottom
line: The US economy remains the bright spot in our outlook, though our
Valuation Model shows that corporate earnings flowing from that scenario are
very richly valued---and that ignores problems in China, Japan, the EU
(Portugal), Ukraine and the Middle East.
Further, Fed
policy isn’t exactly helping the outlook.
Absent Yellen’s comments on frothy markets, her testimony was made from
the same cloth as prior statements by her and by the FOMC---suggesting that the
Fed will remain easy until its hand is forced by the bond market (hence
assuring another botched transition from easy to tight money).
I am not really
sure I get the point of that frothy markets statement---something that seems
universal, judging by the comments that I am getting from the pundits. That said, since a number on international
banking organizations (notably the Bank of International Settlements) have
begun warning of speculative bubbles, it may be that she (the Fed) just wants to
be on record as warning of bubbles---since in 2007, the Fed insisted that everything
was just hunky dory right up until the crash. This way, she can say ‘I tol’ you’.
Further, the
import of the remark doesn’t negate the Fed’s strategy to stay easy until the bond
market rebels. Although perhaps Yellen may
want to hurry the process along.
In short, Yellen’s testimony only muddied the Fed
policy waters.
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.
Revenue
and earnings expectations for the third and fourth quarters (medium):
Conditions
for a crash/correction are still missing (medium):
It
has been a tough year for stock picking (short):
There
is a limited supply of ‘greater fools’ (medium):
A
thought from Jeremy Grantham (short):
The
impact of interest rates and debt on cash flow (medium):
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