The Morning Call
9/12/14
I leave this morning for my
annual college pledge class reunion.
Nothing tomorrow; back on Monday
The Market
Technical
The
indices (DJIA 17049, S&P 1997) had a mixed day (Dow down, S&P up). The S&P remained in uptrends across all
timeframes; short term (1941-2142), intermediate term (1904-2704) and long term
(762-2014); it also closed above its 50 day moving average. The Dow finished within its short term
trading range (16331-17158), its intermediate term trading range (15132-17158),
its long term uptrend (5101-18464) and above its 50 day moving average.
Volume
fell; breadth improved. The VIX
declined, closing within its short and intermediate term downtrends and below
its 50 day moving average.
The
long Treasury was off, finishing below the lower boundary of its short term
uptrend for a second day. A close below
that trend line today will confirm the break and re-set the TLT short term
trend to a trading range. It remained
within an intermediate term trading range and above its 50 day moving average.
GLD
fell (again). Intraday, it touched the
lower boundary of its short term trading range but bounced off that level. It closed within an intermediate term downtrend
and below its 50 day moving average.
Bottom line: the
Averages had a roller coaster day---down in the morning with the ‘buy the
dippers’ showing up in the afternoon and pushing prices roughly back to
even. As long as this phenomena
continues, it seems reasonable to assume that the Dow will ultimately
successfully challenge the upper boundaries of its short and intermediate term
trading ranges and then along with the S&P attack the upper boundaries of their
long term uptrends.
Almost all
segments of both foreign and domestic bond markets continue to get whacked---a
notable exception being US muni bonds. The
consensus remains that fear of an earlier than expected move by the Fed to
higher interest rates is the driving force.
I have no basis for arguing with that thesis. I will just repeat that it feels like something
else is stirring beneath the surface; and I have no clue what it is. But it makes me nervous.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Stocks
are approaching their sweet spot in the Presidential cycle (short):
Fundamental
Headlines
Two
datapoints were released in the US yesterday: weekly jobless claims were higher
than anticipated while the August budget deficit was less than forecast. That jobless number was disappointing but not
enough to suggest questioning our outlook.
That
aside, investors continued to focus on:
(1) the
Fed meeting next week [***in yesterday’s Morning Call, I stated that it was
next month. Clearly an error] and the
prospects that it will change the language on the timing of an interest rate
increase, moving it closer than originally thought. Consensus considers this a necessary move and
appears sanguine about its impact on the Markets.
As you know, I have
believed that the tightening process should have begun long before now. However, I am a bit surprised by the
relative calm with which it is now being received. Certainly, the end of QEI and QEII were
traumatic for the Markets. On the other
hand, this subject is being beat to death every day and I am sure that will
continue until we read the statement following the FOMC meeting---so there is
no surprise here and hence every reason to assume that an earlier rise in
interest rates is being well discounted in security prices.
Admittedly, it
is a bit confusing watching bonds get whacked while stocks draw a bid every time
there is a down tick. The simplest
explanation for this is that the US economy is starting to grow faster---hence,
higher interest rates and faster profit growth.
But I don’t see how that is possible with the rest of the world sinking
into recession. As I said above, it seems
like something else is going on beneath the surface; I am just not smart enough
to know what it is.
The
real problem with higher interest rates (short):
(2) the
EU voted/approved the next round of sanctions on Russia; and Russia wasted no
time in responding. Notice how Putin equated
the sanctions to a rejection of a peaceful settlement in Ukraine.
Not that any
of this matters because the separatists have continued their fight despite the ‘cease fire’ and
have now reached the Crimean border (short):
(3) more
hand wringing over the potential impact of a Scottish secession---not just on
the Scot and UK economies but also the influence in could have on other
secessionist movements in Europe.
George
Soros on the Scottish secession vote (medium):
(4) last
and certainly least, Obama’s new policy against ISIS. This subject spawned a lot less attention
than I would have expected, especially from long time opponents of the
regime. But I think that everyone is so
over this Guy that they are simply too tired of repeating the same old themes [out
of touch, inexperience, lack of concern, naïve, indecisive, etc., etc.], have
relegated Him to an early lame duck status and His policies to temporary status
quo that will be changed when a new regime takes over.
David
Stockman on Obama’s new strategy (medium):
The
UK and Germany on Obama’s new strategy (short):
Russia on Obama’s new strategy
(short):
Bottom line: after
early morning weakness, the buyers were back yesterday. This relentless bid under the Market makes it
easy to believe that stocks are going higher notwithstanding current geopolitical
events, what is transpiring in the global economy, the weakness in the bond
markets or current valuations.
I have a bad
feeling about what the bond guys may be discounting; but then, it is nothing
specific. So there is nothing on which to
hang my concerns other than the same old themes which have been and are
presently being ignored. Our Portfolios
are prepared for a period of asset re-pricing.
Someday it will come; I just don’t know when.
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.
This
is the first of a two part series on the role that currency valuations are
playing in the current market pin action.
It is a must read and suggests that stocks are likely to move higher
(medium):
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