The Morning Call
1/14/15
The Market
Technical
Speaking of a
schizophrenic Market, yesterday witnessed its very definition with the Dow
experiencing a 450 point intraday swing.
After the dust settled, the indices (DJIA 17613, S&P 2023) still closed
within uptrends across all timeframes: short term (16387-19157, 1889-2251),
intermediate term (16401-21570, 1729-2443) and long term (5369-18860,
783-2083); although they remained below their 50 day moving average.
In addition,
they bounced off both the upper boundary and the lower boundary of the
developing pennant formation. I have
included the S&P chart. Notice how
closely the S&P intraday pin action almost exactly covered the entire gap
between the aforementioned boundaries.
Also note that it traded above the high of the prior day and closed
below the low of the prior day, which in technical lingo is an outside down
day---a negative pattern.
Volume
was up slightly; breadth was mixed. The
VIX rose again, finishing above its 50 day moving average and within its short
term trading range and intermediate term downtrend.
The
long Treasury was unchanged on the day holding recent gains and ending the day
within uptrends across all timeframes and above its 50 day moving average.
GLD
fell but closed within its very short term uptrend, its short term trading
range and slightly below the upper boundary of its intermediate term
downtrend. As I noted yesterday a
confirmed break of that upper boundary would likely mean that a bottom has been
made.
Bottom line: yesterday
morning it looked like the Averages were going to reclaim last Thursday’s highs
bolstering the case for a positive first five days of January; then everything
changed. They bounced off the upper
boundary of their pennant formations (1) failing to achieve last Thursday’s
level and (2) made a second lower high in the pennant patterns. Worse still they had an outside down
day. This all would suggest to me that
stocks are in for additional downside.
Having said that, given the recent volatility, nothing would surprise
me.
Fundamental
Yesterday’s
US economic data was generally upbeat: the December small business optimism
index was up nicely, weekly retail chain store sales rose and the US budget in
December was in surplus though not quite as much as anticipated.
Overseas,
the data flow was very mixed:
(1)
Germany reported a balanced budget [leading investors
to optimistically assume that this would make some EU QE more acceptable to
them]; then later in the day announced that it wanted every country in the EU
to balance its budget [leading to an extreme tightening of those same
investors’ sphincter muscles],
(2)
China reported a better than forecast trade balance;
then Tesla described its China business as weak,
***overnight,
the ECJ advocate general ruled that EU QE was compatible with EU law; Russia
announced a 10% budget cut, while the World Bank estimated its GDP would
contract 2.9% in 2015; Abe announced his biggest budget ever but with less
borrowing (thank you sales tax increase); and copper plunged to a 5 year low.
In addition, oil
rallied early in the day, then plunged again.
Meanwhile, China reported that it had bought an additional five million
barrels of oil in December, adding them to its strategic reserves---which
begged the question, how much lower would oil prices have dropped without those
purchases?
David Stockman
on the ‘unmitigated positive’ of lower oil prices (medium):
Back
in the US, in another earnings related disappointment, KB Homes reported
softening demand and cost price pressures.
Not a great combo, especially from within an industry sector from which
investors have been expecting great things.
Bottom
line: despite the positive economic data
here and at least a dabbling of it from abroad, the news on key investment
issues (EU QE, oil, earnings) was not so good.
Particularly discouraging is KB Homes the report which is more anecdotal
evidence following Monday’s poor showing from Tiffany’s (consumer spending) and
American Airlines (benefits of lower oil prices) that the trend in upbeat macroeconomic
data maybe about to change. Again, it
would be foolish to be making predictions about this earnings season or the
economy from just two days of earnings reports.
But, pay attention.
Investing for Survival from the Sovereign
Man
What follows
is a continued personal perspective on some of the challenges facing today’s
investor:
1.
For many investors, capital preservation in real terms should be more important
than capital growth in notional ones.
2. Investors
– as humans – are typically loss-averse. We feel the emotional impact of
equivalent gains and losses disproportionately. This does not mean we should
avoid considered risks, but to invest dispassionately.
3. Investing
dispassionately is difficult when most of the investment media comprise the
participants in a 24/7 circus. If the business of investing is either
entertaining or exciting, you’re doing it wrong.
4.
The answer is obvious: turn off CNBC. (Judging by their viewing figures, plenty
of investors already have.)
5. True
diversification remains the last free lunch in finance.
6.
Having fatally tainted monetary policy, the dismal science of economics has
wrought damage across investment theory as well: ‘homo economicus’ does not
actually exist, and markets will never be wholly efficient until all people
are, too.
7. “The
investor’s chief problem – and even his worst enemy – is likely to be himself.”
(Benjamin Graham)
8. The
general principles of investing are not arcane. They should begin with the
avoidance of loss.
9. Starting
valuation is the most important characteristic of any investment.
10.
Risk is poorly defined as volatility. It is better defined as the possibility
of a permanent loss of capital.
11.
“Operations for profit should be based not on optimism but on arithmetic.”
(Also Benjamin Graham)
12. Don’t
buy poor quality investments pushed by sell-side interests; don’t overpay for
quality investments.
13. The
‘equity / bond / property / cash’ paradigm struggles fundamentally in an
environment where all of these asset classes appear overvalued.
14.
Friends are unlikely to share their worst investment outcomes at the golf club.
15.
Liquidity is overrated. For capital that can be safely committed to the longer
term, it is irrelevant.
16. Private
investors are often poorly served by the asset management industry.
17.
The medical profession has the Hippocratic Oath: first, do no harm. The asset
management profession lacks such an explicit expression of fiduciary commitment
to its clients.
18. Private
investors may, all things being equal, be better served by small, unlisted,
private partnerships than by global, publicly listed, full service investment
brands.
19. Rising
compliance and regulatory pressure reduce variety in the asset management
business. This is unlikely to be in the best interests of private investors.
20. When
interest rates are close to all-time lows and the printing presses are running,
the merits of ‘deep value,’ profitable, well-managed businesses are more than
usually compelling – compared to just about any other asset or asset class.
21.
Distrust anybody who claims to have all the answers. Especially today.
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
December small business optimism index came in at 100.4 versus expectations of
98.1.
Redbook
Research reported month to date retail chain store sales were up 3.8%.
The
December US budget was in surplus by $1.9 billion versus estimates of plus $3
billion.
Weekly
mortgage applications soared 49.1% and purchase were up 24.0% (lower interest
rates).
December
retail sales fell 0.9% versus forecasts of -0.1%; ex autos and gas, they
declined 0.3% versus consensus of +0.6%.
Other
The
golden age of the central banker has reached a cult stage (medium):
Will
low inflation delay the Fed’s rate hike? (medium):
Politics
Domestic
International War Against Radical Islam
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