The Morning Call
2/3/15
The Market
Technical
The indices
(DJIA 17361, S&P 2020) made yet another sharp countermove (this time to the
upside), remaining within uptrends across all timeframes: short term (16507-19283,
1917-2898), intermediate term (16536-21691, 1742-2456) and long term
(5369-18860, 783-2083). In addition, the
Dow recovered back above its mid-December support low (17288) for the second time.
Volume
fell---continuing a recent pattern of being up on up days and down on down days;
breadth improved. The VIX dropped 8%,
finishing within a short term trading range, an intermediate term downtrend and
above its 50 day moving average.
The
latest from TraderFeed (short):
The
long Treasury declined, but closed within very short term, short term, intermediate
term and long term uptrends and above its 50 day moving average.
How
negative can rates go? (medium):
GLD
was down slightly, ending within its short term uptrend, an intermediate term
trading range and above its 50 day moving average. Our Portfolios Added to this position
yesterday morning.
Bottom
line: on the one hand, the Dow has challenged its mid-December
low twice unsuccessfully; and that is a positive. Plus, the Averages remain well within their uptrends. On the other hand, the extreme volatility
continues but with no direction in prices---which I view negatively. In addition, all the price pressure has been
to the downside---it’s the support levels that are being assaulted and to date
the indices have made two lower highs.
Until a major uptrend is broken, the weight of evidence has to be on the
side of higher prices. But the pin
action is confusing, making it a time to do nothing.
TLT and GLD’s
charts have a lot more clarity to them.
Our ETF Portfolio owns a full position in bonds, though I think that it is
too late to be Buying. The turn in GLD
(assuming this is one) in more in its infancy which leaves room for growing
this position.
Fundamental
Headlines
Lots
of US economic stats reported yesterday: December personal income rose in line,
personal spending fell more than expected, the PCE deflator was down less than
estimates, December construction spending rose less than forecasts, both the January
Markit PMI manufacturing and the January ISM manufacturing indices were
slightly less than anticipated. So on
balance, the data was not promising.
Particularly concerning were the personal spending and ISM numbers---but
they are just one day’s input. Much more
is needed before even considering altering our forecast.
Not
to dwell on a recurrent theme, but note how the ‘unmitigated’ positive decline
in oil prices didn’t help consumer spending.
And
this from the SF Fed: the Fed
consistently overestimates the growth rate of the economy (medium):
On
the other hand, we went another day without any disappointing earnings/guidance
from important players in major industries.
So as I noted in the Closing Bell, that early rash of terrible profit
reports/guidance is moderating and leaves me feeling a bit more comfortable
than this time last week. Here is the
latest figures on this earning season; however, remember they do not reflect
any of those poor guidance numbers that caused distress.
And
here is the guidance:
In
addition, oil continued the rally it started last Friday and that helped stabilize
investor psychology following the poor early morning economic stats. Whether or not the last two days trading
marked the bottom is another question.
Certainly from a technical perspective, it has a number of hurdles yet
to be crossed before this pin action can be looked at as anything other than a
rally in a bear market.
Obama
captured some air time and headlines yesterday as He presented His DOA FY2016
budget, the highlights of which were raising taxes on capital gains and
dividends and taxing overseas corporate earnings (medium):
Overseas,
the economic data were balanced: the January Chinese manufacturing PMI was
negative for first time in two and a half years, while EU manufacturing PMI was
positive. Given the current horrendous
dataflow, I will take any upbeat international stat right now.
***overnight,
the Bank of Australia joined in the fun and lower its key interest rate.
The
other news and the most likely explanation for the late in the day stock price
rally was a report that the Greek PM said that a debt deal (with the EU) was
imminent. Here is a summary of the
talking points (medium):
They
don’t sound nearly as positive as the ‘debt deal was imminent’ headline. In addition, given the rhetoric during their
election campaign, I have trouble believing that the new government would
strike a deal that didn’t clearly incorporate their platform of ‘no austerity;
and debt forgiveness’ so quickly. If it
did, it would make them like every other political party that has talked tough
in the campaign then folded like a cheap tent afterwards. That said, maybe they are like every other
political party. More:
***overnight
developments (medium):
Plus
the latest from Angela Merkel (medium):
What’s
going on between Greece and the ECB?
And
(medium):
And this from Ken Rogoff
(medium):
Bottom line: while I am encouraged by an improving trend in
corporate earnings and guidance reports as well as the potential bottom in oil
prices and a ‘deal’ that takes a Greek default on its debt off the table, (1)
the current assumption on corporate profits in our Model would have to be
changed if the early disappointing trend continued; so this ‘better’ news does
nothing for our forecast, (2) at least as reflected in the December personal
spending number, that ‘unmitigated’ positive of lower oil prices remains
suspect, (3) at the moment, the positive EU PMI report is an outlier in an
otherwise endless stream of subpar international economic reports; and even if
it is a sign of a change in trend, all it would accomplish is supporting a ‘muddle
through’ scenario versus something much
worse, (4) the new Greek government may very well go along with the powers
within the EU; but here again that would just help confirm our ‘muddle through’
outlook and not a far worse alternative that could cause severe problems for
the EU banking system. In short,
yesterday’s good news was good only because it give our forecast a chance to be
right. And, as you know, under our forecast, equities are substantially
overvalued.
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.
The latest from John
Hussman (medium):
Update
on stock valuation (short):
Subscriber Alert
The
stock prices of Praxair (PX-$122) and Microsoft (MSFT-$41) traded below the
upper boundary of their respective Buy Value Ranges. Accordingly, they are being Added to the
Dividend Growth Buy List. The Dividend
Growth Portfolio already owns positions in both stocks. So no additional shares will be Bought. However, even if no shares were owned, no
purchases would be made at the present time.
Company Highlights
Schlumberger is
the world’s leading oilfield service company providing wireline, drilling and
measurement and well testing services, completion, artificial lift, data and
consulting services, land and marine seismic services and reservoir
services. The company has grown profits
at a 20% pace over the past ten years; the dividend growth rate has been lower
rate (12%) but management has stated that it intends to increase it in the near
term. In addition, the company has
earned an 11-25%+ return of equity over the last ten years. The current turmoil in the oil supply/demand
picture will undoubtedly prove disruptive to SLB. However, long term the secular growth in the
demand for oil will continue and provide opportunities of innovative
participants like Schlumberger:
(1)
its financial strength,
(2)
technological
leadership which lowers costs and increases efficiency of its clients,
(2) acquisitions,
(3) stock
buybacks.
Negatives:
(1) intense
competition causing pricing and margin pressures, especially in an atmosphere
of declining E&P spending,
(2) commodity
price and currency fluctuations,
(3) geopolitical
risks,
(4) adverse
weather conditions can negatively impact demand.
Schlumberger is
rated A++ by Value Line, carries a debt to equity ratio of about 22%, and its
stock yields of approximately 1.8%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2005
Ind Ave 3.3 11 33 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
Ind Ave 27 12 NA 13 NA
Chart
Note: SLB stock made good progress off the March
2009 low, quickly surpassing the downtrend off its June 2008 high (straight red
line) and the November 2008 trading high (green line). Long term, the stock is in an uptrend (blue
lines). Intermediate term, it is a
trading range (purple line). Short term,
it is in a downtrend (brown line). The
wiggly red line is the 50 day moving average.
The Dividend Growth Portfolio owns a full position and the Aggressive
Growth Portfolio owns a 75% in SLB. The upper
boundary of its Buy Value Range is $43; the lower boundary of its Sell Half Range
is $120.
2/15
Investing for Survival
The
small firm effect (medium):
News on Stocks in Our Portfolios
·
United Parcel Service (NYSE:UPS): Q4 EPS of $1.25 in-line.
·
Revenue of $15.9B (+6.1%
Y/Y) beats by $100M
·
Revenue of $5.58B (-0.5%
Y/Y) misses by $10M.
·
Revenue of $87.27B (-21.3%
Y/Y) misses by $310M.
·
Revenue of $2.42B (+13.6%
Y/Y) beats by $30M.
·
Revenue of $46.09B (-17.9%
Y/Y) beats by $1.2B.
Economics
This Week’s Data
December
construction spending rose 0.4% versus expectations of +0.6%.
The
January Markit PMI manufacturing index came in at 53.9 versus estimates of
54.0.
The
January ISM manufacturing index was reported at 53.5 versus forecasts of 54.5.
Other
World
inflation continues to fall (short):
Baltic
Dry Index hits 29 year low (short):
http://www.zerohedge.com/news/2015-02-02/baltic-dry-plunges-fastest-pace-lehman-hits-new-29-year-low
Politics
Domestic
Quote of the day
(short):
International
White
House considering sending weapons to Ukraine (oh, yeah, this is going to end
well):
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