The Morning Call
2/10/15
The Market
Technical
The indices
(DJIA 17729, S&P 2046) sold off yesterday, though given the news flow, it
could have been a lot worse. They remained
within uptrends across all timeframes: short term (16559-19335, 1925-2906),
intermediate term (16595-21750, 1750-2464) and long term (5369-18860,
783-2083). The Dow finished above its 50
day moving average and the lower boundary of the former downtrend off its mid-December
high, while the S&P closed right on those boundaries and the NASDAQ
remained below both. Clearly a mixed
picture with no real momentum indicated for either direction. For the moment, my focus is on the boundaries
that were set in mid-December trading (17989/2080 and 17288/1980).
Volume
fell, countering the recent up volume on down price day trend; breadth was
mixed. The VIX rose 7%, ending within
its short term trading range, its intermediate term downtrend and above its 50 day
moving average. It is beginning to
develop a pennant formation (lower highs and higher lows); but the last time it
followed that pattern, nothing meaningful came of it.
The
long Treasury dropped fractionally, remaining within short term, intermediate
term and long term uptrends and above its 50 day moving average. Because of our large ETF Portfolio’s large bond
position, I am very focused on TLT’s pin action, awaiting a sign of initial
support.
GLD
was up slightly, but failed to regain the initial Stop Loss level that had been
previously set---that’s the bad news. It
did finish within a short term uptrend, an intermediate term trading range and
bounced off its 50 day moving average---that’s the good news.
Bottom
line: despite yesterday’s sell off, it
could have been a lot worse given the news flow. That in itself is a sign that the bulls have
life. On the other hand, the Averages
present a somewhat mixed picture technically speaking; so I would still be cautious
until we get them all moving in the same direction. It still think that the boundaries of the mid
December trading range are the levels to watch.
The TLT remains
OK; but I would feel much better with a more vigorous sign of price
stability. GLD is nerve wracking; but
our Portfolios are holding the remainder of their position.
Fundamental
Headlines
There
was little domestic economic news yesterday, though we did get a further update
on this season’s earnings reports that confirmed our assessment from late week,
to wit, it was not as bad as it initially appeared but it was still not great,
in particular the forward guidance.
We also got some
banking news as the DOJ stated that it was investigating charges of foreign
exchange fraud at Barclay’s; and HSBC admitted to assisting clients to dodge
taxes and hide assets. Just another example
of bankster misdeeds, why someone ought to be jail and why investor confidence
in the bank management is apt to be skin deep.
***Overnight,
the NY Department of Financial Services issued subpoenas to Goldman, Credit
Suisse and Paribas for information on their foreign exchange trading.
Overseas,
China posted a 3.3% decline in exports.
***Overnight,
China reported January CPI and PPI well below expectations---which doesn’t help
the global deflation story but may get investors jiggy with the prospect of
more easy money. The January UK manufacturing
and industrial production were lower than anticipated.
And
on the political front, the EU is trying to tone down the conflict in Ukraine
(who woulda thunk?); while the Greeks are ramping up tensions as the PM vowed
to roll back austerity measures and stated that Greece won’t ask for an
extension of its bail out. Looks like we
are getting down the flop card in Texas Hold’em; but I suspect that there is
still a good deal of bluffing going on.
Nonetheless, it is a bit surprising to me that the Markets aren’t a tad
more jittery given the magnitude of the consequences of failing to work out a
compromise.
Greenspan
on Greece (short):
UBS
of Greece (medium):
Latest on US/Germany/Ukraine
(short):
***on the wires but no confirmation
yet that the ECB may give Greece a six month extension on repayment of its bail
out loan.
Bottom
line: geopolitical events captured most
of the Market’s attention yesterday. The
good news is that Merkel seems to be having success in diffusing international tensions
in Ukraine. The bad news is that threats
are running hot and heavy in the Greek/ECB/EU standoff; and, perhaps more
concerning, time is getting short to come up with a resolution. That said, in a high stakes game like this,
you never know who will blink. So the
outcome remains in doubt and I wouldn’t be making any bets on it. The sidelines seems to be the safest place to
be.
Finally, there
was more confirming evidence of a slowdown in corporate profitability with possibility
of more to come. And equity prices remain in nosebleed
territory---not an inspiring risk/reward equation.
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):
Company Highlights
Conoco Phillips
one of the world’s largest exploration and production (E&P) companies.
Profits and dividends have grown approximately 10-14% annually over the last 10
years. In the same time frame, COP has earned between a 10-20% return on equity. While
suffering a similar fate as the rest of the oil and gas industry, long term the
demand for energy will continue to rise and the company is positioned to take
advantage of that progress as a result of:
(1) its exposure
to promising international regions,
(2)
domestically, its capital expenditures will focus liquids versus gas,
(3) splitting
the exploration and production from the refining and marketing should unlock
value for shareholders,
Negatives:
(1) weak current
outlook for production,
(2) price
fluctuations of oil and natural gas,
(3) its
international operations are subject to political risks.
Conoco is rated
A++ by Value Line, has a 24% debt to equity ratio and its stock yields
approximately 4.2%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2005
Ind Ave 2.0 11 28 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
Ind Ave 42 11 NA 18 NA
Chart
Note:
COP stock made good progress off its 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 in a trading range (purple lines). Short term, it is in a downtrend (brown
line). The wiggly red line is the 50 day
moving average. The Dividend Growth and
High Yield Portfolios own a 50% position in COP, having Sold Half in mid-2011. The upper boundary of its Buy Value range is
$32; the lower boundary of its Sell Half Range is $72.
2/15
Investing for Survival
Three
rules for stock picking (medium):
News on Stocks in Our Portfolios
o
Coca-Cola (NYSE:KO):
Q4 EPS of $0.44 beats by $0.02.
o
Revenue of $10.87B (-1.5% Y/Y) beats
by $110M.
- However, the company will get to charge a 5% royalty rate on
3G-capable devices (including multi-mode 3G/4G hardware, which account
for a large % of Chinese 4G phones sold today) for access to "3G and
4G essential Chinese patents," 4G devices that don't support 3G CDMA
or WCDMA networks will carry a 3.5% rate. However, the royalty is derived
from a base of 65% of the device's net selling price.
- Some fine print: Qualcomm will license its "essential
Chinese patents" separately from other patents - that could mean 3G
TD-SCDMA patents aren't covered - and negotiate cross-licenses in
"good faith." It also won't "condition the sale of
baseband chips on the chip customer signing a license agreement with
terms that the NDRC found to be unreasonable or on the chip customer not
challenging unreasonable terms in its license agreement." However,
Qualcomm isn't obligated to sell chips to a non-licensee.
- The company has also agreed to create "a China-specific
investment fund of $150 million to further the development of mobile and
semiconductor technologies." It already committed to similar investments in
December.
- FY15 (ends Sep. '15) guidance has been hiked on the low end:
Revenue guidance is now at $26.3B-$28B vs. $26B-$28B, and EPS guidance at
$4.85-$5.05 vs. $4.75-$5.05.
Economics
This Week’s Data
Other
A
contrary opinion on US employment growth (short):
Three
charts not to be dismissed (short):
Politics
Domestic
Thoughts on the
performance of the US military (medium):
International
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