The Morning Call
2/18/15
The Market
Technical
The indices
(DJIA 18047, S&P 2100) had another good day, ending within uptrends across
all timeframes: short term (16603-19375, 1930-2911), intermediate term (16645-21800,
1755-2469) and long term (5369-18860, 797-2093). They both closed above their 50 day moving
averages and their mid-December highs.
The S&P finished above the upper boundary of its long term
uptrend. That starts our time and
distance discipline; the break will confirmed if it remains above that upper boundary
through the close next Monday.
Update on the seventh
year (presidential cycle) market pattern (short):
Volume
rose; breadth deteriorated---somewhat unusual for an up day. The VIX rose 8%, again not the customary pin
action for a plus day in prices. It
ended within its short term trading range, its intermediate term downtrend and
below its 50 day moving average.
The
long Treasury got monkey hammered again.
It finished below its 50 day moving average and the lower boundary of
its short term uptrend but well within its intermediate term and long term
uptrends. Clearly, we are not getting my
hoped for stability. Our ETF Portfolio will
Sell a third on its muni bonds holdings at the Market open.
GLD’s
chart just keeps getting worse. It ended
very near the lower boundary of its a short term uptrend, below its 50 day moving
average and within an intermediate term trading range. It is also developing a very short term downtrend. A close below the lower boundary of its short
term uptrend will prompt the sales of the remainder of out Portfolios’ positions
in GLD.
Bottom
line: the pin action suggests that investors
are reasonably sure that Greece/EU bail out discussions will end
positively. That is supported by bond
and gold investors---no need for a ‘safety trade’. On the other hand, breadth and the VIX
provided cognitive dissonance.
Nevertheless, the momentum is to the upside and the levels to be
watching are the upper boundaries of the Averages long term uptrends. I continue to believe that they represent
strong resistance. However, until
investors ditch their ‘good news is good news and bad news is fantastic’
attitude, it make no sense to me to try to buck this trend. If you are a nimble trader, there may be
short term opportunities on the upside.
I am not a trader much less nimble.
The TLT continues
to suck. Our ETF Portfolio will start to
lighten up at the Market open. (Remember
this is a full position and the largest holding in the ETF Portfolio). GLD is
even worse. A close below the lower boundary
of its short term uptrend will prompt the elimination of this position.
This
is a great piece from TraderFeed on forward thinking. While it specifically deals with trading, it
is easy to see how the Valuation Ranges set by our Valuation Model along with
our Price Discipline fit the kind of mental preparation that the author is
advocating (short):
Fundamental
Headlines
More
subpar economic numbers yesterday: the NY Fed manufacturing index and the
February homebuilder confidence index.
Both are secondary indicators; so in and of themselves, they aren’t that
alarming. However, coming as they do as
part of a three week string of disappointing data flow, they reinforce that
trend---which is not a plus.
Overseas,
fourth quarter Japanese business spending (+0.1%), private consumption (+0.3%)
and GDP (+2.2%) all missed estimates on the downside; as did UK CPI. As you know, the stats out of Europe improved
a bit last week (and that is a positive) but clearly there is no global trend change
in total.
***overnight,
UK jobless claims fell and the Japanese government stated that it was maintaining
its quadruple down, swing for the fence, balls to the wall, give me liberty or
give me death QE policy.
Once
again though geopolitical events captured the front page:
(1)
the Ukraine/rebel/Russia dispute is not over. There remains the small problem of Debaltseve,
a major transportation center in eastern Ukraine (read, now Russia) that is
still being held by Ukrainian forces.
***overnight,
the fighting continued around Debaltseve; but by early morning, it appeared
Russia (the rebels) had secured that enclave (medium):
(2)
negotiations on the Greek bail out broke off amidst
acrimonious dialogue and seemingly intractable positioning. But it was water off a duck’s back. The Market is focused on two story lines: [a]
there will be a settlement because there has always been one or [b] Grexit is
already priced into most securities.
What, me worry?
At the risk of boring you with irrelevant details, here is
the latest news on each parties’ comments and negotiating position: (medium):
And (medium):
Plus the latest gambit in the
negotiating process (medium):
You want the truth, here’s the
truth (medium):
And this 4 minute video from my
favorite eurocrat:
Bottom
line: the economic data flow both here
and aboard did little to improve the overall global economic outlook or assuage
my concerns regarding the ultimate impact of declining worldwide growth on the
US.
Ukraine is not
quite as resolved as we thought it was last Friday. But I have only a small doubt that Putin
doesn’t have this situation under control.
He has played this masterfully and, therefore, I assume will be in
complete control of eastern Ukraine sooner rather than later. I am not sure that this has any significant
economic implications; but it does demonstrate that the US can whack him across
the balls as much as it wants, it is not likely to achieve its geopolitical
objectives---at least not using its current tactics.
Some
observations on what the Russian populous thinks (short):
The Greek/EU
situation is a head scratcher to me. (1)
I could accept the proposition that the whole negotiating process has been a Kabuki
dance and that a deal keeping Greece in the eurozone and getting its bail out
relief was a foregone conclusion, if there weren’t that so many nonmarket experts
are giving the odds of a deal at 50/50.
That is not to say that there won’t be a deal. It is to pose the question, is a 50/50 deal
properly priced at current levels? (2) I have a tougher time with the ‘a Grexit
is all priced in’ argument because [a] I have seen no analysis whatsoever from
market or nonmarket types that puts any numbers on the consequences [b] which
assumes that anyone even knows the economic implications of the consequences. Again, I am not arguing that the consequences
aren’t somehow priced in, I just haven’t seen any analysis to support that
notion.
In the end,
price is truth; and I apparently just can’t handle the truth. Even if there is a Greek/EU deal and/or the
final outcome is priced in, stocks are still priced for perfection---and the
current trend in US and international economic data is not perfect.
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):
Investing for Survival
MarketWatch columnist Brett Arends has been looking for
the Holy Grail of investment portfolios. In a recent article he describes his
search for a simple ‘perfect portfolio.’
In the end he came up with a broadly diversified global
portfolio consisting of 10 equal-weighted asset classes that are rebalanced on
an annual basis.
I appreciate the fact that Arends is looking for a
simple, diversified portfolio that, as he says, “maximizes my chances of
earning a good long-term return, and minimizes my chance of ending up in the
poor house.”
I’m just not so sure that his choice of words makes sense
for investors. There is no such thing as a perfect, all-weather portfolio. It
doesn’t exist. There is only a most-of-the-time-this-works-portfolio because
nothing works all the time in every environment.
Craig Israelsen wrote an article for Financial Planning
Magazine where he analyzed a portfolio made up of 12 different asset classes.
He first looked at what would happen if an investor had perfect
foresight to choose the best performing asset class in advance each
year:
Assuming a person could
accurately pick each year’s winning asset class at the start of each year, and
devote an entire portfolio to that asset class, that investor’s 15-year
annualized return would have been an astounding 32.25%, with a standard
deviation of annual returns of just under 19%.
Obviously, that would be
impossible since no one can predict the future and there is no rhyme or reason
to annual asset class performance. Look at any asset allocation quilt to understand this dynamic.
While the perfect portfolio is impossible, investors can
easily invest in a terrible portfolio. Israelsen next looked at what
would have happened if an investor based their purchases strictly on past
performance by investing in the top performing asset class from the prior year:
The “perfect” 32.25% annualized
15-year return plunged to 2.71% for an investor using this strategy during the
15-year period, while the standard deviation of annual returns increased to
23.7%.
In fact many investors fall for this trap by investing in
the hottest performing sector or asset class. It’s why fund flow
data shows that investors pile into asset classes after large gains and
pull money out after large losses, the opposite of a prudent investment
strategy.
This is the problem with a search for perfection.
There are only perfect past portfolios, not perfect future portfolios.
You could go through all of the asset allocation studies, Monte Carlo
simulations or risk tolerance questionnaires you can find but all they will
tell you is how certain portfolios have performed in the past.
While these tools can be useful as a way to gauge
possible risk factors, assuming future cycles will play out exactly as they did
in the past can lead to overreactions when things don’t go as planned.
If your goal is to create a perfect portfolio you
have basically already lost because you are only setting yourself up for
disappointment. It’s a pipe dream. There are only investment styles that
fit your personality and allow you to meet your needs with a high probability
for success.
The real “perfect” portfolio is whatever approach allows
you to stick with your investment plan without completely abandoning your
strategy at the worst possible times.
It’s the portfolio that helps you eliminate any possible
behavior gap that comes from chasing hot funds, buying high or selling low and
investing in products or markets that you don’t understand.
News on Stocks in Our Portfolios
·
Revenue of $1.22B (-8.3%
Y/Y) beats by $60M.
·
Genuine Parts (NYSE:GPC): Q4 EPS of $1.07 in-line.
·
Revenue of $3.82B (+8.5%
Y/Y) beats by $90M.
Economics
This Week’s Data
February
homebuilder confidence came in at 55.0 versus estimates of 58.0.
Weekly
mortgage applications fell 13.2% while purchase applications were down 7.0%
January
housing starts declined 2.0% versus consensus of -1.7%; building permits
dropped 1.0% versus forecasts of an increase of 3.6%
January
PPI was down 0.8% versus expectations of down 0.5%; ex food and energy, the
number was off 0.3% versus an anticipated rise of 0.1%
Month
to date retail chain store sales improved to 3.2% year over year.
Other
More
from our resident optimist (medium):
Household
debt continues to grow (medium):
Politics
Domestic
International War Against Radical Islam
Update
on WMD’s in Iraq (medium):
Chris Matthews (not exactly a right
wing zealot) on Obama’s ISIS policy (1 minute video):
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