The Morning Call
2/12/15
The Market
Technical
The indices
(DJIA 17862, S&P 2068) treaded water yesterday, awaiting news out of the
Greek/EU meeting (which we didn’t get until after the close) and ended within
uptrends across all timeframes: short term (16571-19347, 1925-2906),
intermediate term (16611-21766, 1752-2466) and long term (5369-18860,
783-2083). Both (along with the NASDAQ)
finished above their 50 day moving average and the lower boundary of the former
downtrend off its mid-December high, leaving the balance of momentum to the
upside.
Volume
was flat---again reflecting investors’ wait and see position; breadth
deteriorated. The VIX fell slightly,
closing within its short term trading range, its intermediate term downtrend
and below its 50 day moving average. The
lower close did nothing to disturb the developing pennant formation.
More
on breadth (short):
The
long Treasury finally bounced, though not by much. It remains within short term, intermediate
term and long term uptrends and above its 50 day moving average. The rebound was hopeful but by no means
convincing.
GLD
continues its disappointing pin action, falling below its 50 day moving
average. It did finish within a short
term uptrend and an intermediate term trading range and above its 50 day moving
average. I don’t want to do anything
until there is some clarity to the Greek/EU bail out talks; but if the news is
positive (which it seems to be; see below), our Portfolio will likely blow out
the remainder of this position.
Bottom
line: all eyes remain on the Greece/EU
discussions, the outcome of which will likely be the main determinant of near
term stock, bond, commodity price movement.
To me, the only thing to do is await the news because the spread of
possible outcomes is so wide (as is the risk/reward equation), it is best to
just let the smoke clear. I continue to
believe that the boundaries of the mid December trading range (17989/2080) are
the levels to watch.
The TLT seemed
to stabilize but not persuasively enough to give me much comfort. GLD is a short hair away from history.
Fundamental
Headlines
Despite
expectations that we would experience an event filled day via the Greek/EU
negotiations, it was a dud as a result of no news. In addition, there was little data flow from
any source. The only economic numbers
from the US were two secondary indicators---weekly mortgage and purchase
applications were awful while the December Treasury budget deficit was lower
than anticipated.
Though
overshadowed by geopolitical events, oil continues its roller coaster ride,
yesterday being to the downside. There
remains much debate about the direction of oil prices and their potential
impact on the economy (though so far, lower oil prices = lower stock
prices).
Energy stock
valuations and the price of oil (short):
Overseas,
there were no stats. During the day,
there was a positive announcement from French, German, Russian and Ukrainian
peace conference, to wit, a ceasefire. Plus
western Ukraine gains more autonomy (i.e. Russia has the land bridge to the Crimea);
but Ukraine receives $40 billion in IMF funds over the next four years. If this all holds, Putin will win again---as
he probably should have. The US really
screwed this situation up. Most
important, such a resolution will almost certainly be interpreted positively by
investors.
Cease
fire in Ukraine or Putin wins again (short):
Putin
warns against US supplying arms to Ukraine (short):
Interview
with Jim Rogers on Russia/Ukraine (medium and a must read):
We
waited all day for news out of the Greek/EU meeting; but it didn’t conclude
until after the Market closed. Initial
reports are that ‘an agreement in principle’ had been reached that is hoped to
be finalized by next Monday. Rumored was
that Greece will consent to (1) stay within the EU, (2) implement fiscal
reforms, (3) honor its debts and (4) not be granted maturity extensions in
return for receiving additional bail out money.
Of course the spin started almost immediately with Greek sources saying
that they hadn’t agreed to those terms----which according to the latest news,
they didn’t. Here is the latest as of
this morning (no agreement but negotiating):
How
the Greek markets are handling the current negotiations (short):
http://www.zerohedge.com/news/2015-02-11/europes-greek-contagion-update-peripheral-bonds-risk-surges
The
latest negotiating positions of the Greek/EU/Germany (medium):
***overnight,
Sweden joins the low (negative) interest rate club; December Japanese machinery
orders surged 11.5% year over year; and Austria’s third largest bank has
balance sheet problems.
Bottom
line: the resolution of the Greek
bailout discussions remain uncertain as of this moment; though good faith negotiations
appear to be ongoing. If an economically
viable solution can be reached, that clearly removes another potential source of
additional economic pressure on Europe, keeping our ‘muddle through’ scenario
still hanging by its fingernails. And
that is a major positive, in that our outlook would not have to be
downgraded.
However, as I
keep repeating, not having to downgrade our economic forecast, doesn’t mean
that investors should be tip toeing through the tulips. Stocks are extremely overvalued based on our
outlook which does not account for major negative geopolitical events or the inability
of the US to fend off a global slowdown.
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 on private equity valuations (short):
Rising
interest rates and long term stock returns (medium):
Where
the value is (short):
Company Highlights
Johnson &
Johnson is a major developer, manufacturer and marketer of health care
products. Its major divisions are: Consumer (baby care, oral care,
non-prescription drugs, wound care and skin care), Medical Devices
(electrophysiology, circulatory disease management and orthopedic joint
reconstruction) and Pharmaceuticals (contraceptives, psychiatric,
anti-infective, gastrointestinal and dermatological). Over the past ten years, the company has
earned a 20%+ return on equity while growing its earnings and dividends at a
9-12% annual rate. While profit and dividend growth may slow somewhat short
term, its strong, well diversified product line should continue to grow rapidly
longer term as a result of:
(1)
acquisitions--the latest being [a] Cougar Biotechnology, a biotech company
developing oncology products for treating prostate cancer, breast cancer and
multiple myeloma, [b]Aragon, which will strengthen its presence in the prostate
cancer market, [c] Synthes which will enhance its medical device portfolio and
[d] an agreement with Gilead to develop a once daily antiretroviral HIV pill,
(2) continued
strong performance of Remicade, JNJ ’s
bestselling drug for the treatment of rheumatoid arthritis, Crohn’s disease and
ulcerative colitis,
(3) focus on
commercializing its late stage pharmaceutical pipeline and invest in future
growth areas (venous thromboembolism, deep vein thrombosis, atrial
fibrillation,
(4) growing
presence in the emerging markets.
Negatives:
(1) generic
sales,
(2) FDA warnings
on several drugs including Remicade,
(3) EU pricing
pressures,
(4) FDA recently
imposed manufacturing restrictions,
(5) the risk of
product recalls.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2005
Ind Ave 1.8 9* 36 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin
Rating
Ind Ave 23 14 NA 9 NA
*most companies in JNJ industry do not pay dividends
Chart
Note:
JNJ stock made great progress off its March 2009 low, quickly surpassing the
downtrend off its September 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 an uptrend (purple line). Short term, it is a trading range (brown
line). The wiggly red line is the 50 day
moving average. The Dividend Growth
Portfolio owns a 50% position in JNJ having Sold Half in mid-2014. The upper boundary of its Buy Value Range is
$63; the lower boundary of its Sell Half range is $104.
2/15
Investing for Survival
The
efficient market is an outdated concept (medium):
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
December US Treasury budget deficit came in at $17.5 billion versus estimates
of $18.5 billion.
Weekly
jobless claims rose 25,000 versus forecasts of up 10,000.
January
retail sales fell 0.8% versus consensus of -0.5%; ex autos and gas, they were
up 0.2% versus expectations of +0.4%.
Other
Update
on the Baltic Dry Index (short):
Have
oil prices bottomed (medium):
More
for the optimists (medium):
More
bankster misdeeds (medium):
Politics
Domestic
International
Obama
crawfishes on the JV/ISIS (short):
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