The Morning Call
2/4/15
The Market
Technical
The indices
(DJIA 17666, S&P 2050) made a strong follow though from Monday’s sharp
rally, leaving them within uptrends across all timeframes: short term (16514-19290,
1918-2899), intermediate term (16550-21705, 1748-2462) and long term
(5369-18860, 783-2083). The S&P also
finished above its 50 day moving average, while the Dow closed right on its
average. Despite this upbeat pin action,
neither Average has advanced above the downtrend line off their 12/19 highs.
Volume
was flat---a bit surprising given the Market strength; breadth improved---but
only slightly. The VIX dropped 11%, ending
within a short term trading range, an intermediate term downtrend and above its
50 day moving average.
The latest reading
on the Dow Theory (short):
More
on Market divergences (short):
The
long Treasury declined again, this time breaking the lower boundary of its very
short term uptrend; a close below that boundary today will negate that trend. Nevertheless, it remained within short term,
intermediate term and long term uptrends and above its 50 day moving average.
GLD
was down, ending within its short term uptrend, an intermediate term trading
range and above its 50 day moving average.
As usual, the volatility in GLD’s chart makes it harder to read and
trade than most. Our Portfolios have a
Stop Loss at 119, if things (again) get out of control on the downside.
Bottom
line: the volatility continues to make life exciting
in stock land. The technical evidence remains
weighted to the positive. However, the
indices are nearing several resistance levels: (1) the downtrends off their December
highs [17724/2052], (2) those same December highs [17986/2080] and (3) the
upper boundaries of their long term uptrends [18860/2083]. Even if I wanted to Add to our positions
(which I don’t at current prices), I wouldn’t do anything until I saw how the
Averages handle those resistance levels.
GLD continues to
be a Hold for those with a strong enough stomach to handle its roller coaster
trading. As I noted above, our
Portfolios have a Stop Loss to prevent a smack in the chops. However, a bounce would likely prompt another
small addition to this holding.
Fundamental
Headlines
US
economic news was weak again yesterday.
While weekly retail sales were good, December factory orders and January
light vehicle sales were below expectations.
Still not enough negative data to get worried.
Earnings
reports were a bit more mixed. Nothing
from the big boys but there were negative readings/guidance from some visible
names: Chipotle, Gilead Sciences and Wynn Resorts.
Oil
remained the big domestic story with another big up day. As you probably know, much of the upward impetus
for higher oil prices has come from a declining rig count. Here is an in depth look at rig count
(medium):
Overseas,
the Bank of Australia lowered its key interest rate, adding yet another player
in the fruitless global game of QE roulette.
The results of
zero interest rates (medium and a must read):
Why
QE and negative interest rates will fail (medium):
***overnight,
the Chinese services PMI was below forecasts and the central bank eased reserve
requirements; Germany, Italy and Spain all reported better than consensus
services PMI.
More important,
the Greek PM retreated on the initial hardball stance on bond haircuts and
austerity---and in less than two weeks after the election. That
got investors tip toeing through the tulips and, it would seem, confirms that no matter how
radical the rhetoric, no politician has the cojones to challenge Brussels (or
more correctly, the Germans) (medium):
S&P
downgrades credit ratings of numerous EU banks (medium):
Bottom
line: clearly the prospects of the
Greeks remaining debt serfs to the big EU banks was positively elating but the
probability of our EU ‘muddle through’ scenario rose. Good for everybody but the Greeks. On the other hand, central banks continue to
migrate to QE and that just ups the odds that it won’t work. Indeed, it likely means that this policy
sinks further and faster. Good for nobody.
Finally, a question: if lower oil
prices are an ‘unmitigated positive’, what are higher oil prices? Watch the news. My bet is that higher oil prices will be
interpreted to mean economic strength; and that will be………drum roll……you
guessed it---an ‘unmitigated’ positive.
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.
More
on valuation (short):
Investing for Survival from David Merkel
There are several reasons to
avoid illiquidity in investing, and some reasons to embrace it. Let me
go through both:
Embrace Illiquidity
·
You are offered a lot
of extra yield for taking on a bond that you can’t easily sell, and where you
are convinced that the creditor is impeccable, and there are no sneaky options
that you have implicitly sold embedded in the bond to take value away from you.
·
An unusual opportunity
arises to invest in a private company that looks a lot better than equivalent
public companies and is trading at a bargain valuation with a sound management
team.
·
You want income that
will last for your lifetime, and so you take some of the money you would
otherwise allocate to bonds, and buy a life annuity, giving you some protection
against longevity. (Warning: inflation and credit risks.)
·
In the past, you
bought a Variable Annuity with some good-looking guarantees. The
company approaches you to buy out your annuity at a 10-20% premium, or a 20-30%
premium if you roll the money into a new variable annuity with guarantees that
don’t seem to offer much. Either way, turn the insurance company down,
and hold onto the existing variable annuity.
·
In all of these
situations, you have to treat the money as money lost to present uses. If
there is any significant probability that you might need the money over the
term of the asset, don’t buy the illiquid asset.
Avoid Illiquidity
·
Often the premium
yield on an illiquid bond is too low, or the provisions take value away with
some level of probability that is easy to underestimate. Wall Street does
this with structured notes.
·
Why am I the lucky
one? If you are invited to invest in a private company, be skeptical.
Do extra due diligence, because unless you bring something more than
money to the table (skills, contacts), the odds increase that they are after
you for your money.
·
Often the illiquid
asset is more risky than one would suppose. I am reminded of the times I
was approached to buy illiquid assets as the lead researcher for a
broker-dealer that I served.
·
Then again, those that
owned that broker-dealer put all their assets on the line, and ended up losing it all.
They weren’t young guys with a lot of time to bounce back from the loss.
They saw the opportunity of a lifetime, and rolled the bones. They
lost.
·
We tend to
underestimate how much we might need liquidity in the future. In the
mid-2000s people encumbered their future liquidity by buying houses at
inflated prices, and using a lot of debt. When everything has to go
right, the odds rise that everything will not go right.
·
And yet, there
are two more reason to avoid illiquidity — commissions, and inability to
know what is going on.
Commissions
Illiquid assets offer the
purveyor of the assets the ability to pay a significant commission to their
salesmen in order to move the product. And by “illiquid” here, I include
all financial instruments that carry a surrender charge. Do you want to
know how much the agent made selling you an insurance product? On
single-premium products, it is usually very close to the difference between the
premium you paid, and the cash surrender value the next day.
Financial companies build their margins into their
products, and shave off a portion of them to pay salesmen. This not only applies to insurance
products, but also mutual funds with loads, private REITs, etc. There are many brokers masquerading as
financial advisers, who do not have to act strictly in the best interests
of the client. The ability to receive a commission makes them less than
neutral in advising, because they can make a lot of money selling commissioned
products. In general, it is good to avoid buying from commissioned
salesmen. Rather, do the research, and if you need such a product, try to
buy it directly.
Not Knowing What Is Going On
There are some that try to turn a
bug into a feature — in this case, some argue that the illiquid asset has no
volatility, while its liquid equivalents are more volatile. Private REITs
are an example here: the asset gets reported at the same price period after
period, giving an illusion of stability. Public REITs bounce around, but
they can be tapped for liquidity easily… brokerage commissions are low.
Some private REITs take losses and they come as a negative surprise as
you find large part of your capital missing, and your income reduced.
So, in closing, avoid
illiquidity, unless you don’t need the money, and the reward is very, very high
for making that fixed commitment.
News on Stocks in Our Portfolios
·
Revenue of $2.67B (+6.7%
Y/Y) misses by $10M.
·
Revenue of $3.36B (+6.7%
Y/Y) beats by $20M.
Economics
This Week’s Data
Redbook
Research reported month to day retail chain store sales up 3.8% on a year over
year basis.
December
factory orders fell 3.4% versus expectations of -2.2%.
January
light vehicle sales were below December’s number.
Weekly
mortgage applications rose 1.3% but purchase applications fell 2.0%.
The
January ADP private payroll report showed job growth of 213,000 versus
estimates of 220,000.
Other
Two
decades of inflation and deflation (medium):
Politics
Domestic
Here is your
nominee for Attorney General (short):
International War Against Radical Islam
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