The Morning Call
3/4/15
The Market
Technical
The indices
(DJIA 18203, S&P 2107) underwent some consolidation yesterday but ended
within uptrends across all timeframes: short term (16683-19454, 1943-2924),
intermediate term (16752-21903, 1764-2478) and long term (5369-18860,
797-???). They both closed above their
50 day moving averages and their mid-December highs. The S&P again finished back below the upper
boundary of its former long term uptrend (2112), sustaining that boundary’s magnetic
pull on the S&P. Meanwhile the Dow
remains well below its comparable boundary.
Volume
declined; breadth deteriorated. The VIX
rose 6%, closing within its short term trading range and its intermediate term
downtrend, below its 50 day moving average and above the upper boundary of a
developing very short term downtrend.
The
long Treasury was down again, leaving it below its 50 day moving average and
the lower boundary of its short term uptrend for a second day. A close below that boundary today will
confirm that break and re-set the short term trend to a trading range. However, it is still above its recent
low. If it trades below that support
level (1) then the notion that TLT has stabilized following its early February
sell off is called into question and (2) having already made a lower high, it
will then have made a lower low and that sets up the potential for another
change in the short term trend from a trading range to a downtrend. The good news is that TLT finished within its
intermediate and long term uptrends.
GLD
was also down again, ending right on the lower boundary of its short term
uptrend, within its intermediate term trading range, a very short term
downtrend and below its 50 day moving average.
Bottom
line: after a strong up move in
February, some consolidation in the Averages is not unexpected. Plus the inability of the S&P to break
the gravitational pull of the upper boundary of its long term uptrend is also
not surprising. I noted before that if
the S&P ever challenged this boundary that it would likely be difficult to
break through in a meaningful way.
Hence, there is little reason to question the upward momentum in the
Market, save for its lousy internals---but they have been lousy for months now
and the indices continue to advance.
Both bonds and gold are again on the cusp of
breaking support levels. A failure by
either will likely prompt action by our Portfolios.
Bull
market turns six next week (short):
A
history of the recovery from of the worse bear markets. Notice the similarity in timing of the end of
three of those recoveries (short):
Fundamental
Headlines
Yesterday
was slow in terms of US economic data: month to date retail chain store sales
were up but slowed slightly from last week and February light vehicle sales
slowed from January’s report. Nothing
here to break the string of poor stats.
Stocks
rise as consumers pull back (medium):
Atlanta
Fed forecasts first quarter US GDP at 1.2% (short):
Overseas,
the numbers were again mixed: the Bank of Australia declined to raise interest
rates and Germany reported much stronger than expected monthly retail
sales. More evidence that the slide in
global economic activity may be coming to an end.
***overnight,
the Reserve Bank of India lowered rates for the second time in two months;
fourth quarter Australian GDP grew less than expected; China’s service PMI was
slightly ahead of estimates; the EU composite PMI was weaker than the initial
reading; UK services PMI was below forecasts; Japan’s services PMI was much
less than anticipated.
Greece
remains out of the headlines; but that doesn’t mean that things are going
swimmingly:
Are
Greece and the Troika talking past each other/ (medium)?
Latest
developments in Greece (short):
Bottom line: the
US economic numbers are not improving.
Plus yesterday Goldman suggested the economy is in contraction and the
Atlanta Fed cuts its first quarter GDP estimate dramatically. If correct, that probably won’t be good for
earnings forecast. In addition, the bond
market has been acting squirrelly. If
that continues, it probably won’t be good for stock multiples. In short, stocks are considerably overpriced
and the major components of prices may soon be facing some stiff headwinds.
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 (medium):
Investing for Survival from Morningstar
Diversification
is often treated as an unalloyed good. It's not. The more I learn, the more I
appreciate that Warren Buffett said something as perfect as can be about the
subject: "Diversification is protection against ignorance."
Diversification
is a volatility-control strategy that requires little knowledge on your part.
As long as 1) two assets aren't perfectly correlated and 2) the expected return
on one of the assets isn't too low, it follows as a matter of math that owning
a combination of the two can be expected--not guaranteed--to provide a better
volatility-adjusted pay-off than owning only one.
If you know
little, diversification is a no-brainer. In fact, you want to diversify as much
as possible. Moreover, you want to do it as cheaply as possible, as the
benefits of diversification don't require expertise. There is a trade-off. If
you know something--say, you can actually identify undervalued stocks--then at
some point diversification hurts you by diluting your edge. An extreme example
would be someone privy to news that's certain to send a stock's price
rocketing. It would be crazy for him not to put a huge chunk of his wealth into
the stock (assuming he's not breaking the law). The more you know, the more
diversification hurts you.
Most
investors understand that they should diversify a lot. However, some hurt
themselves by behaving inconsistently: They diversify a lot while implicitly
behaving as if they know a lot. A big subset of this group is investors who own
lots of different expensive funds. Owning one expensive fund is a high-confidence
bet on the manager. Well-done studies estimate that the percentage of truly
skilled mutual fund managers is in the low single digits.
It would be
strange if your process for assessing managers turns up lots and lots of
skilled ones, because there aren't many in the first place. (If you see skilled
managers everywhere, chances are your process is broken or not discriminating
enough.) It would be even stranger if you bet on many of them. Doing so dooms
you to getting index-fund-like results while paying hefty fees. It makes little
sense to pay 1% or more of assets on an aggregate portfolio with hundreds of
positions and market like behavior.
An exception
is if you assemble a portfolio of extremely concentrated fund managers. Owning
10 funds with 10 stocks each put together will look like a moderately
concentrated fund manager. This is a model some successful endowments, hedge
funds, and mutual funds use.
Most
investors should own diversified, low-cost funds. Those who believe they know
something should concentrate to the extent that they're confident in their own
abilities. A big danger is that humans are overconfident; many will concentrate
when they should be diversified.
A young investor with lots of room to make mistakes and a
passion for investing should consider forming a portfolio of "play
money" with a handful of his best ideas. Over time, he can learn whether
he knows what he's doing and either size up or down his bets. An advantage of a
concentrated "skill" portfolio is it becomes quickly apparent if an
investor knows what he's doing. This can prevent a lot of heartache down the
road. An older investor near or in retirement just beginning to learn about investing
cannot take the risk of self-exploration. He should stick to low-cost, highly
diversified funds.
News on Stocks in Our Portfolios
·
Revenue of $1.1B (+1.9%
Y/Y) misses by $20M.
Economics
This Week’s Data
Redbook
Research reported month to date retail chain store sales rose 2.7% year over year
versus last week’s reading of +2.8%.
February
light vehicle sales declined versus January’s report but increased versus
February 2014.
Weekly mortgage
applications rose 0.1% but purchase applications fell 0.2%.
ADP
February private payrolls grew 8,000 less than expected; however, the January
reading was revised up by 37,000.
Other
Raising
interest rates may not be all that bad (medium):
Could
oil prices plummet again? (medium):
Is
the Bank of Japan losing control? (short):
Politics
Domestic
International War Against Radical Islam
Netanyahu’s
message to congress (medium):
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