The Morning Call
3/17/15
The Market
Technical
The indices
(DJIA 17977, S&P 2081) had a great day, ending within uptrends across all
timeframes: short term (16783-19554, 1956-2937), intermediate term (16858-22009,
1775-2924) and long term (5369-18860, 797-2112). They both closed above their 50 day moving
averages and the upper boundary of a developing very short term downtrend---a
close above this boundary today will confirm the break.
Volume
fell; breadth improved. The VIX fell slightly
(2%) unusual for a strong up day, closing within its short term trading range
and its intermediate term downtrend, below its 50 day moving average and the
upper boundary of a developing pennant formation.
Update
on investor sentiment (short):
The
long Treasury moved higher, finishing within its short term trading range,
above its 50 day moving average but within its intermediate and long term
uptrends.
http://www.project-syndicate.org/commentary/bond-market-crash-contagion-by-robert-j--shiller-2015-03
GLD
fell again, remaining within its short and intermediate term trading ranges, a
very short term downtrend and below its 50 day moving average.
Bottom
line: if the Averages confirm the break
of that very short term downtrend, then I would expect another assault on the
upper boundaries of their long term uptrends. I continue to believe that those boundaries
will offer too much resistance for any meaningful break to the upside. In addition, if the technical internals remain
poor, they should sap any energy for a move to higher levels.
TLT continues to attempt to stabilize; but it
is too soon to hope that it will be successful. I have little hope for GLD, at least in the
short term.
Fundamental
Headlines
We
are off to another week of lousy US economic data. Yesterday, the March New York Fed
manufacturing index was below expectations and February industrial production
and capacity utilization were disappointing.
If the trend remains negative for the eighth week, I will likely lower
our forecast.
Overseas,
Chinese GDP growth rate was the lowest in 20 years. Meanwhile, the Chinese
shadow banking industry is making fewer loans and more Chinese stock purchases
(medium and a must read):
That
Austrian bank that collapsed two weeks ago claimed its first victim (a German
bank). And that is not all:
Latest comments
by Germany on Greek bail proposal (short):
Italian
bad loans at record levels (short):
So no help for
us from the international community.
***overnight,
the Bank of Japan renewed its vows with QE and the German index of investor
confidence rose but considerably less than anticipated.
Meanwhile,
all eyes are on the FOMC meeting this week.
While the media portray investors as braced for the removal of ‘patience’
from the Fed statement (meaning a rate hike is nearing), yesterday’s Titan III
shot was powered at least partially by the poor industrial production number (hoping/praying
that a rate hike isn’t nearing). This whole
discussion and Market volatility surrounding the ‘patience’ versus ‘no patience’
issue is emblematic to me and of just how distorted investor perceptions have
become. That the Market could bounce or
decline hundreds of points base on whether the Fed raises its bench mark rate
from near zero to a tiny fraction above near zero is nuts.
In
the grand scheme of things, the probability of a move or lack thereof in
interest rates of magnitude being discussed has never produced a significant
impact on the economy. Now if the Fed
let it be known that it was the first of many and the subsequent hikes would be
much greater than the first, I can see how investors could be skittish. However, we know Yellen et al aren’t about to
do that.
That leaves the
Fed policy impact on stock prices as the most likely source of investor concern. And it should be. Indeed, what investors should really be
worried about is the fact that all other investors are focusing on a small
group of ivory tower intellects that have screwed up monetary policy (and the
economy) consistently and ignoring the economic data at a time when it is turning
to s**t.
Bottom line:
volatility/schizophrenia have their grip on the Market with every data point
being weighed on its probable effect on monetary policy. Meanwhile, valuations are at fantasy levels,
the economy looks more and more like it is rolling over and very little
positive is coming out of the rest of the world whether it be economics or
geopolitics.
The problem as I
see it is that there is no ‘win’ scenario.
If the Fed recognizes and confirms that the economy is weak, suddenly
earnings estimates start coming down much more aggressively---and that has
never been good for stocks. If the Fed
goes on and starts tightening, it will likely exacerbate the rate of economic
deceleration---and that will ultimately make those earnings estimates decline
even more. Some will argue the ‘goldilocks’
scenario: the economy is just weak enough to prevent a Fed tightening but not
so weak as impair the rate of growth.
Good luck with that.
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 Doug Kass (medium):
The
latest from John Hussman (medium):
Dollar’s
impact on the S&P from Goldman Sachs (short):
http://thereformedbroker.com/2015/03/16/goldman-the-us-dollar-has-no-definitive-effect-on-us-stocks/
Company Highlights
Proctor and
Gamble is a major household products and cosmetics company marketing products
in over 180 countries with four divisions:
(1) Beauty, Hair
and Personal Care products: Old Spice, Clairol Nice ‘n Easy, Pantene, Head and
Shoulders, Wella, Pert, Ivory, Safeguard, Zest, Secret, Right Guard, Whisper,
(2) Fabric Care,
Home Care and Batteries: Tide, Gain, Dash, Ariel, Downy, Frebreeze, Dial, Joy,
Cascade, Swiffer, Mr. Clean, Dawn, Duracell, Iams, Eukanuba,
(3) Grooming:
Gillette, Mach 3, Venus, Braun, Duracell,
(4) Family,
Feminine and Baby Care: Cover Girl, Max Factor, Olay, Pampers, Luvs, Charmin,
Bounty, Tampax, Always and Puffs.
(5) Health Care:
Crest, Oral-B, Actonel, Prilosec OTC, Vicks, Scope, Pepto-Bismol, Therm-Care,
Metamucil, NyQuil and Oral B
The company has
grown earnings and dividends 7-11% for the last 10 years on a 15-17% return on
equity. Management’s expects to continue
this record because of:
(1) its
aggressive expansion of its portfolio of brands through both acquisitions and
new product development,
(2) its powerful
marketing effort,
(3) expand
rapidly into faster growing developing countries,
(4) emphasize a
faster growing, higher margin product mix [e.g. health and beauty care
products] and divest lower margin/non-core operations,
(5) generates
strong cash flow to not only finance the strategy described above but to also
conduct a huge stock buyback program as well as raise its dividend every year.
Negatives:
(1) subject to
commodity cost inflation and currency fluctuations,
(2) it is in an
intensely competitive industry,
(3) sluggish global
growth.
PG is rated A++ by Value
Line, has a 22% debt to equity ratio and its stock yields 2.9%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2005
PG 2.9% 7% 53% 10
Ind Ave 2.5 11 46 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
PG 22% 18% 3 15% A++
Ind Ave 49 17 NA 9 NA
Chart
Note:
PG 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 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 Portfolio owns a full position in PG. The upper boundary of its Buy Value Range is
$87; the stock is currently on the Dividend Growth Portfolio. The lower boundary of its Sell Half Range is
$124.
3/15
Investing for Survival
Eleven
ideas on better investing (medium):
News on Stocks in Our Portfolios
o
FactSet Research Systems
(NYSE:FDS): FQ2 EPS of $1.52 beats by $0.12.
o
Revenue of $247.79M (+9.2% Y/Y) beats
by $1.11M.
·
ParkerVision (NASDAQ:PRKR) ended Q4 with $11.2M in cash and
available-for-sale securities, down from $17M at the end of Q3. Towards the end
of Q4, the company struck with
litigation investment firm 1624 PV to obtain up to $7M in legal funding; $1.3M
in warrant proceeds were received from 1624 during the quarter.
·
As expected, no revenue was
recorded in Q4. GAAP operating expenses fell to $5.6M from Q3's $6.4M and Q4
2013's $7.9M - R&D spend totaled $2M, G&A $2.8M, and sales/marketing
$694K.
·
ParkerVision's issue patent
portfolio grew 11% in 2014 to 267 - 179 U.S., 88 foreign. The company has 45
pending patent applications.
·
A Markman hearing for Parkervision's suits against
Qualcomm, HTC, and Samsung is set to occur this August, and a trial in August
2016.
Economics
This Week’s Data
February
industrial production was up 0.1% versus estimates of up 0.3%; capacity utilization
was 78.9 versus forecasts of 79.5.
The National Association
of Home Builders sentiment index came in at 53 versus consensus of 56.
February
housing starts fell 15.7% versus expectations of a 3.0% decline.
Other
Update
on big four economic indicators (medium):
Australia
joins Chinese regional bank (medium):
Politics
Domestic
International
The
latest deal between the IMF and Ukraine (medium to long):
Putin
says that he was ready to use nukes to secure Crimea (medium):
And turns the heat up
even further (medium):
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