The Morning Call
3/3/15
The Market
Technical
The indices
(DJIA 18288, S&P 2117) had a good day, ending within uptrends across all
timeframes: short term (16683-19454, 1943-2924), intermediate term (16745-21896,
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 finished
back above the former upper boundary of its long term uptrend (2112); but is
still hugging that boundary. Meanwhile
the Dow remains well below its comparable boundary.
Volume
declined; breadth improved but not as much as the pin action would suggest. The VIX fell, closing within its short term
trading range, its intermediate term downtrend and below its 50 day moving
average.
The
long Treasury got whacked, driving it back below its 50 day moving average and the
lower boundary of its short term uptrend.
A close below that boundary on Wednesday will confirm that break. However, it finished within its intermediate
and long term uptrends and above its 50 day moving average.
Japan starting to realize
the downside to QE (medium):
GLD
was down, ending very close to 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: the indices had another good day,
though volume fell and breadth wasn’t that supportive. Plus the Market internals continue to signal
caution. But price is truth and the
truth is prices are moving higher.
Both bonds and gold took it in the snoot and
seem likely to test recent lows. A
failure by either to hold those support levels will likely prompt action by our
Portfolios.
March
performance following a down January/up February combo (short):
Fundamental
Headlines
US
economic data took up where it left off last week: January personal income and spending
were both lower than expectations with spending showing negative growth (for
the second month is a row); the February ISM manufacturing index was slightly
less than anticipated and January construction spending was well below forecast
and like personal spending was negative.
There was one positive indicator---the February Markit manufacturing PMI. The personal spending number is particularly
disappointing; the economy will have a tough time showing growth when consumers
are cutting their spending.
Goldman
affirms that US economy is in contraction (medium and clearly a must read):
Overseas,
the news was more mixed: EU consumer prices fell 0.3%; unemployment was lower
but so was the PMI manufacturing index. On the other hand, the UK PMI
manufacturing index improved. As I have
been noting, mixed international data is a positive in that the biggest risk to
our outlook is a slowing global economy.
While ‘mixed’ doesn’t necessarily mean that a slide to recession has
been halted, it clearly raises the question.
And at this point, I will count that as a plus.
***overnight,
the Bank of Australia held interest rates at current levels; German retail
sales were much stronger than expected.
The
Greek/EU financial spat continued to fade from the headlines; though there
remains a negative undercurrent that could push the potential of a Greek
default back to center stage.
The risk of the
Greeks overplaying their hand (medium):
Fears
of a Greek default are rising again (medium):
Goldman
on why Greece can’t go back to the drachma (medium):
Is
Portugal any better off than Greece? (medium):
Bottom line: the
US economic numbers are not improving and no one seems to give a damn. Either that or everyone is assuming that as
long as the numbers are poor, the Fed will never raise interest rates. Whatever the reason, stocks are getting ever
more over valued while the prospects for one key component of that valuation (corporate
earnings) are getting worse and the other (P/E) is near an historic high. That doesn’t mean that prices can’t go
higher; but it does mean that the risk of mean reversion will advance with
them.
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
Bill Gross (medium):
More
on valuation (medium):
Subscriber Alert
The
stock price of Medtronic (MDT) has traded into its Sell Half Range. Accordingly, one half of its positions in the
Dividend Growth and Aggressive Growth Portfolios will be Sold at the Market
open this morning.
Company Highlights
General Dynamics
is a leading defense contractor supplying products and technology to marine
systems, combat systems, information systems and aerospace (basically
submarines, tanks, aircraft and command and control systems). The company has
grown earnings and dividends 11% and 13% respectively over the last 10 years
and has earned a consistently high 17-18% return on equity. GD should be able to continue to match that
record because of:
(1) its broad
diversified portfolio of products and service,
(2) growing
backlog of orders,
(3)
improving sales at Gulfstream,
(4) an
aggressive cost reduction program,
(5) share
repurchases.
Negatives:
(1) a large percentage of its sales are
dependent on government spending both in the US and Europe ,
(2) emergence of China as a premier defense
contractor.
GD has a debt to
equity ratio of approximately 21%, is rated A++ by Value Line and its stock
provides a yield of 1.7%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2005
GD 1.7% 4% 30% 10
Ind Ave 1.6 10* 25 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
GD 21% 21% 1 9% A++
Ind Ave 38 17 NA 9 NA
*many companies in GD’s industry
don’t pay a dividend
Chart
Note:
GD 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). It is in uptrends
across all timeframes: long term (blue lines), intermediate term (purple lines)
and short term (brown line). The wiggly
red line is the 50 day moving average.
The Dividend Growth and Aggressive Growth Portfolios own full positions
in GD. The upper boundary of its Buy
Value Range is $64; the lower boundary of its Sell Half Range is $152.
3/15
Investing for Survival
Asset
allocation intangibles (medium):
News on Stocks in Our Portfolios
o
Bank of Nova Scotia (NYSE:BNS):
FQ1 EPS of C$1.36 misses by C$0.04.
o
Revenue of C$5.86B (+3.9% Y/Y) misses
by C$150M.
Economics
This Week’s Data
The
February PMI manufacturing index was reported at 55.1 versus expectations of
54.0.
The
February ISM manufacturing index came in at 52.9 versus estimates of 53.0.
January
construction spending declined 1.1% versus forecasts of +0.3%.
Other
The
next subprime lending crisis (medium):
The
problems with ‘dynamic scoring’ (medium):
The world in
front running the ECB QE (short):
Politics
Domestic
International
More
saber rattling in Ukraine (medium):
US
counters with ‘boots on the ground’ (medium):
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