The Morning Call
4/30/15
The Market
Technical
The indices
(DJIA 18035, S&P 2106) were off yesterday---despite some lousy economic
numbers which usually have investors all giddy about more easy money. The S&P remained above its 100 day moving
average but traded back below its prior high for the second time---keeping the
trend to lower highs intact. The Dow
continued to trade above its 100 day moving average and below its prior high.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(17066-19863, 1999-2980), intermediate term (17193-22319, 1805-2578 and long
term (5369-18873, 797-2129).
Volume was down;
breadth deteriorated. The VIX jumped 8%,
finishing below its 100 day moving average and within short and intermediate
term trading ranges. It remains a short
distance away from the lower boundaries of both its short and long term trading
ranges. The latter should provide strong
support. For that reason, I continue to
think that the VIX remains a reasonably priced hedge.
The value of
margin debt as a stock market indicator (short):
Traderfeed looks
at yesterday’s pin action (short):
Stock Trader’s
Almanac on sentiment (short):
The long Treasury
got whacked hard again---like stocks, somewhat surprising in the face of poor
economic data and a noncommittal Fed statement.
It ended below its 100 day moving average, the lower boundary of the
very short term trading range---negating that trend and right on the lower
boundary of its short term trading range.
It is now only a
point and a half from the lower boundary of its intermediate term uptrend. If that trend is broken, aside from doing
some serious technical damage to the TLT chart, it also opens questions
regarding the fundamentals behind such a move.
At first blush,
it appears that the poor GDP number (suggesting the US economy may not be the
best economy in a sloppy world) pushed the dollar and US Treasuries down. Of course, if the US economy is slipping,
rates should decline especially if the Fed remains easy.
Another
explanation is that the bond guys think that the Fed may tighten sooner than
later. That doesn’t fit yesterday’s FOMC
narrative but does reflect the opinion voiced in the Fed mouthpiece
Hilsenrath’s article (see below).
Or it could mean
that investors have had enough of QE, they see the end game and don’t like it,
and are no longer willing to hold low yielding sovereign debt.
Or it could mean
that fears of inflation are being rekindled; although gold’s performance
doesn’t support that notion. On the
other hand, oil does.
Or more sellers
than buyers (short):
Two points here:
(1) the TLT chart has not yet broken down; so all of the above is just
speculation, (2) but IF the interest rate charts turn negative, it may well be
a signal that something is changing in the economic outlook. I am just trying to anticipate what force may
be accounting for this. At the moment, I
have no clue what it is (if indeed there is anything); but if I am paying
attention, then I hopefully catch it early on.
GLD returned to
its old ways (down), closing back below its 100 day moving average and
continuing to build a head and shoulders formation.
Bottom line: the
bull/bear battle continues around the trend line forming by a string of lower
highs. While yesterday favored the
bears, I count that for little. What is
needed is strong follow through in either direction before we can make any
judgment about short term price movement.
As you know, I believe that the short term risk/reward (as defined by
the upper boundaries of the Averages long term uptrend and the lower boundaries
of their short term uptrends) suggests lower prices. Longer term, the momentum remains to the
upside.
The TLT chart is
getting sloppy and if it continues, suggests the economy is not weakening
and/or the Fed is about to tighten and/or the bond guys have had enough of the
Fed’s QE routine.
Fundamental
Headlines
No
relief for the weary. Yesterday,
mortgage applications were reported down, purchase applications flat; but the
real downer was first quarter GDP which grew considerably less than
anticipated. This was hardly news to me;
but investors didn’t seem to care for the number which is surprising given
their predilection for indications of more Fed easing. In any case, it reaffirms our forecast of an
economy growing even slower than our original outlook with the danger of
slipping into recession.
GDP
per capita (medium):
In
addition as everyone in the investing universe knows, yesterday ended the
latest FOMC meeting. In the trailing
statement, the Fed (1) removed all calendar references regarding the decision
to raise interest rates, (2) stated that economic growth ‘slowed’ versus ‘moderated’ in its prior
statement, and (3) attributed that to
‘transitory’ factors [weather, the dollar].
In short, it appears to have no idea when, as or if it will raise
rates. And if I am correct about a
permanent versus ‘transitory’ slowdown, it most likely won’t raise rates at
all.
On
the other hand, Fed whisperer Hilsenrath says the Fed isn’t worried and rate
hikes are on the way (medium):
Let
me repeat a couple of my opinions: (1) the economy is slowing as a direct
result of the effects of QE, (2) hence, ending QE [easy money]/raising rates will
likely have little impact on the economy, (3) however, because QE’s primary
result has been to drive asset prices higher, then any reversal would have a greater
consequence on asset prices than the economy.
So
you might ask, if QE doesn’t end, will asset prices continue to rise? Here are a couple of reasons why that might
not happen: (1) in my opinion is that
unlike the government, corporations and individuals have finite capacity to
borrow whether set internally by their own discipline or externally by their
creditors. So matter no how cheap or
easy money is or continues to be, when those corporations/individuals reach
their finite capacity, there will still be no corporate or individual
borrowers---which is another way of saying that the demand created by spending
the borrowed money falls into the toilet, the r word. In short, assets may likely continue to rise
until investors realize that corporations and individuals have maxed out the
ability to borrow against future income; demand then craters and along with it,
the economy [read corporate profits]. I
have a problem believing investors will continue to push stock prices higher in
the face of recession and declining corporate earnings.
(2)
another angle of this answer is that by keeping rates so low and the supply of
money high, the Fed has created conditions where anyone can borrow money
(anecdotally, I had a conversation this week with an acquaintance with a so so
personal balance sheet who had just financed a B++ apartment house with no
recourse) and in doing so has minimized the risk/price of failure. On a global scale, the world’s central banks
have done the same thing with sovereign debt---there are huge chunks of which
investors have to pay the sovereign to take their money. In other words, investors are saying that
there is less risk holding a sovereign debt than cash. Bear in mind, a portion of Spain’s debt is
priced at negative interest rates. Again,
I have a problem believing that investors will price risk at zero for the rest
of history.
I have no clue how
all this gets resolved. I do know that
risk has been mispriced but it has not gone away.
Oversea, the
news was no better.
(1) the central
banks of Thailand and Sweden made additional monetary easing moves [see above],
***overnight,
the Bank of Japan voted to maintain QE but failed to meet expectations of an
even greater commitment; Russia’s central bank lowered key interest rates.
(2) it was
reported that lending by EU banks to companies and households rose for the
first time in three years [see above],
(3) today Greece
will present a [new and improved] draft for fiscal reforms mandated by the
troika.
The
latest from Greece (medium):
Coming
defaults in Greece (medium):
***overnight,
Moody’s cut Greece’s credit rating, again; Greece scrambled to make pension
payment; and today, the government is meeting with EU officials in hopes of
having a preliminary deal by May 3rd.
***overnight,
April inflation in the EU was flat versus the March report of -0.1%;
Bottom line: the economic news was not great (again), but Markets
failed to get jiggy with it. A slowing
or declining economy (ies) didn’t conjure QE sugarplums in investors’ heads. Meanwhile, the global central banks continue
merrily down the path of greater monetary ease, creating risk then mispricing
it. I have to wonder is yesterday’s pin
action was one off or if investors are starting to doubt the notion of QEInfinity. We will know soon enough.
The Treasury
market pin action (discussed above) may be an early warning or it may be nothing. I will be watching just in case. In the meantime, I feel very comfortable with
the cash in our Portfolios.
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.
Company Highlight
The 3M Company
(formerly Minnesota Mining and Manufacturing) is a broadly diversified
technology and manufacturer of great brands in industrial, health care,
consumer, safety and graphics and electronics and energy (50,000 products sold
in over 70 countries). The company earns over a 20%+ return of equity and has
generated profit growth of 7-10% over the past 10 years. While dividends have
not kept pace as the company reinvested cash flow in new businesses, the
dividend payout ratio should increase in the next several years. The pillars of its business plan are:
(1) invest in
strengthening and streamlining its supply chain,
(2) increase its
brand building marketing focus on high growth overseas markets, using acquired
local or regional brands where it makes sense,
(3) raise its
investment in R&D to advance the 3M brands,
Negatives:
(1) its large international business exposes it
to currency fluctuation risks,
(2) its businesses are highly competitive,
(3) success depends on new product acceptance.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2005
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
*the Diversified Company Industry
operates in so many varied products and services, comparable numbers would be
of little analytical value.
Chart
Note:
3M stock made great progress off its March 2009 low, quickly surpassing the
downtrend off its October 2007 high (straight red line) and the November 2008
trading high (green line). MMM is in
uptrends long term (blue lines) and intermediate term (purple lines). The wiggly red line is the 100 day moving
average. The Dividend Growth and High
Yield Portfolios own full positions in 3M.
The upper boundary of its Buy Value Range is $88; the lower boundary of
its Sell Half Range is $228.
4/15
Investing
for Survival
You
may need less money in retirement than you think (medium):
News on Stocks in Our Portfolios
·
Revenue of $67.62B (-36.7%
Y/Y) beats by $14.47B.
·
Revenue of $3.03B (+7.1%
Y/Y) beats by $10M.
·
Revenue of $4.98B (-0.4%
Y/Y) beats by $140M.
- Franklin Resources (NYSE:BEN): FQ2 EPS of $0.98 beats by $0.12.
- Revenue of $2B (-2.9% Y/Y) misses by $50M.
·
Revenue of $2.23B (+2.8%
Y/Y) misses by $50M.
Economics
This Week’s Data
Weekly
jobless claims fell 34,000 versus expectations of an 8,000 decline.
March
personal income was flat versus estimates of a rise of 0.2%; personal spending
was up 0.4% versus forecasts of up 0.5%.
Other
Politics
Domestic
Quote of the day
(short):
International War Against Radical Islam
