The Morning Call
4/2/15
The Market
Technical
The indices
(DJIA 17698, S&P 2059) were down again yesterday. Both fell back below the lower boundaries of
their very short term uptrends---those challenges will be confirmed if the Averages
close below them today. That would also
have the effect of breaking to the downside from the pennant formation which I mentioned
in yesterday’s Morning Call---suggesting more still more downside.
Also the Dow
finished below its 100 day moving average while the S&P ended right on its
moving average. As you know, these moving
averages have provided plenty of support when they have been challenged for the
last couple of years. So I will be
paying a lot of attention to the pin action around them.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(16889-19666, 1971-2952), intermediate term (16977-22138, 1785-2543 and long
term (5369-18860, 797-2122).
Volume declined;
breadth was mixed. Oddly, the VIX was down
on a down Market day, finishing within its short term trading range, its
intermediate term downtrend, its long term trading range, below its 50 day
moving average and within a developing pennant formation. I continue to think that it remains a
reasonably priced hedge.
The long Treasury
had another great day, ending within its short term trading range, intermediate
and long term uptrends and above its 50 day moving average. This chart keeps improving as have our ETF
Portfolio’s muni bond positions.
GLD’s price rallied,
closing within its short and intermediate term trading ranges, its long term
downtrend and below its 50 day moving average.
GLD still has a number of tough resistance levels yet to overcome before
we can assume that the worst is over.
Bottom line: given
many technicians positive comments on the first two trading days in April, I was
a little surprised by the poor pin action.
Further, it was weak enough that both of the Averages traded through the
lower boundaries of their very short term uptrends which would bust the pennant
formations I pointed to yesterday.
Generally, if those breaks are confirmed (which would occur today) the
follow through is in the direction of the break. Arguing against that is the fact that the
indices are at or through their 100 day moving averages which have provided major
support for the last couple of years.
How this standoff gets resolved could be instructive of a longer term
trend.
Fundamental
Headlines
Yesterday
was another active day for US data and were mixed by volume but negative by
order of magnitude: March light vehicle sales were upbeat, mortgage and
purchase applications were up and the March manufacturing index was slightly
better than expected. On the other hand,
the March ADP private payrolls report, the March ISM manufacturing index and
February construction spending were all well below expectations. Tipping the
scale even further to the negative, the Atlanta Fed for lowered its first
quarter GDP growth estimate for the third time; this round to zero.
Five
signs that there is trouble ahead (medium):
Just how
impactful was this winter’s snow storms? (medium):
And
(short):
Overseas, Europe
again provided promising stats, i.e. the March EU manufacturing PMI came in
better than expected (52.2 versus 51.9).
Unfortunately, two other major world economies produced some dismal reports
with the March Chinese manufacturing PMI falling below the February reading;
and Japanese manufacturing data were abysmal.
***overnight,
Greece submitted a more detailed economic program but again it was well short
of the Troika’s standards.
Bottom line: while
it had its bright spots, US economic data returned to its negative tilt. Further, the global economic news was not
good, though the Europe turned in another upbeat number. It is possible that the EU could be
rebounding. If so, then the questions
will be, (1) is the improvement strong enough to sustain itself when the
economies of its major trading partners [the US, China and Japan] are losing
steam? (2) can it weather adverse developments in Greece and Ukraine? (3) can
it possibility make enough of a difference to make currently overvalued
equities appear reasonable?
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):
Update
on valuation:
Investing for Survival
The
best thing to do is nothing (medium):
Company Highlight
Cummins Inc.
designs, manufactures, distributes and services diesel engines for heavy,
medium and light duty trucks, autos, buses as well as industrial, electric
power generation and engine related components markets. The company has grown profits and dividends
at a 20% rate over the last ten years earning a 13-20% return on equity. Like most heavy industrial firms, CMI earnings can be somewhat volatile. However, it should continue to grow at an
above average pace as a result of:
(1) it is positioned to benefit from trends in
emission standards, fuel economy, increased demand for electricity and
infrastructure investments,
(2) introduction of new products,
(3) growing usage by OEM manufacturers
(4) an aggressive stock buyback program,
(5) acquisitions.
Negatives:
(1) economic weakness has a major impact on
sales,
(2) it is in a highly competitive industry,
(3) declining revenues in power generation
market.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2005
Ind Ave 1.6 4 22 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
Ind Ave 37 15 NA 7 NA
Chart
Note:
CMI stock made great initial progress off its November 2008 low, quickly
surpassing the downtrend off its July
2008 high (straight red line) and the November 2008 trading high (green
line). It recently broke both its long
term and intermediate term uptrends and have re-set, at least temporarily to
trading ranges (purple lines). The
wiggly red line is the 50 day moving average.
The Aggressive Growth Portfolio owns a 75% position in CMI. The stock is on the Aggressive Growth Buy
List; the lower boundary of its Sell Half Range is $228.
4/15
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
March PMI manufacturing index was reported at 55.7 versus consensus of 55.3.
The
March ISM manufacturing index came in at 51.5 versus expectations of 53.5.
February
construction spending fell 0.1% versus estimates of a rise of 0.2%.
Light vehicle sales in
March were better than February and above forecasts.
The February trade
balance was -$35.4 billion versus consensus of -$41.5 billion.
Weekly
jobless claims fell 20,000 versus expectations of a 3,000 increase.
Other
The
Atlanta Fed downgrades its 2015 forecast---again (short):
Three
reasons the Fed should wait on a rate increase (short):
Politics
Domestic
International War Against Radical Islam
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