The Morning Call
4/22/15
The Market
Technical
The indices
(DJIA 17949, S&P 2097) sold off modestly yesterday. Both remained above their 100 day moving
averages but below their prior highs---keeping the series of lower highs
intact.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(17009-19806, 1989-2970), intermediate term (17123-22249, 1802-2575 and long
term (5369-18873, 797-2129).
Volume fell;
breadth improved. The VIX declined, remaining right on the lower boundary of a (now
in question) developing pennant formation.
I continue to think that the VIX
remains a reasonably priced hedge.
The long
Treasury declined again, but finished within a tight trading range dating back
to mid-February and still within longer term uptrends.
Bill Gross says
German bunds are the short of a lifetime (medium):
GLD’s dropped, closing
within its short and intermediate term trading ranges. A head and shoulders pattern continues to
develop.
Rounding out,
oil slid 3%, ending below the former upper boundary of a trading range (i.e.
resistance turned support). If OIH closes
below this boundary today, it will again become resistance.
An update on Dr.
Copper (short):
Bottom line: both
the indices closed in the narrowing boundaries formed by their very short term downtrends
(upper) and their 100 day moving averages (lower). The spread between these
boundaries is down to 20 points on the S&P, so we should receive some short
term directional guidance soon. While
the 100 day moving averages have offered strong support in the recent past, the
risk/reward between the upper boundaries of their long term uptrends and the
upper boundaries of their short term uptrends continues to favor the risk side.
That said, longer
term, the trends are solidly up and will be so until the short term uptrends,
at the very least, are negated.
Fundamental
Headlines
There
was only a single US datapoint yesterday: month to date retail chain store
sales slowed on a year over year basis.
Earnings
reports continue to come in better than estimates; but we need to remember that
those forecasts had previously been revised down substantially. Putting first quarter earnings season in
perspective (short):
Update
on this season’s earnings and revenue beat rates (short):
Overseas,
there were no data releases; but we still got news:
(1)
China allowed the first default on onshore bonds of a
state owned enterprise. That keeps the
news flow out of that country confusing [increased margin requirements last
Friday, lower reserve requirements Monday, and then this default
yesterday]. I include myself under the
category of ‘confusing’,
(2)
there were news reports that Greece was close to
signing a pipeline deal with Russia (medium):
***and to
inflame matters more, overnight,
[a] the EU
filed antitrust charges against Gazprom (medium):
[b] and lowered the collateral value
of Greek bank assets posted to secure loans.
[c] the Greek government announced that it would
not present reform measures at Friday’s meeting of EU finance ministers.
Plus:
The end nears for Greece (medium):
(3)
US ups the ante against Russia, sells missile defense system
to Poland (short):
***overnight,
Japan reported its first trade surplus in three years largely on the back of a
collapse in imports.
Bottom line: even
though there was little by way of good fundamental news yesterday, stocks took
it all in stride---which fits perfectly with the current Market psychology:
stocks upbeat in face of economic weakness, ineffective central bank policies
and rising geopolitical risks.
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.
Why
we are not in a secular bull market (medium):
The
latest from John Hussman (medium):
The
latest from John Mauldin (long but a must read):
Thoughts on Investing from Cullen Roche
My latest post on “passive” indexing
made some people upset. I have argued, in essence, that
there is no such thing as “passive” investing and that most people who use the
term don’t really understand that what they’re doing is actually quite active
and forecast based. These are not “strawman” comments or
misunderstandings as some people (see here and here) have claimed.
They are incontrovertible facts grounded in macro realities. Let me
explain.
Fact #1 – At the macro level there is only one portfolio of all
outstanding financial assets. If you were a truly “passive” investor you
would simply buy the total market of financial assets as opposed to trying to
pick your own superior portfolio based on assets inside of the aggregate.
Of course, that portfolio can’t be purchased because that portfolio
product doesn’t exist.
Fact #2 – We all allocate assets differently from the aggregate
financial portfolio thereby rendering us all “asset pickers”. This asset
picking requires some level of forecasting or underlying prediction based on
how your risk tolerance relates to how you expect a set of financial assets to
help you meet your financial goals. You can claim that your approach
doesn’t rely on forecasting, but that’s like claiming that your ability to
successfully sail from San Francisco to Hawaii does not rely on a weather
forecast – it’s just not true.
Fact #3 – This portfolio and your risk tolerance to certain assets
will evolve over time which will require you to maintain and alter the above
portfolio in some manner. Therefore, it will require some level of
upkeep and maintenance even if this is rather minimal over time.
The
above facts should not be controversial. Anyone who constructs a
portfolio has to accept the reality that they are an asset picker of some sort.
They should also acknowledge that their perception of risk and the
underlying risks of assets changes over time. Therefore, we are all
asset pickers who are required to maintain an evolving portfolio over time.
Again, these facts should not be remotely controversial.
When
someone tells you to invest in a “passive” portfolio they are basically telling
you to pick broad indexes of assets and maintain a tax and fee efficient
structure. I don’t disagree with this concept AT ALL. But what
seems to have happened over time is that many people who advocate “passive”
indexing seem to have forgotten the most important part of portfolio
construction – the actual process and necessary forecasting of the assets you
pick to allocate.
We know that John Bogle was right when he
constructed his “Cost Matters Hypothesis”.
It should be another incontrovertible fact that the less active investor
who buys the aggregate market will outperform the more active investor who buys
the aggregate market. Costs matter. But we should also remember
that the most important driver of
portfolio performance is not the
result of cost and tax structure, but allocation. Therefore, I think one
must adopt the most important hypothesis of all when constructing a portfolio:
THE
ALLOCATION MATTERS MOST HYPOTHESIS
And
make no mistake – when you allocate assets inside of the global aggregate
financial asset portfolio, you are indeed making an implicit forecast and
“picking assets”. The investor who doesn’t embrace this reality is simply
not understanding what they are doing. So yes, costs and frictions
matter. John Bogle was right. But the passive investing ideology
seems to have gone a bit overboard in emphasizing these points. And in
this pursuit to differentiate themselves from “stock pickers” and “active”
investors they have lost sight of the reality that what they are involved
in is a process of asset picking that will leave some asset pickers inevitably
outperforming others who engage in that process utilizing a superior
understanding of what it is that they are doing.
News on Stocks in Our Portfolios
·
McDonald's (NYSE:MCD): Q1 EPS of $0.84 may not be comparable to
consensus of $1.06.
·
Revenue of $5.96B (-11.0%
Y/Y) in-line.
- Coca-Cola (NYSE:KO):
Q1 EPS of $0.48 beats by $0.06.
- Revenue of $10.7B (+1.1% Y/Y) beats by $40M.
- T. Rowe Price (NASDAQ:TROW): Q1 EPS of $1.13 misses by $0.01.
- Revenue of $1.03B (+7.9% Y/Y) in-line.
- Boeing (NYSE:BA):
Q1 EPS of $1.97 beats by $0.16.
- Revenue of $22.15B (+8.3% Y/Y) misses by $340M.
·
Genuine Parts (NYSE:GPC): Q1 EPS of $1.05
in-line.
·
Revenue of $3.74B (+3.3%
Y/Y) misses by $50M
Economics
This Week’s Data
Month
to date retail chain store sales slipped again versus the prior year (+0.8%
versus +1.1%)
Weekly
mortgage applications rose 2.3% while purchase applications were up 5.0%.
Other
Currency
genocide (medium):
Update
on student loans (short):
Trade
credit now at lowest level since financial crisis (medium):
Politics
Domestic
International
Saudis
end bombing campaign in Yemen but place ground units on alert (medium):
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