The Morning Call
4/29/15
The Market
Technical
The indices
(DJIA 18110, S&P 2114) bounced yesterday. The S&P remained above its 100 day moving
average and traded back above its prior high for the second time. A close above that level today would indicate
that the trend to lower highs has been broken.
The Dow continued to trade above its 100 day moving average but below
its prior high.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(17060-19857, 1997-2978), intermediate term (17174-22300, 1802-2575 and long
term (5369-18873, 797-2129).
Volume was up
slightly; breadth improved. The VIX dropped
5%, 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.
Divergences in
the NASDAQ rally (medium):
The long
Treasury got smacked, ending once again below its 100 day moving average and the
lower boundary of the very short term trading range. As you know, this is the second time this has
occurred in the last week. Plus
yesterday’s close was below the prior low, suggesting that there is more
downside. So it looks like we may get a
challenge to the lower boundaries of its short term trading range and
intermediate term uptrend.
GLD had another
good up day, rising above its 100 day moving average but remaining within a developing
head and shoulders pattern, a completion of which would set it up for a
challenge of the lower boundary of its long term downtrend.
Bottom line: the
bulls grabbed at the reins yesterday, though the recent pin action suggests
that the Averages are now trading in contested range. The indices are out of sync with respect to
the recent trend of lower highs; but they are within striking range of their all-time
highs and the upper boundaries of their long term uptrends. It seems increasingly likely that they will
do so. However, I believe that the
latter presents formidable resistance.
Short term, I still
think the risk/reward setup favors the risk side. Longer term, the momentum remains to the
upside.
Pre-election
year May’s Market performance has not been so good (short):
Fundamental
Headlines
Yesterday’s
US economic data was mixed (which in and of itself is an improvement) with month
to date retail chain store sales and the February Case Shiller home price index
recording favorable comparisons while April consumer confidence and the April
Richmond Fed’s manufacturing index were disappointing. I have said before that I will take good news
wherever I can get it, but those two stats do nothing to alter the current
trend in weaker numbers.
Maybe
it hasn’t been the weather (short and a must read):
Overseas,
we weren’t so lucky.
(1)
Japan reported April retail sales lower than
anticipated,
Japan is the
poster child for QE failure (medium):
(2) the Bank of
China denied Monday’s speculation that it would implement QE, but the WSJ reported
that there was a credit easing program coming.
***overnight,
the central banks of Thailand and Sweden made additional monetary easing moves.
(3) the UK reported
that first quarter GDP grew one half of expectations [did they have bad weather
and a west coast longshoremen’s strike, too?],
***overnight, it
was reported that lending by EU banks to companies and households rose for the
first time in three years,
(4) the only
potential bright spot was the Greek PM promising that he would keep Greece in
the EU. But then we have heard that
story before.
***overnight,
along those lines, today Greece will present a (new and improved) draft for
fiscal reforms mandated by the troika.
If only.
If Greece does
default, here are some alternative strategies (medium):
Bottom line: while
we at least got a couple of upbeat economic datapoints yesterday, the overall
trend remains negative both here and abroad; making matters a bit worse, the
news flow out of Europe is no longer constructive. On the other hand, China appears to be ready
to do some kind of easing. Plus the regular
FOMC meeting concludes today and hope springs eternal that it will make yet
another dovish policy statement.
A letter to the
Fed (medium):
That investors
can ignore slowing global economic growth off of a subpar recovery, the obvious
distortions in asset pricing and misallocation of investment capital, the worldwide
embrace for a monetary policy with no record of success either historically or at
present and no clear plan for an exit and yet value equities at present rich levels
is a testament to group think. In that
kind of atmosphere, I believe that the best strategy is defense. Husband cash and wait for the light to come
on.
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.
Where
stocks need to be priced to generate a 10% annual return (medium):
Could
bonds outperform stocks in the next Fed tightening? (medium):
The
latest from John Hussman (medium):
Investing for Survival from Morgan Housel
Imagine
you're a weather forecaster. For the last four years, you've predicted a
massive blizzard and frigid temperatures. But it never came. It's actually been
downright hot for the four years straight. Ninety degrees and sunny every day.
Now imagine you resign from the meteorology business
because you are sick and tired -- sick and tired --
of atmospheric pressure. "All of my forecasting models tell me it should
be snowing," you say. "But like some spoiled brat, atmospheric
pressure waltzes in here like he owns the place, keeping it hot day after day.
This pressure has no business being in the sky. It's appalling how much gall
the atmosphere has."
This
would, of course, be ridiculous. Your viewers would tell you that the weather
is always right, and you, as a forecaster, are the one who is wrong. It doesn't
matter if it's abnormally hot. Your job as a forecaster was to predict that it
would be abnormally hot. That's why they pay you to be a forecaster.
Finance is
different. Unlike all other fields, finance people get to blame their poor
forecasting skills on reality.
Hedge fund Rinehart Capital Partners LLC announced
it was closing last week. It's easy to see why. According to The Wall Street Journal,
the fund lost 7% in 2012, another 15% in 2013, and is down 4% this year. The
S&P 500 gained 68.2% during this period.
Reinhart founder Andrew Cunagin wrote a letter to
investors announcing the closure. He explained his poor performance by blaming high-frequency traders,
the Fed, and a market that went higher when he doesn't think it should have:
Just as in previous boom-bust cycles, the seeds of
destruction are sewn in the illusion of trend masquerading as truth, with
momentum seeming to validate a widening gap between perception and economic
reality. And just as in past cycles, the manager who doesn't subscribe to the
new rules, who goes against the grain of convention is viewed as out of touch or left
behind ...
Since the beginning of our fund's drawdown in early 2012,
a Bloomberg index of the "Worst Balance Sheet" companies of the
S&P500 has returned to-date over +30% on an annualized basis. An MSCI index
of the "Most-Shorted" companies of the Russell 3000—a proxy for the
visibility of bad valuations, bad managements, and bad fundamentals—has also returned
over +30% annualized. These perversions are even more pronounced within EMs,
exacerbated by record fund outflows in the first half of 2014, exceeding even
those of the 2008 crisis. This dash for trash puts
to shame even the speculative excesses of the dot.com era. This is a circus
market rigged by HFT and other algorithmic traders who prey on the rational
behavior of warm-blooded investors. They only serve to further undermine the
integrity of public markets, which will ultimately bring about their
rationalization. Nonetheless, it's an internal dynamic to which we are uniquely
levered, by design, as an alpha strategy.
One thing is certain, managers whose strategies are working may be bright and well-informed with
advanced metrics on which they make investment decisions, but a reasonable
assessment of value is not among them. Do
previous cycles not bear asking, what other measure is there?
Look,
stocks have gone up a lot. Some sketchy companies are expensive by any
definition.
But the
entire history of the stock market is a pendulum swinging from absurdity to
absurdity. There is no such thing as a normal, healthy market. It's perpetually
in some state of irrationality that no one can explain.
You should
never blame an irrational market for your terrible performance. The market is
always right, even if you disagree with it. It's your strategy that got it
wrong. And "wrong" is the right word to use here because your actions
dragged performance down so far that you're being forced to close, forfeiting
any chance of vindication. "The market can stay irrational longer than you
can stay solvent," John Maynard Keynes famously said.
What bugs
me about this is incentives. When hedge fund managers get it right, they earn
multi-million, even billion-dollar paydays, and are paraded around as living
gods. When they get it wrong, it's someone else's fault. The Fed is
irresponsible, the president is ruining the economy, high-frequency traders are
destroying confidence, Congress is creating uncertainty, yadda yadda yadda.
Rarely is
anyone in finance forced to admit what the weatherman would have to: I was
wrong.
News on Stocks in Our Portfolios
·
Revenue of $7.78B (+7.0%
Y/Y) beats by $360M.
·
Revenue of $2.76B (-8.9%
Y/Y) misses by $200M.
Economics
This Week’s Data
Month
to date retail chain store sales improved from +0.8% for the comparable term last
year to +1.4%.
The
February Case Shiller home price index rose 0.9% versus expectations of up
0.7%.
April
consumer confidence came in at 95.2 versus forecasts of 103.0.
The
April Richmond Fed manufacturing index was reported at -3 versus consensus of
-2.
Weekly mortgage
applications fell 2.3% while purchase applications were flat.
First
quarter GDP came in +0.2% versus estimates of +1.0%; the price deflator was
-0.1% versus expectations of +0.5%.
Other
The
vicious feedback loop of oil prices and oil company debt (medium):
Politics
Domestic
A hopeful sign?
Liberals against a tax increase. (medium):
Accounting at
the Clinton Foundation (medium):
International War Against Radical Islam
No comments:
Post a Comment