Thursday, April 16, 2015

The Morning Call & Subscriber Alert---The numbers keep getting worse

The Morning Call

4/16/15

The Market
           
    Technical

The indices (DJIA 18112, S&P 2106) continued to rise yesterday.  They both closed above their 100 day moving averages.  The Dow ended above the upper boundary of a very short term downtrend (a finish above that boundary today will negate the trend); however, the S&P remained below its comparable trend line.

Longer term, the indices remained well within their uptrends across all timeframes: short term (16973-19750, 1984-2965), intermediate term (17086-22212, 1796-2567 and long term (5369-18873, 797-2129).  

Volume rose; but breadth was mixed.  The VIX fell 6%, closing back below the lower boundary of the pennant formation; a finish below that boundary today will negate that formation.  It also ended within its short term trading range, its intermediate term downtrend, its long term trading range and below its 100 day moving average.  The cheaper this gets, the better its value as a hedge. 

The long Treasury declined, but remained within a very short term and short term trading range, intermediate and long term uptrends and above its 100 day moving average.

Why interest rates won’t rise soon (medium):

GLD’s price increased, closing within its short and intermediate term trading ranges, its long term downtrend and below its 100 day moving average.  GLD continues to struggle just to stay flat.

Oil appears to have made a bottom and then broken a resistance level on the upside.




Bottom line: despite yesterday’s rally, the indices closed mixed with respect to the upper boundaries of their very short term downtrends.  We will likely know today which is the outlier.  As I have opined, both need to get through this trend line as well as their February highs before assaulting the upper boundaries of their long term uptrends which I believe will prove impossible to challenge in any meaningful way.
           
            More on sentiment (short):

            Stock market performance around April options expiration (short):

    Fundamental

       Headlines

            Yesterday’s US economic stats were again largely disappointing: negatives: mortgage and purchase applications, industrial production, capacity utilization and the NY Fed manufacturing index; positive: homebuilder confidence; Casper Milquetoast: Fed Beige Book.   After last week’s dearth of data, clearly the numbers are backing our recent call of a slowdown in the rate of US economic growth.

            Overseas, multiple datapoints from China showed a significant slowdown in its growth rate.  These numbers don’t assuage my concerns about a global economic slowdown.

                ***overnight, EU March auto sales rose 11%.

Not surprisingly, the ECB kept interest rates unchanged.

And last but not least, S&P lowered Greece’s bond rating to CCC+ and the Greek PM met with a sovereign debt (‘restructuring’) lawyer.  As the probabilities of a Grexit mount, a large portion of the investment and economic worlds spent yesterday professing little to no concern.  They may be correct but I would be unwilling to bid stock prices up until I knew.

Bottom line: at the risk of sounding like a broken record, the economic outlook continues to deteriorate both here and abroad.  True we haven’t seen any economic data this week from Europe---which has been the only bright spot in the global economy of late.  That said, the Chinese growth numbers were at seven year lows and that won’t help global trends---as can be seen in Tuesday’s WTO trade forecasts and declining US GDP figures. 

Further, actions by the Greek government suggest the rising odds of an exit from the EU.  Not that such an event hasn’t been well publicized or that all the experts aren’t correct in poo pooing any negative impact of such an occurrence.  But given past history, it seems to me that in this case, discretion is the better part of valor. (must read):

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.

       Subscriber Alert

            The stock price of Lorillard (LO) has risen above the upper boundary of its Buy Value Range.  Therefore, it is being Removed from the High Yield Buy List.  The High Yield Portfolio will continue to Hold this stock.


       Company Highlights

Caterpillar is the world’s largest producer of earth moving equipment serving the road building, mining, logging, agriculture, petroleum and general construction industries.  The company has earned a 12-20% return on equity over the past ten years growing earnings and dividends at a 10-19% annual rate.  While the CAT’s profitability is economically sensitive, longer term the company should prosper as a result of:

(1) strict cost controls.

(2) strength in real estate and transportation markets,

 Negatives

            (1) declining backlog,

            (2) weak mining market,

            (3) rising R&D expenses,

            (4) restructuring costs.

CAT is rated A+ by Value Line, has larger than desirable debt to equity ratio of 56% and its stock yields 3.3%. 

   Statistical Summary

                  Stock      Dividend        Payout      # Increases  
                  Yield      Growth Rate     Ratio       Since 2005

CAT          3.3%            7%             54%              10
Ind Ave      1.6               4                22                 NA 

                Debt/                        EPS Down       Net        Value Line
                Equity         ROE      Since 2005      Margin       Rating

CAT          56%           22%           3                  7%           A+
Ind Ave     37               15             NA               7             NA

     Chart

            Note: CAT stock made initial good progress off its March 2009 low, surpassing the downtrend off its May 2008 high (straight red line) and the November 2008 trading high (green line).  Long term the stock is in an uptrend (blue lines).  Intermediate term it is in a trading range (purple lines).  Short term it is a downtrend (brown lines).  The wiggly red line is the 100 day moving average.  The High Yield Portfolio owns a 50% position in CAT, having Sold Half in early 2011.  The upper boundary of its Buy Value Range is $39; the lower boundary of its Sell Half Range is $123.      



4/15
  
       Investing for Survival

            Learning how to be wrong (medium):

      News on Stocks in Our Portfolios

Blackrock (BKN)
 
·         Q1 adjusted net income of $830M or $4.89 per share vs. $762M and $4.43 one year ago. Adjusted operating margin of 41.2% down 20 basis points.
·         AUM of $4.77T up 8% year-over-year.
·         Retail net inflows of $14.17B brings AUM to $551B. iShares inflows of $35.5B brings AUM to $1.07T. Institutional inflows $20.8B brings AUM to $2.8T.


Q1 EPS of $3.07 misses by $0.04.
  • Revenue of $2.44B (+2.1% Y/Y) misses by $20M.

Sherwin-Williams (NYSE:SHW) reports sales in its paints business rose 7.5% to $1.46B in Q1.
  • Paint segment profit rate increased 130 bps to 12.1%.
  • Sales in the consumer segment were up 8.1% to $352M.
  • Consumer segment profit rate +10 bps to 15.8%.
  • The company missed on EPS due in part to foreign exchange swings which negatively impacted EPS by $0.04 during the quarter and weak end market demand in some markets.
  • Guidance; Sherwin-Williams expects sales to increase 6% to 8% in Q2 and EPS to fall in a range of $3.70 to $3.90 vs. $3.70 consensus. For the full-year, a high single-digit sales growth rate is seen and EPS of $10.90 to $11.10 vs. $11.22 consensus.

Philip Morris (NYSE:PM): Q1 EPS of $1.16 beats by $0.15.
  • Revenue of $6.62B (-4.3% Y/Y) beats by $490M.




Economics

   This Week’s Data

            March industrial production fell 0.6% versus expectations of a decline of 0.3%; capacity utilization came in at 78.4 versus estimates of 78.7.

            The NAHB builders’ confidence index came in at 56.0 versus forecasts of 55.0.

                The latest Fed Beige Book was released and it contained the usual thin gruel of ‘on the one hand/on the other hand’ comments designed to make everyone comfy.  For those counting, weather was mentioned 71 times.

                March housing starts rose 2% versus consensus of up 16%; building permits fell 6% versus expectations of 1% decline.
           
            Weekly jobless claims climbed 12,000 versus estimates down 1,000.

   Other

            Update on big four economic indicators (short):

            Update on US macro surprise index (short):

            The collapse of the petrodollar (medium and a must read):

Politics

  Domestic

  International War Against Radical Islam

            Another red line crossed (medium):





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