The Morning Call
5/12/15
The Market
Technical
The indices
(DJIA 18105, S&P 2105) settled yesterday.
Both remained above its 100 day moving average. However, the S&P fell back below the
trend line connecting lower highs (for the third time), voiding that upside
break. The Dow did not. That leaves them out of sync with respect the
trend to lower highs.
Longer term, the
indices continue to trade well within their uptrends across all timeframes:
short term (17136-19938, 2010-2991), intermediate term (17290-22405, 1814-2587
and long term (5369-18873, 797-2132).
Volume declined,
as did breadth. The VIX was up 8%, but finished
below its 100 day moving average, below the upper boundary of a very short term
downtrend and within a short trading range.
The long
Treasury suffered another day of severe whackage, keeping it below its 100 day
moving average, within a short term downtrend and an intermediate term trading
range. Clearly, bond investors had no
second thoughts about their less than enthusiastic reception of Friday’s ‘goldilocks’
jobs reports.
Staying on the theme
of me not having any confidence regarding the reason for the recent selloff in
bonds, it appears that is NOT (1) inflation---gold and commodities are weak, or
(2) a stronger economy. That leaves my
sentimental favorite [the bond vigilantes calling bulls**t on QE] still in the
running. I am not saying that is ‘the’
explanation. I am not saying the bond
bull market is over. But clearly, the
negating of TLT’s short and intermediate term uptrends suggests things are
amiss. And if things continue amiss,
that is probably not good news for stocks.
The problem with
high money liquidity and low trading liquidity (short):
Japan: today’s
example of low trading liquidity (short):
GLD fell again,
closing below its 100 day moving average and continuing to build a head and
shoulders formation.
Oil fell again,
ending within a short term trading range.
Bottom line: the
technical picture remains confused as the indices continue to churn between
their 100 day moving averages and their trends to lower highs. Yes, the Dow negated the latter with
yesterday’s close above it and maybe a leading indicator of higher prices. But the S&P did not---hence the term ‘confused’. If the
Averages do break to the upside, they will almost surely challenge the upper
boundaries of their long term uptrends.
But I don’t believe that they will achieve any kind of meaningful upside
above those trend lines.
The
rapid decline in bond prices has been unsettling all the more so because it is
not clear what prompted it. It doesn’t
mean that the long term bull market in bonds is over; but given the technical
damage, TLT has little visible support for another 10-12 points to the
downside.
Fundamental
Headlines
About
the only news yesterday centered around the Greek/Troika bail out negotiations. There was no US or overseas datapoints
released; though we did get word that the Bank of China lowered its key rate
for the third time in six months.
As
for the Greek/Troika talks, to paraphrase George Costanza---I think I can summarize
those talks in one word: ‘nothing’.
Update
on the Greek/Troika negotiations (medium):
Update
on the update: no deal (medium):
And
Russia asks Greece to join BRICS bank (short):
***overnight,
Greece repaid the IMF with reserves held by the IMF which Greece will have to
repay in 30 days. In short, Greece took
out a short term loan to repay a long term loan---the last gasp before
bankruptcy. In another development, the
IMF told the other Troika is would no longer be part of the bailout
negotiations.
Bottom line: the Market’s reaction to Friday’s nonfarm
payroll number notwithstanding, we are not in a ‘goldilocks’ economy in my opinion. I have no idea how long it takes investors to
figure that out. I would think that if
the bond market continues to deliver that message, the stock guys will have an
increasing tough time holding on to that notion. In addition, it looks like the Greek/Troika
standoff is in the bottom of the ninth inning with two outs and the Troika is leading. Miracles can still occur---just ask Bobby
Thompson. But time and the odds don’t
seem to be in favor of the Greeks. I won’t
presume to predict how the Markets will take a default/Grexit; but I don’t
think anyone else does either, simply because we can’t know the unintended
consequences of such an event.
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 John Hussman: Recognizing the risks to financial stability
(medium):
Positive
thoughts from Barry Ritholtz (medium):
Company Highlight
Automatic Data
Processing (ADP ) provides business
outsourcing solutions including payroll and tax filing services, brokerage
services, comprehensive human resource services and financial services to auto
and truck dealerships. The company has grown profits and dividends 6-14% over
the last 10 years and has earned an 18-20% return on equity. Long term, the company should continue to
prosper based on:
(1) dominant
player in payroll processing market,
(2) the
contribution from the recent acquisitions,
(3) divesting of
noncore assets,
(4) its stock
buyback program.
Negatives:
(1)
highly competitive industry,
(2)
sensitivity to economic conditions.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2005
Ind Ave 1.8 11 37 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
Ind Ave 20 20 NA 11 NA
Chart
Note:
ADP stock made great progress off its October 2008 low, quickly surpassing the
downtrend off its October 2007 high (straight red line) and the November 2008
trading range (green line). Long term,
it is an uptrend (blue lines); intermediate term, it is in an uptrend (purple
lines); short term, it is in an uptrend (brown line). The wiggly red line is the 100 day moving
average. The Dividend Growth Portfolio
owns an 85% position in ADP. The upper
boundary of its Buy Value Range is $57; the lower boundary of its Sell Half
Range is $114.
5/15
Investing
for Survival
12
things I learned from Morgan Housel: Part 5
5. “It’s much easier to say ‘I’ll be greedy when others
are fearful’ than to actually do it. But those who can truly train themselves
to be skeptical of outperformance and attracted to underperformance will likely
do better than most. They have an advantage.”
Buying stocks when Mr.
Market is fearful is easier to say than do. You can’t simulate investing.
The best way to learn to invest is to invest. The feelings involved in
investing are primal and often hard to control. For example, humans are simply not
hard wired to be contrarian when others are full of fear. You can read all the
books, articles and speeches about being fearless when others are fearful and
yet fail to be calm when the time comes. This presents a fundamental problem in
that this is the best time to be buyer of assets. The best investors are
actually nostalgic for times like March of 2009 when the market was rife with
fear and uncertainty. Screaming buys based on valuation like those that existed
in March of 2009 may appear only two to three times in an investing lifetime. By
the time you get good at this key skill you may be too old to take advantage of
the opportunity.
News on Stocks in Our Portfolios
Economics
This Week’s Data
Other
Almost
one half of US states are broke (medium):
Politics
Domestic
This is a speech
by Paul Craig Roberts. I am not sure
about the conclusion, but he does a good job of outlining the current US
problems and their causes (medium):
International War Against Radical Islam
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