The Morning Call
5/5/15
The Market
Technical
The indices
(DJIA 18070, S&P 2114) rallied yesterday.
The S&P remained above its 100 day moving average and rose above its
prior high---this is the second attempt to break this trend. A close above it today will negate it---though
remember last time, it negated the trend, then reversed sharply the following
day. The Dow closed above its 100 day
moving average (it bounced off this support level on Friday) and below its
prior high. So the Averages may once again
be out of sync with respect to their recent trend of lower highs.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(17091-19888, 2003-2984), intermediate term (17213-22339, 1807-2580 and long
term (5369-18873, 797-2129).
Volume fell
sharply (UK and Japanese markets were closed); breadth was mixed. The VIX rose slightly, finishing below its
100 day moving average and within short and intermediate term trading
ranges. Its pin action remains
supportive of rising stock prices.
Seasonal MACD
sell signal (short):
The long
Treasury was seriously pounded again, ending below its 100 day moving average
and the lower boundaries of its short term trading range and intermediate term
uptrend. If TLT remains below these
boundaries, the short term trading range will be negated today and the
intermediate uptrend tomorrow.
As I noted last
week, a break of the intermediate trend would raise questions about our
underlying fundamental assumptions, i.e. a weak economy/potential
deflation. What could account for rising
rates?: (1) an anticipated burst of inflation, though GLD performance belies
that, (2) an improving US economy of which there is little evidence, (3) investors
are sick and tired of getting paid little to nothing and are fearful that others
may feel the same; then what about stocks?
(4) an improving EU economy prompting a shift by investors from dollar
assets to EU assets. This is a
possibility. It is supported by [a] a
weakening dollar [b] a stronger bund and [c] better numbers from Europe of
late; though I think it way too early to soon to make the call of a recovery,
especially with the Greek bailout talks unresolved. Nevertheless, it seems that TLT is potentially
signaling that changes are afoot. I am
not convinced of any scenario yet; but if our muni bond holdings in the ETF
Portfolio break a major trend, I will lighten up.
GLD was up but
closed below its 100 day moving average and continued to build a head and
shoulders formation.
Bottom line: the
S&P is back challenging the recent trend of lower highs. If it is successful and the Dow can confirm
the break, I remain doubtful that the Averages can break above the upper boundaries
of their long term uptrends in any meaningful way.
The long
Treasury seems to be alerting us that times, they are a’changin’. To that I would add that historically, the
bonds guys have been smarter than stock guys in anticipating an alteration in
trend. May not happen this time; indeed,
nothing may be happening. But the
warning light is flashing and I am watchful
Fundamental
Headlines
We
got one US economic indicator yesterday: March factory orders which were up and
in line. Positive news is always
welcome.
Overseas,
the April Chinese and EU PMI’s were below expectations (more of the same); and according
to Greek officials, progress is being made in that country’s bail out
negotiations with the Troika.
Although
the IMF apparently didn’t get the memo (medium):
***overnight,
Australia’s central bank lowered its key interest rate; and the EU raised in
2015 economic growth forecast (see above).
Bottom line: nothing in yesterday’s news suggests any
improvement in the global economy or in any particular country. Nor were there any changes in monetary/fiscal/regulatory
policies to offer hope of some subsequent advance. What did occur was that stocks got more
expensive while a key component of the discount factor (interest rates) used
for their valuation rose. And there is a
whiff in the air that a key element (inflation) of that component may also be
moving higher. To be clear, I am not
making an inflation call; I am saying that there is evidence that it may be
about to rise and we need to pay attention.
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 Bill Gross (medium and a must read):
How
does a bursting bubble sound? (medium):
Stephen
Roach on central bankers’ delusions (medium and today’s must read):
http://www.zerohedge.com/news/2015-05-04/stephen-roach-derides-central-bankers-mass-delusion
http://www.zerohedge.com/news/2015-05-04/stephen-roach-derides-central-bankers-mass-delusion
Update
on valuation:
Of the S&P 500 members that have
already released results this season, 73 percent beat profit projections and 49
percent topped sales estimates. Analysts have tempered their predictions for a
corporate profit slump, now projecting a first-quarter drop of 0.4 percent,
compared with April 17 calls for a 4.3 percent decline.
On the other
hand, estimates continue to drop (short):
Company Highlight
The Bank of Nova
Scotia (Scotiabank) is Canada’s third largest bank with operations in Canada,
the US and 50 foreign countries. BNS
has earned a 14-20% return on equity over the last ten years and has grown
profits and dividends at a 9-11% pace. While the 2008-2009 financial credit
crisis impacted BNS , it weathered
the storm much better than most large US banks and should continue to grow
earnings and dividends as a result of:
(1) an improving
Canadian economy,
(2) a very
strict cost control program,
Negatives:
(1) a slowdown
in the Canadian mortgage market,
(2) increased
losses in the Caribbean and Puerto Rico,
(3) margin pressures.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2005
Ind Ave 2.6 11 35 NA
Debt/ EPS Down Net Value Line
Equity
ROE Since 2005 Margin Rating
Ind Ave 28 10 NA NA* NA
*banks’ income statements don’t provide
a Net Margin number
Chart
Note:
BNS stock made good progress off its March 2009 low, surpassing the downtrend
off its October 2007 high (straight red line) and its November 2008 trading
high (green line). Long term, it is in
an uptrend (blue lines), Intermediate
term, it is in a trading range (purple lines).
The wiggly red line is the 100 day moving average. The High Yield Portfolio owns an 85%
position in BNS. The upper boundary of
its Buy Value Range is $33; the lower boundary of its Sell Half Range is $84.
5/15
Investing for Survival
12
things I have learned from Morgan Housel: Part 2
2. “There are no points awarded for difficulty.”
The best investors make frequent use of a “too hard” pile
when it comes to investing. One of the many things that investors like
Morgan Housel have learned from great investors like Charlie Munger is how much
investing performance can be improved by just avoiding some of the boneheaded
mistakes made by other investors. For example, there is no shame in admitting
that a given business can’t be valued. There are plenty of other businesses
that are understandable which present investment decisions that are not very
difficult. Most of the time what an investor should do is nothing. And
there is no better time to do nothing than when something is difficult.
On this
point Warren Buffett likes to say “I don’t look to jump over 7-foot bars: I
look around for 1-foot bars that
I can step over.” These 1-foot bar
jumping opportunities with big financial payoffs don’t appear very often, but
when they do, it is wise to bet big.
News on Stocks in Our Portfolios
o
Emerson Electric (NYSE:EMR):
FQ2 EPS of $0.65 misses by $0.11.
o
Revenue of $5.4B (-7.1% Y/Y) misses
by $20M.
·
Revenue of $1.1B (-26.2%
Y/Y) misses by $60M.
·
Revenue of $2.32B (-43.1%
Y/Y) misses by $390M.
Economics
This Week’s Data
March
factory orders came in at +2.1%, in line.
The
April US trade deficit was $51.4 billion versus expectations of $42.0 billion.
Other
The
liquidity paradox (medium):
David
Einhorn on the price of oil and oil company balance sheets (medium):
Is
the ECB running out of bonds to buy? (medium):
Politics
Domestic
International War Against Radical Islam
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