The Morning Call
5/7/15
The Market
Technical
The indices
(DJIA 17841, S&P 2080) were down again yesterday. The S&P remained above its 100 day moving
average, though not by much and continues in a very short term downtrend. The Dow closed right on its 100 day moving
average and within a very short term downtrend.
Remember that the 100 day moving average has provided great support for
the last year; so it would not be a surprise to see a bounce from current
levels, especially with the Market getting oversold.
Longer term, the
indices continue to trade well within their uptrends across all timeframes:
short term (17110-19907, 2003-2984), intermediate term (17245-22360, 1812-2585
and long term (5369-18873, 797-2129).
Volume was flat;
breadth mixed. The VIX was up another
6%, finishing back above its 100 day moving average but remaining within a
short trading range. The last two days’
pin action notwithstanding, it has been more docile than I would have
expected. That said, its portfolio
insurance value is less impressive.
The long Treasury
got pummeled. It ended below its 100 day
moving average, within a short term downtrend and below the lower boundary of
its intermediate term uptrend for a fourth day, negating that trend. At the open this morning, our ETF Portfolio
will Sell one half of its muni bond positions.
I remained concern about the current weakness and what it may mean for
the underlying fundamentals. That said,
I am still not sure of the cause. What I
feel more sure about is that bond prices will lead stock prices whatever the
reason.
A new bond bear
market? (short):
Or
is this just a correction? (short):
Yesterday,
I offered the thesis that rates are rising because the bond vigilantes have
recognized the inadequacies of low rates and that they will push the Fed to
raise rates. Here is a counterpoint
(medium):
GLD fell, closing
below its 100 day moving average and continuing to build a head and shoulders
formation.
Bottom line: the
indices are now at or near their 100 day moving averages, which as I have noted
several times, has been a powerful support for over a year. As long as it holds, the very short term
trend is within a trading range bound by the 100 day moving average on the
downside and the upper boundary of a very short term downtrend (the trend of
lower highs) on the upside. One of these
boundaries has to break near term simply because they are converging.
My prejudice is
to the downside but that’s been my story for 18 months and I have been
wrong. One fundamental supporting that
position is the damage being done in the bond markets. That said, longer term, the Averages are
solidly within uptrends across all timeframes.
The rapid
decline in bond prices continues to make me nervous, especially since I don’t
have a firm conviction as to why. That,
of course, doesn’t mean that things aren’t amiss.
The
difference between risk and volatility (short):
***overnight,
Euronext Derivatives Market is having problems (short):
Fundamental
Headlines
Yesterday’s
US economic stats were mixed to negative: weekly mortgage applications fell but
purchase applications rose; first quarter nonfarm productivity declined but was
in line while unit labor costs increased more than expected; finally, the April
ADP private payroll report showed a decline in employment versus expectations of
an increase. The numbers still point to
a declining rate of growth.
Elsewhere
at home, in an interview, Yellen pronounced stock valuation ‘quite high’---which
I thought a bit unusual given the Fed’s current objective of higher asset
prices. Could she possibly be responding
to the whackage in the bond market and proving once again that the Fed follows
the bond market rather than leading it? On the other hand, given that the record of
Fed forecasts on the economy to say nothing of the Market has been so abysmal,
I can’t imagine why anyone would take this seriously. (short):
Overseas,
the UK services PMI came in ahead of forecasts and the EU composite PMI was
higher though not as much as anticipated.
So the case for improvement in the EU economy received another boost.
***overnight
the EU April retail PMI was better than March’s reading but still in negative
territory.
In
addition, Greece made a E200 million payment to the IMF but has another E750
million due on May 12. Unfortunately,
the odds of a bail out agreement before that happens are shrinking.
Sources
within the troika say that an agreement is not possible by next Monday
(medium):
Plus,
foreign banks are cutting credit lines to Greek banks (medium):
Bottom line: the economic stats were downbeat in the US but
a plus abroad. However, I don’t think
that investors are noticing given the sudden weakness in the global bond
markets and the rapidly approaching endgame in the Greek/Troika bailout standoff.
The risk
associated with the former are easier to quantify simply because we have all
lived through periods of interest rate reversals and know roughly how stocks
act during those periods. There is
legitimate disagreement on the timing of equities turn to the downside; but
there is little reason to believe that ultimately they won’t pay the
price.
On the other
hand, I don’t think anyone has a clue as to how the Greek financial crisis
resolves itself and the consequences of whatever that end result will
be---which makes the potential for a major surprise significantly higher over
the near term.
I am not arguing
that either the bond market has bottomed and is heading higher or that the
Greek problems will ultimately lead to financial disruptions. But they both have a higher probability of
occurring than they did last week, last month or six months ago; and stock
prices are a milli short hair away from their valuations in those timeframes.
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.
Greg
Mankiw on the virtues of index funds (short):
Company Highlight
Lorillard Inc.
produces and markets Newport ,
Kent
(1) increasing
market share,
(2) product
innovation, including investment in tobacco alternatives
(3) improved
pricing,
(4) a stock
buyback program.
Negatives:
(1) governments
around the world are imposing restrictions on tobacco use,
(2) a highly
competitive industry,
(3) the industry
is not allowed to advertise.
Lorillard is
rated A by Value Line, has a 600% debt to equity ratio but is working hard to
reduce this figure. Its stock yields 3.8%
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2008
LO 3.8% 10% 67% 6
Ind Ave 4.3 8 65 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2006 Margin Rating
LO 600% NA 0 19 A
Ind Ave 70 50 NA 14 NA
Chart
Note:
LO stock made great progress off its January 2009 low, quickly surpassing the
downtrend off its December 2007 high (straight red line) and the November 2008
trading high (green line). Long term,
the stock is in an uptrend. The wiggly
red line is the 100 day moving average.
The High Yield Portfolio owns a full position in LO. The stock is on the High Yield Buy List; the
lower boundary of its Sell Half Range is $95.
5/15
Investing
for Survival
12
things I have learned from Morgan Housel: Part 3
3. “Three of the most important variables to consider are
the valuations of stocks when you buy them, the length of time you can stay
invested, and the fees you pay to brokers and money managers.”
“The
single most important variable for how you’ll do as an investor is how long you
can stay invested. I’m always astounded when I think about compound
interest and the power that it has for investing. Time is massively powerful.”
Each of the points made here by Morgan Housel has a major
champion. On the first point, Howard Marks points out: “It shouldn’t take
you too long to figure out that success in investing is not a function of what
you buy. It’s a function of what you pay.” On the second point, Charlie Munger
puts it simply: “Understanding both the power of compound interest and the
difficulty of getting it is the heart and soul of understanding a lot of
things.” On the third point there is John Bogle: “You get what you
don’t pay for.”
An
excerpt of a Motley Fool post called I Prefer to Keep Things Simple, by Morgan Housel
helps explain compounding:
“What
[too often] happens … is that the magic of compounding returns is overwhelmed
by the tyranny of compounding costs. It’s a mathematical fact.
You’ve
probably heard the story about the guy who invented the game of chess.
It
goes like this: An inventor brought his chess board to the emperor of China,
who was so impressed he offered to grant the man one wish. The inventor had a
simple wish: He requested one grain of rice for the first square on the board,
two grains for the second square, four for the third, eight for the fourth, and
so on. Sounding like a modest proposal, the emperor agreed. But filling the
chess board’s last 10 squares would have required 35 quintillion grains of
rice – enough to bury the entire planet. Unamused, the emperor had the inventor
beheaded.
While
I doubt the story is true, its message is important to understanding the power
of compound interest: When things grow exponentially, gains look tiny at first,
modest in the middle, and then — very suddenly — they shoot utterly off the charts.”
News on Stocks in Our Portfolios
o
Becton, Dickinson (NYSE:BDX):
FQ2 EPS of $1.61 beats by $0.08.
o Revenue of $2.05B (-1.0% Y/Y) in-line.
·
Revenue of $953.6M (-15.6%
Y/Y) misses by $24.15M.
Economics
This Week’s Data
Weekly
jobless claims were up 3,000 versus estimates of up 18,000.
Other
Thursday
morning humor (short):
Politics
Domestic
Hillary on
immigration (short):
Baltimore
teachers (short):
International War Against Radical Islam
If
true, this can’t be good (medium):
The complex and confusing
politics of the Middle East (medium):
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