The Morning Call
5/14/15
The
Market
Technical
The indices
(DJIA 18060, S&P 2098) were off slightly yesterday, following a gap up in
early trading. Both remained above its
100 day moving average; and both finished below their trend lines connecting
lower highs.
Longer term, the
indices continue to trade well within their uptrends across all timeframes:
short term (17168-19965, 2012-2993), intermediate term (17315-22432, 1816-2589
and long term (5369-18873, 797-2132).
Volume fell;
breadth remained mixed. The VIX declined
slightly, closing below its 100 day moving average, below the upper boundary of
a very short term downtrend and within a short trading range---all a plus for
stocks.
The long
Treasury got hammered gain, in spite of a weak retail sales number and
successful Treasury offerings. It
finished near the bottom of its short term downtrend and below its 100 day
moving average.
An outbreak of
sanity in the bond market (medium):
Don’t expect
help from the Fed (medium):
But that doesn’t
necessarily mean a bear market in bonds has begun (medium):
Moody’s
downgrades the city of Chicago’s credit rating (medium):
GLD was up
strong, ending back above its 100 day moving average and near the neckline of
its head and shoulders formation. If
that line is challenged successfully, a short term uptrend would be set. However, given the head fakes this market has
given over the last 18 months, I need strong confirmation before getting too
excited about GLD.
Oil fell,
finishing right on the upper boundary of its short term trading range.
Plus the dollar
has broken below the lower boundary of a short term uptrend. If it closes below that trend today, it will
be negated.
If E60 billion
of QE can’t keep the euro down, what will (short and a must read):
Bottom line: the
technical picture remains somewhat confused as the indices continue to churn
between the ever narrowing range separating their 100 day moving averages and
their trends to lower highs. Unfortunately
the volatility and lack of correlation in the bond, commodities and currency
markets is only adding to that confusion.
I said before that a break has to come because the trends are converging;
but I have no idea which way that will be but (1) I don’t view the increased
volatility in other markets as a positive, (2) the risk reward at this point is
in the favor of risk and (3) if the Averages do break up, I believe that the
upper boundaries of their long term uptrends represent formidable resistance.
Stock Traders’
Almanac on stock performance in pre-election years (short):
The flogging TLT
took yesterday in the face of news that should have given it a lift seems to
indicate (again) that the bond guys just don’t like the risk/reward proposition
that the central banks have created.
There is a link below arguing that the underwhelming global economic
performance will ultimately act as a lid on rates. That may be true; but we don’t know how much
‘greater fool’ money is in bonds that will likely exit and we don’t know the
impact of the lack of liquidity among the bond market makers (also see below). My bias is to be cautious rather than
sanguine.
Fundamental
Headlines
US economic data
reverted to its old ways (negative): weekly mortgage and purchase applications
were off, both the headline and ex autos and gas April retail sales numbers
were disappointing and both April export and import prices declined versus
forecast of increases (can you spell deflation?). There was one upbeat stat: March business
inventories fell but sales rose.
Clearly, mixed is the best we can say about this week’s data so
far. Certainly, there is no reason to
even consider a change in our forecast.
Atlanta
Fed lowers second quarter GDP estimates, again (short):
The
US macro surprise index and more (short):
More
on Tuesday’s retail sales number (short):
First
quarter earnings season recap (medium):
Overseas, the
first quarter eurozone economic growth was very positive. On the other hand, April Chinese industrial
output, retail sales and fixed asset investment were all below estimates. So
the international outlook continues to improve slightly, in the sense that
Europe continues to turn in better numbers.
Yesterday’s news
flow bonus is that we weren’t inundated with Greece/Troika negative bailout
statements---clearly the absence of bad news doesn’t imply anything positive.
***overnight
from Greece (hint, a plan) (medium):
Stock
market performance following a currency crisis.
This may be helpful in thinking about a Grexit; but while Greece’s
problem is related to currency, it is also a sovereign debt and fiscal
bankruptcy crisis (medium):
Bottom line: the
positive economic data interlude lasted exactly one day; and then was reversed
with authority. So I see little hope for
equities coming from better economic or corporate profit growth (the E part of
P/E). Plus I am beginning to see cracks to
discount factor implied in P/E in the form of rising interest rates. To be sure, it is too soon to be confident
that rates are definitely going to trend higher, enough so to materially impact
that discount factor. But as I noted
above the volatility in all markets are suggesting that investors are starting
to rethink the economic/valuation models.
This is a time for patience.
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.
Are
central banks the new dot.coms? (medium and a must read):
Understanding
liquidity risk (medium and a must read):
Here
is a perfect example of the above and the central banks’ complicity in it all
(medium, this and the two above it are absolute must reads. They are all related and should be read
together):
And
speaking of government sponsored illiquidity, take a look at numero uno
(medium):
Company Highlight
Brown Forman (BF.B)
produces and markets Jack Daniel’s, Southern Comfort, Finlandia, Canadian Mist,
and Korbel. The company has earned a
20-30%+ return on equity and grown profits and dividends between 10% and 11%
over the past 10 years. Historically, BFB has managed to increase earnings per share
through even the toughest economic period and should continue to do so as a
result of:
(1) the
competitive advantage offered by its strong portfolio of brands,
(2) geographic
expansion into developed [France ]
as well as emerging [Russia ,
Poland ,
Mexico ]
markets,
(3) broadening
of its Jack Daniels product offerings [Gentleman Jack, Jack Daniels Single
Barrel],
Negatives:
(1) its products
are sensitive to economic developments,
(2) a highly
competitive industry,
(3) distilled
spirits are subject to excise taxes in various countries; increases can have an
adverse effect on the company’s financial results,
(4)
currency headwinds.
Brown Forman is
rated A+ by Value Line, has a 35% debt to equity ratio and its stock yields
1.4%
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2005
Ind Ave 2.5 9 50 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2005 Margin Rating
Ind Ave 36 22 NA 13 NA
Chart
Note: BFB stock made great progress off its March
2009 low, quickly surpassing the downtrend off its August 2008 high (straight
red line) and the 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 Dividend Growth Portfolio
owns a 50% position in BFB, having Sold Half in mid-2012. The upper boundary of its Buy Value Range is
$39; the lower boundary of its Sell Half Range is $68.
5/15
Investing
for Survival
12
things I learned from Morgan Housel: Part 6
6. “The most important thing to know when you look at
long term financial history is that volatility in the stock market is perfectly
normal.”
Anyone who believes in the Mr. Market metaphor
understands that volatility is both inevitable and the source of an opportunity
for a rational investor. Charlie Munger: “To [Ben] Graham, it
was a blessing to be in business with a manic-depressive who gave you this
series of options all the time.” It is volatility that creates the mispriced
assets which present an opportunity for investors. Volatility is one type of
risk. For example, if you’re retiring or have tuition bills to pay at a certain
time. While volatility is one type of risk you must face, it’s not
the only risk. Why do some investment managers try to equate risk with
volatility rather than just considering it as one important type of risk?
They want you to believe that volatility is equal to risk because
volatility is a major risk for them since, if assets drop in price, investors
will flee from their services. They also want you to believe that risk can be
expressed a number and controlled by magic formulas with Greek letters in
them you do not understand.
News on Stocks in Our Portfolios
Economics
This Week’s Data
March
business inventories rose 0.1% versus expectations of an increase of 0.2%; but
sales were up 0.4%, making this set of data upbeat.
Weekly
jobless claims fall 1,000 versus estimates of an 11,000 drop.
April
PPI came in at -0.4% versus forecasts of +0.2%; ex food and energy, it was down
0.2% versus consensus of up 0.1%.
Other
Schiff
versus Bernanke (medium and funny):
Politics
Domestic
More of your
government at work (short):
Another example
(medium):
Thursday morning
humor (4 minute video):
International
The
US and China in verbal fisticuffs in South China Sea (medium):
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