The Morning Call
5/13/15
The
Market
Technical
The indices
(DJIA 18068, S&P 2099) fell again yesterday, though they did recover from major
early losses by the end of the day. Both
remained above its 100 day moving average; and both finished below their trend lines
connecting lower highs---putting them back in sync with respect to those trend
lines.
Longer term, the
indices continue to trade well within their uptrends across all timeframes:
short term (17149-19946, 2012-2993), intermediate term (17296-22411, 1816-2589
and long term (5369-18873, 797-2132).
Volume rose
slightly; breadth was mixed. The VIX was
up fractionally, but closed 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 inched higher after taking a beating on Monday. The bounce was not surprising given that it
ended Monday’s trading near the bottom of its short term downtrend. That was helped by a short covering rally
after central banks stepped in big to yesterday’s Treasury auction. TLT remained below its 100 day moving
average.
What is driving
the bond market? (short):
And
(short):
A
bull on the bond market (medium):
Fighting the Fed
(medium):
GLD lifted a
tad, but still closed below its 100 day moving average and continued to build a
head and shoulders formation. This chart
is still ugly.
Oil rose and
closed back above the upper boundary of its short term trading range for the
second time. The lack of success of the
first challenge suggests that follow through may be tough to come by; that said,
a challenge to the upper end of the trading range lends more credence to the
notion that oil has found a bottom and is building a base.
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. I said
before that a break has to come because the trends are converging. I have no idea which way that will be but (1)
the risk reward at this point is in the favor of risk and (2) if the Averages
break up, I believe that the upper boundaries of their long term uptrends represent
formidable resistance.
The latest from
Stock Traders’ Almanac (short):
Yesterday’s
minor uptick notwithstanding, the recent waterfall formation in bond prices is
concerning. At current levels, TLT could
experience a nice rally and never get out of its short term downtrend. So we need a lot more momentum to the upside
before the long bond price even stabilizes.
Fundamental
Headlines
I
can’t remember the last day in which multiple economic releases were made and
they were all positive: month to date retail chain store sales, the April small
business optimism index and the April US budget surplus were all ahead of
expectations. Of course, one day does
not a trend make; but I will take good news anyway I can get it.
Two
points:
(1)
while I discounted the impact of weather and the west
coast longshoremen’s strike on first quarter numbers, it doesn’t mean that they
had no impact. Some improvement was
almost inevitable. That said, when
fourteen of the last fifteen weeks having witnessed a steady stream of
disappointing economic stats, it is going to take a lot of progress just to get to a flat economic
performance,
(2)
which brings me to my second point and that is, our
downward revised economic forecast was not for a recession; it was for a lower
rate of growth. In order to get that, we
need better data or I will have to lower the outlook to a recession.
***overnight, the DOJ is contemplating
ripping up an agreement not to prosecute UBS for rigging interest rates
No economic releases
from overseas, though Greece continues to generate headlines. As I reported yesterday,
Greece did manage to repay the E750 million loan from the IMF; but only by
doing some fancy footwork, drawing on reserves at the IMF which has to be
repaid in 30 days. In short, that is a one-time
measure that in effect digs Greece into an even deeper hole since it has used up
one of its sole remaining assets and left its liabilities unchanged---quite a
financial feat; sort of like burning down your uninsured house but still having
the mortgage.
To make matters
a bit worse, the IMF told the Troika it no longer wished to participate in the
bail talks---probably a temper tantrum over the ECB unwillingness to accept any
haircuts on the loans to Greece.
Whatever the reason, it will make an ultimate bailout agreement all the
more difficult.
The
latest from Greece (medium):
Greek
creditors seeking E3 billion in budget cuts (medium):
It
turns out that there is a Plan B for a Grexit (medium):
***overnight,
first quarter eurozone growth rose while Chinese industrial output, retail
sales and fixed asset investment were all below estimates.
Bottom line: the
economic data finally showed some improvement.
Partly it was inevitable; partly it was absolutely necessary, otherwise
the absence of progress in the April figures would suggest that our revised 2015
GDP growth estimate might still be too high.
The Greek
bailout negotiations remained as confused as ever. Yesterday’s repayment of the IMF loan was
hardly a positive, in that the country now has E750 million fewer assets (but
the same amount of liabilities) to help it through the current crises. Given the eurocrats proclivity to kick the
can down the road, I have no clue when or how this situation resolves
itself. But I have little doubt that the
longer it goes on, the more painful the outcome.
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.
Has
sales growth peaked (short)?
Investing for Survival
Is It Time To Move Wealth
Outside Of The Financial System?
Summary
·
How negative interest rates change
the game.
·
How one safely stores and insures
cash privately.
·
How safely stored cash can be a
better investment than negative interest rate bonds.
We
are experiencing an unusual phenomenon in the financial world at present, that
being negative interest rates. Professors in economics and finance were
teaching students as late as 2007 that the absolute bottom for interest rates
would be 0%. Yet at the height of the 2008 financial crisis, interest rates on
1-month T-bills fell below 0% for the first time in history. Now, negative
interest rates are becoming more common. The extreme case as of the time of
this writing is the 10-year Swiss bond, which peaked at -0.28%. Some bond
investors are comfortable with these negative rates because they feel interest
rates will go even lower, enabling them to sell the bonds at a higher price.
However, an average investor seeking no risk is unlikely to accept a bond with
a negative interest rate. With safe haven investment now costing the investor,
options outside the conventional financial system become a viable option.
When
people think of storing cash outside of the financial system, it brings to mind
images of storing cash in a mattress, cookie jar or other home hiding places.
Having known someone who left a large amount of silver in an attic after
selling a house, I'm not advocating this approach. Assuming an investor
exhausts the $250,000 FDIC insurance deposit limit (or mistrusts the FDIC's
ability to pay), one alternative worth considering is a safe deposit box. A box
large enough to hold $1 million in $100 bills can be rented for about $200/yr.
While banks themselves will not insure the contents of a safe deposit box,
insurance on a box's contents can be purchased for up to $1 million in
valuables. This $1 million in insurance can be purchased for as little as
$2,000/yr. Hence, having a fully insured $1 million in a safety deposit box
costs about $2,200, the equivalent of an interest rate of -0.22%. This cost
compares favorably to the 10-year Swiss bond at -0.28% mentioned earlier. And
unlike this Swiss bond, whose principal is locked away for 10 years, the assets
in a safe deposit box are only locked away until the time the box holder
decides to remove them.
Today's
unique financial environment of negative interest rates creates both the
temptation and the opportunity for cash hoarding outside of the conventional
financial system. Admittedly, in just about any other time in history, this
would be an unwise financial strategy. Even now, this approach best fits those
who need to protect amounts that are insurable by private insurance but not the
FDIC. However, if these negative interest rates are the indicator of a bond
bubble, and some of the more dire predictions about the world's financial state
come to pass, cash in a safe deposit box protected by private insurance might
prove to be a critical and secure asset.
Bonus read: 27 health tips backed up
by science (medium):
News on Stocks in Our Portfolios
Economics
This Week’s Data
Month
to date retail chain store sales improved versus the comparable period a year
ago.
The
April small business optimism index was reported at 96.9 versus expectations of
96.0.
The
April US budget surplus was $156.7 billion versus estimates of $153 billion.
Weekly
mortgage applications fell 3.4% while purchase applications were off 0.2%.
April
retail sales were unchanged from March versus forecasts of up 0.2%; ex autos
and gas, they were up 0.2% versus consensus of up 0.4%.
April
export prices declined 0.7% versus expectations of an increase of 0.1%; import
prices decreased 0.3% versus estimates of a rise of 0.4%.
Other
Household
debt increased slightly in the first quarter (short):
Politics
Domestic
Mohamed El Erian
on political polarization (medium and a must read):
Obama loses
first round in Trans Pacific partnership trade talks; and here is where the
objections are coming from (long but a must read):
International War Against Radical Islam
Iran
sends naval escort for ship carrying ‘humanitarian’ aid to Yemen (short):
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