The Morning Call
5/6/15
The Market
Technical
The indices
(DJIA 17928, S&P 2089) got banged yesterday. The S&P remained above its 100 day moving
average; but fell back below its prior high---this is the second failed attempt
to break the trend of lower highs. The
Dow closed above its 100 day moving average and (remains) below its prior
high. The trend of lower highs remains
intact.
Longer term, the
indices continue to trade well within their uptrends across all timeframes:
short term (17110-19907, 2003-2984), intermediate term (17232-22347, 1809-2582
and long term (5369-18873, 797-2129).
Volume rose;
breadth was terrible. The VIX was up 11%,
but still finished below its 100 day moving average and within a short trading
range. Its pin action remains supportive of rising stock prices; though given
its proximity to the lower boundary of its long term trading range, I still
believe that it cheap portfolio insurance.
The long
Treasury was down again, though only slightly.
It ended below its 100 day moving average, the lower boundary of its
short term trading range, thereby negating it and the lower boundary of its intermediate
term uptrend. If TLT closes below this
boundary at the end of the day, that trend will also be negated.
As you know, I am
very concerned about the fundamental implications of rising interest rates
because (1) it suggests our economic forecast (weak economy, potential
deflation) is incorrect and (2) hence, our muni bond bet in the ETF Portfolio
is at risk. I listed a number of different
explanations for higher interest rates in yesterday’s Morning Call.
Two of those
were cited as reasons for yesterday’s sell off: higher oil prices (inflation)
and fear of a Fed rate hike. I still have a problem with the inflation
explanation. But the more I think about
it, the more the reason (3) listed in yesterday’s Morning Call (i.e. investors
are sick and tired of getting paid little to nothing and are fearful that others
may feel the same) is making sense to me in this context: the Fed has always
missed the timing of a transition to tighter money; indeed, what has prompted
the eventual tightening move most frequently was not economic conditions but
rather the bond market forcing the move by pushing interest rates up on its own
leaving the Fed no choice but to follow.
I am not saying that this is what is now occurring; I am saying that it
is becoming my number one choice if this latest move in yields is something
more than noise. I am on the edge of my
seat.
The Fed balance
sheet is shrinking. i.e. it is tightening.
Could this help explain the poor price action in Treasuries? (short):
Here is a discussion
on the time lag between rising rates and recession (medium):
GLD was up but
closed below its 100 day moving average and continued to build a head and
shoulders formation.
Finally, oil
appears to be breaking out to the upside of its recent trading range (see
above).
Bottom line: try
as they might, the indices have not been able to successfully challenge (under
our time and distance discipline) the trend of lower highs dating back to late
February. That suggests that the ranks
of the bulls are diminishing. That said,
there has been no sign of a pickup in number of bears. So on a short term basis, the Averages seem
stuck between their 100 day moving averages (or the lower boundary of their
short term uptrends) on the downside and the trend to lower highs on the
upside. I have no clue which way they break.
Longer term, the
Averages are solidly within uptrends across all timeframes.
The pin action
in the long Treasury makes me more nervous each day---I just don’t know about
exactly what. There are several possible
fundamental explanations and one strictly technical one---random price movement. The last notwithstanding, I am looking for a
potential change in the economic landscape which could alter our economic and
investment outlooks.
Sell
in May and go away. Myth or reality? (medium):
Fundamental
Headlines
Lots
of US economic data yesterday; and they were evenly divided. Negatives: the March US trade deficit and the
April PMI services index. Positives:
month to date retail chain store sales and the April ISM nonmanufacturing
index---the ISM and trade data being the most significant. Week to date, the stats have been mixed.
Overseas,
Australia’s central bank lowered its key interest rate, keeping the global QE
merry-go-round spinning; and the EU raised in 2015 economic growth forecast---another
indication that Europe may be pulling out of its slump. On the other hand, forecasts of improvement,
especially from eurocrats, for the last seven years have largely proven to be
well short of reality.
Plus, I doubt
that there is any provision for a Greek exit/default in that outlook; and
yesterday’s news on that front was anything but optimistic:
(1)
EU Commission slashes Greek economic forecasts
(medium):
(2)
the Troika can’t agree among themselves on the proper
conditions for a bail out (medium):
(3)
and the ECB tightens the screws on Greek banks (short):
***overnight,
Greece made a E200 million payment to the IMF but faces a more daunting one of
E750 million on May 12; the UK services PMI came in at 59.5 versus expectations
of 58.5.
Bottom line: yesterday’s US economic news was mixed and
that is a plus. But it is not to say
that economy isn’t weakening. The
eurocrats are predicting that the EU economy is improving, though I believe it
should be taken with a grain of salt. The
Greek bail out remains iffy. The
Australian central bank is cutting rates, suggesting that all may not be well
out in the Pacific. And finally, bonds
are acting like something is amiss (at least in our weak economy/deflation
forecast). In short, the news flow is
confusing; so it is no wonder stocks are acting the same way.
I have no big
picture conclusions about this mixed bag of news or about the message of the
bond market. I do believe that stocks
are extremely overvalued; so unless the ultimate economic/interest rate
environment is quite positive, stock prices are at risk.
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 (medium):
QE
and stock prices (short):
Subscriber Alert
A
number of the stocks on our Buy Lists have fallen below the lower boundaries of
their respective Buy Value Ranges, so they are being Removed from their
respective Buy Lists. None of them have
traded down to their Stop Loss Price.
They include:
In the Dividend Growth Portfolio:
ITC Corp (ITC-$36)
South Jersey Industries (SJI-$51)
Chevron (CVX-$108)
The Dividend Growth Portfolio
doesn’t own ITC and will continue to Hold SJI and CVX.
In the Aggressive Growth
Portfolio:
Cummins (CMI-$139)
Donaldson (DCI-$35)
The Aggressive Growth Portfolio
will continue to Hold CMI and DCI.
Investing for Survival
How to learn more about investing?
There are three main answers
here:
1.
Study the classics
2.
Study areas where
there are current problems
3.
Read widely
When I talk about the classics, I
am talking about the writings of Ben Graham, Buffett, Munger, Phil Fisher, and
notable investors who have spilled their theories to the world. Also men
like Seth Klarman, Howard Marks, Ray Dalio, George Soros, Bill Gross, Jeffrey
Gundlach and other clever investors who understand the markets well.
Second, if there are current
problems in the market, do your research, and try to understand them well.
This may take more effort, because current problems are not well-understood,
or they would have been solved already.
The correct answer is not
immediately obvious. Prior to the crisis, it is a minority view.
After the crisis, everyone knew it would happen 
.
.
Try to view the markets in a
comprehensive way. Think of the buyer and the seller, and their motives.
Look for minority opinions, and analyze them — maybe that have it
right. Most of the time, you will throw their opinions away, but in rare
cases you might find something valuable.
Finally, read widely. Try
to understand the changing economy. and where value is being added where
current valuations don’t reflect it. Understand the economic world, and
dedicate time to it. I dedicated an hour par day while I was an actuary
to understanding all manner of investments for ten years before I had my first
job in investing at age 38.
And read economic history.
It is very valuable to understand how things worked in the past, because
it offers clues to those of us in the present who don’t think “It’s Different
This Time.”
News on Stocks in Our Portfolios
·
Occidental Petroleum (NYSE:OXY): Q1 EPS of $0.04
in-line.
·
Revenue of $3.09B (-37.7%
Y/Y) misses by $210M.
·
Western Gas Partners (NYSE:WES): Q1 EPS of $0.26 may not be comparable to
consensus of $0.44.
·
Revenue of $375.1M (+27.7%
Y/Y) beats by $32.03M.
Economics
This Week’s Data
Month
to date retail chain store sales improved slightly year over year.
The
April PMI services index was reported at 57.4 versus estimates of 57.7.
The
April ISM nonmanufacturing index came in at 57.8 versus forecasts of 56.5.
Weekly mortgage
applications fell 4.6% but purchase applications rose 1.0%.
The
April ADP private payroll report showed a 3.4% decline in employment versus expectations
of an 8.4% increase.
First
Quarter nonfarm productivity declined 1.9%, in line; unit labor costs rose 5.0%
versus consensus of up 4.6%.
Other
The
source of the EU’s economic problems (medium):
QE
and inflation (short):
SEC
commissioner bashes Deutschebank (medium):
Politics
Domestic
International War Against Radical Islam
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