Tuesday, June 2, 2015

The Morning Call--A deal in the making?

The Morning Call

6/2/15

The Market
           
    Technical

The indices (DJIA 18040, S&P 2111) lifted modestly yesterday.  Both closed above their 100 day moving average, but below their former all-time highs. 

Longer term, the Averages remained well within their uptrends across all timeframes: short term (17293-20098, 2030-3009), intermediate term (17438-22566, 1830-2597 and long term (5369-19175, 797-2138).  

Volume fell but breadth improved.  The VIX was up slightly---a little unusual on an up Market day.  It ended below its 100 day moving average and the upper boundary of its very short term downtrend, but is nearing both---a potential negative for stocks if it breaks above those trends. 

Another divergence (short):

Counterpoint:

The long Treasury had bad day on heavy volume, finishing below its 100 day moving average and within a short term downtrend. 
                       
GLD was down slightly, ending below its 100 day moving average and the neck line of the head and shoulders pattern.  Oil rose closing very near the upper boundary of its short term trading range.  The dollar was up but appears to be developing a pennant formation (a series of lower highs accompanied by a series of higher lows).  The penetration of one of these boundaries typically leads to a move in the direction of the break.

Bottom line: there remains a lack of conviction among Market participants with neither side willing to press its case. Yesterday, the temerity was demonstrated by the bulls as the US economic data seemed paint the kind of goldilocks scenario that has had them wee weeing in their pants of late.  Also weighing on the downside: (1) volume has tended to expand on the down days and shrink on the up days and (2) the number of divergences continues to grow. I still believe that the Averages have come too far not to challenge the upper boundaries of their long term uptrends but I also think that any further advance will be limited to the rate of ascent of those boundaries.

            Ten bearish and one bullish chart (short):

            A counterpoint on current risk of high margin debt (short):

    Fundamental
   
       Headlines

            Yesterday was a big data day: April personal income was above expectations while personal spending was below; the May Markit PMI, May ISM manufacturing index and April construction spending were all above estimates. So we have for the second week in row started off with a very upbeat day of stats.  I will note that the positive reports beat forecasts narrowly while the negative releases were big misses.  Nonetheless, a good day is still a good day; and yesterday’s numbers help give me comfort that I won’t have to lower our forecast for a second time.

            Overseas, the May EU and Chinese PMI’s came in slightly above consensus.  Following poor data from both last week, this gives support to our international ‘muddling through’ scenario.

            ***overnight, EU inflation rose 0.3%; the Reserve Bank of India lowered rates for the third time this year even though the country’s first quarter output production was up; and China doubles down on its latest QE strategy (medium):

            Greece remained center stage, the Greeks having missed a self-imposed deadline for a new and improved financial plan to allow additional bailout funds, earning it some well-deserved raspberries from their negotiating counterparts.  The Troika is actually meeting as this is being written to plan their next move.

            ***overnight, apparently the Troika has decided to write the terms of the bailout agreement for Greece and present it on a take it or leave it basis.  It reportedly contains concessions by both sides. (medium):

Bottom line: the economic data appears to be starting to trend more positively, which it absolutely had to do to avoid raising the specter of recession.  Whether this improvement can be sufficient to return the promise of economic growth to Street expectations of a 2%+ rate is something entirely different.  Not that it can’t/won’t happen.  It just seems unlikely to me. 

Likewise, yesterday’s positive EU/Chinese PMI reports were welcome; especially from Europe because we had the improvement thing going for us and then it took a hit last week.  If the trend to better numbers continues that helps our ‘muddling through’ scenario. 

That said equity valuations as measured by our Valuation Model are stretched, meaning that any disappointment in US economic/corporate profit growth or international economic growth or some event that could negatively impact either (Grexit, oil supply disruption) could potentially throw a monkey wrench in Street Models and induce heartburn in the securities markets. 

Even if nothing untoward occurs, current stock prices are incorporating so much future return, the likelihood of achieving meaningful returns over the next ten years is not very high.

 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 liquidity time bomb (Nouriel Roubini) (medium):

            High valuations test the bullish case (medium):

            M&A deals and volume; notice the last time we saw activity at current levels (short):

            More on IPO volume (short):

            The latest from John Hussman (medium):

      
       Investing for Survival

            Beware of you emotional intelligence (medium):
  
   
Economics

   This Week’s Data

            April personal income rose 0.4% versus expectations of up 0.3%; personal spending was flat versus estimates of up 0.2%.

            The May Markit PMI came in at 54.0 versus forecasts of 53.8.

            The May ISM manufacturing index was reported at 52.8 versus consensus of 51.8.

            April construction spending was up 2.2% versus an anticipated rise of 0.7%.

   Other

Politics

  Domestic

In case you missed this one: TSA failed to detect 95% of prohibited devices worn by investigation team (medium):

  International War Against Radical Islam

            Saudi Arabia is no friend of the US (medium):






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