The Morning Call
3/16/16
The
Market
Technical
The indices
(DJIA 17251, S&P 2015) turned in another mixed day (Dow up, S&P down)
on even lower volume. Stocks are
becoming less overbought and breadth is mixed.
The VIX declined slightly and still looks like it could have made a
double bottom---perhaps a sign of impending weakness.
The Dow closed
[a] above its 100 day moving average for the third day, thereby reverting to
support, [b] above its 200 day moving average for the third day, now resistance;
if it remains there through the close today, it will revert to support, [c]
above the lower boundary of a short term downtrend {16655-17386}, [c] in an
intermediate term trading range {15842-18295}, [d] in a long term uptrend
{5471-19343}, [e] and has made a third higher high and is working on a fourth.
The S&P
finished [a] above its 100 day moving average for the third day, thereby
reverting to support, [b] back below its
200 day moving average, now resistance and voiding Friday’s break, [c] within a
short term trading range {1867-2104}, [d] in an intermediate term trading range
{1867-2134}, [e] in a long term uptrend {800-2161} and [f] has made a second
higher high and is working on a third.
The long
Treasury continued to drift higher, but remained in a very short term downtrend
and below a key Fibonacci retracement level.
In virtually every other segment of the fixed income market, rates up
ticked (prices down) noticeably. I am a
bit unsure what higher TLT prices and lower prices everywhere else means; but
it suggests more attention is being paid to risk-off.
GLD recovered
somewhat yesterday, but still finished below the lower boundary of its very
short term uptrend for a second day, thereby confirming the break. However, it closed right on another support
level; so we will see if the sellers can do anymore damage. In the meantime, it remains well above the
lower boundary of its short term uptrend, as well as its 100 moving
average.
Bottom line: even
though we were treated to an number of economic stats and the conclusion of the
Bank of Japan’s meeting, investors still sat on their hands again, undoubtedly
awaiting today’s Fed meeting results. While
the Averages’ confirmation of their break of their 100 day moving averages and
the S&P’s retreat back below its 200 day moving average might have meant
something under different circumstances, I think this was mostly noise waiting
for today.
I still believe that the bull market is likely
over and that mean reversion is the principal risk right now.
Update
on trading in the oil ETF’s (short):
Fundamental
Headlines
This
week’s data surge got off to somewhat disappointing start. The best number we got was a very positive
March NY Fed manufacturing index.
February PPI was in line. But it
went downhill from there: February retail sales down, though in line; but
January’s reading was revised down big time; month to date retail chain store
sales were weaker than the prior week; January business inventories rose but
only because sales were awful; and the March national homebuilders index was
below forecasts.
However,
there are a lot more stats coming, among them three primary indicators. So it is way too soon to be thinking about how
this week will end.
Overseas,
February EU industrial production came in better than forecast; the Bank of
Japan lowered its 2016 growth estimates.
***here
we go again, OPEC is scheduling another meeting to discuss a production freeze,
this time in Qatar on April 17, but apparently without the participation of Iran. Looks like we are set up for another round
trip in oil and stock prices. You know,
they will keep doing this until it doesn’t work anymore.
Central bank are
receiving equal time this from investors.
Yesterday, the Bank of Japan surprised most observers by doing
nothing. It declined to push rate cuts
further into negative territory though it stayed with its projections of
accelerated monetary growth.
***overnight, a
Japanese official said that further rate cuts into negative territory were
still a real possibility.
John Mauldin has
a very interesting thesis on the Japanese hesitancy to cut rates further; the
bottom line of which is that the Chinese told all the central bankers at the
recent G20 meeting that if they (the central bankers) didn’t lay off the
currency devaluation measures, they (the Chinese) would unpeg the yuan from the
dollar---which would likely be followed by a significantly lower yuan. Nobody wants that, trust me. It would also explain both the Bank of Japan
and last week’s ECB actions, i.e. focus on stimulating internal demand by
pouring more money into the banks versus stimulating foreign demand by currency
devaluation.
Letter
to the President from John Mauldin (a long but a must read):
If John is
correct, then one would expect the Fed to be very circumspect in its comments
with respect to raising rates in the future
In addition, the
Bank of China reported that it was considering a tax on currency
transactions---a form of capital control (supporting the yuan valuation). Here are some comments from more knowledgeable
Street experts (medium):
Bottom
line: so far the ECB and the Bank of
Japan have delivered more QE and faded additional rate cuts; and the Markets
seem fine with that. In addition, the
Bank of China is scrambling to keep control of an economy spinning out of
control (proposing [1] cramming down nonperforming debt owned by the banks and
then lending them more money and [2] a tax that would hamper the exit of wealth
from China). And, so far, investors seem
fine with that also. But if you think
about what these measures are intended to accomplish, maybe ‘fine’ is not the
appropriate reaction.
Today is the Fed’s
turn. Hilsenrath said to not expect a
rate hike. Mauldin is suggesting that the
Fed is likely to demure on the timing of further hikes. Investors will almost surely be fine with
that also.
Fed forecasts losing
credibility (short):
The question is,
how much of all of this in the Market?
Even if the Fed is surprisingly more dovish than expected and stocks
take another leg up, nothing has happened different than what has already
occurred time and again---more central bank money printing. Therefore, I see no reason to assume that the
results will be any different; that is, no economic improvement but more asset
misallocation and mispricing.
I have been saying
for the last three years that sooner or later, the price will likely be paid
for this ineffective policy that has no known exit strategy. Clearly, I have been wrong, at least on the ‘sooner’
part. However, I remain of the opinion
that stocks won’t reach record valuations in a deteriorating economic environment
in which every monetary trick known to man has been tried and failed and there
remains little chance of fiscal stimulus in the next year, if at all---in the absence
of some extraordinarily positive exogenous event.
In my opinion,
the current rally represents an excellent opportunity to raise cash reserves by
selling either a portion of your profitable investments and/or sell your
losers.
More
on buybacks (short):
Investing for Survival
More
on the benefits of diversification.
News on Stocks in Our Portfolios
·
Oracle (NYSE:ORCL) has used its FQ3
report (revenue missed, EPS beat) to announce its adding $10B to its buyback
authorization. The new funds are good for repurchasing 6% of shares at current
levels. $8.5B was spent on common stock repurchases over the first 9 months of
FY16, with over $2B spent in FQ3 (boosted EPS).
·
The software giant has
also declared its regular $0.15/share quarterly dividend (1.5% yield). The next
dividend is payable on April 28 to shareholders on record as of April 14.
·
Top-line performance: Op-premised software + cloud revenue fell 1% Y/Y in FQ3,
and rose 3% in constant currency (within a 3%-4% guidance range). On-premise
software revenue fell 4% to $6.3B, a smaller decline than FQ2's 7%.
Cloud revenue rose 40% to $735M, an improvement (thanks to strong prior
bookings) from FQ2's 26%. Hardware revenue fell 13% to $1.1B, and other
services revenue fell 7% to $793M. Forex had a 400 bps impact on revenue growth
(-3% Y/Y vs. +1%)
Within on-premise, new software license revenue (hurt by cloud adoption) fell a steep 15% Y/Y to $1.7B. Software license update/product support revenue (driven by past license deals) was flat at $4.7B. Within cloud, SaaS/PaaS (cloud apps and app platforms, an Oracle priority) revenue rose 57% to $583M; IaaS (cloud infrastructure, faces tough competition from Amazon and others) revenue fell 2% to $152M. SaaS/PaaS bookings rose 77% Y/Y in constant currency. Mark Hurd and Larry Ellison once more trash-talk Salesforce and Workday.
Within on-premise, new software license revenue (hurt by cloud adoption) fell a steep 15% Y/Y to $1.7B. Software license update/product support revenue (driven by past license deals) was flat at $4.7B. Within cloud, SaaS/PaaS (cloud apps and app platforms, an Oracle priority) revenue rose 57% to $583M; IaaS (cloud infrastructure, faces tough competition from Amazon and others) revenue fell 2% to $152M. SaaS/PaaS bookings rose 77% Y/Y in constant currency. Mark Hurd and Larry Ellison once more trash-talk Salesforce and Workday.
·
Financials: Lifting EPS: GAAP costs/expenses rose just 1% Y/Y to $6B,
thanks partly to a 23% drop in amortization expenses to $408M. Sales/marketing
spend rose 3% to $1.9B, R&D 4% to $1.4B, and G&A 15% to $290M. Oracle
ended FQ3 with $51B in cash/investments (much of it offshore) and $40B in debt.
Economics
This Week’s Data
Month
to date retail chain store sales grew less than in the prior week.
January
business inventories rose 0.1% versus expectations of being flat; however,
sales fell 0.4%.
The
March National homebuilder index came in at 58 versus forecasts of 59.
Weekly
mortgage applications fell 3.3% while purchase applications were up 0.3%.
February
CPI fell 0.2% versus projections of -0.3%; ex food and energy, it rose 0.3% versus
consensus of up 0.2%.
February
housing starts were up 7.2% versus estimates of up 4.2%.
Other
The
Atlanta Fed lowered its first quarter GDP growth outlook to +1.9% from +2.2%.
Politics
Domestic
The pain that
the American consumer would feel if Trump has his way (medium and a must read):
Note to Republicans: Merkel’s
defeat---what happens when you don’t listen to your citizens?
International
War Against Radical Islam
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