The Morning Call
4/6/16
The
Market
Technical
The indices
(DJIA 17603, S&P 2045) had their worse day in a while as volume rose and
breadth weakened. They also broke their very
short term uptrends; if they remain there through the close today, those trends
will be negated. The VIX was up another
9%, breaking above the upper boundary of its very short term downtrend; if it
remains there through the close today, that trend will voided. However, it remained below its 100 day moving
average.
The Dow closed
[a] above its 100 day moving average, now support, [b] above its 200 day moving
average, now support, [c] back below the upper boundary of its short term
trading range {15431-17758}, negating Friday’s break, [c] in an intermediate
term trading range {15842-18295} and [d] in a long term uptrend {5471-19343}.
The S&P
finished [a] above its 100 day moving average, now support, [b] above its 200
day moving average, now support, [c] within a short term trading range {1867-2081},
[d] in an intermediate term trading range {1867-2134} and [e] in a long term
uptrend {800-2161}.
The long
Treasury was up 1%, closing within a very short term uptrend, above its 100 day
moving average and above a Fibonacci support level. It continues to strengthen its support base.
GLD rose
1.3%. However, it still has some work to
do get out of its consolidation mode.
While it did recover above a key Fibonacci support level, it is still in
a very short term downtrend.
Bottom
line: yesterday’s pin action was the
first sign that the current recovery is losing its mojo. Not that it has; but as I noted previously,
stocks are at a level of heavy congestion and so it makes sense that some
momentum would be lost. But it will take
a lot more than one poor day of price performance before I will question the
assumption that the Averages will challenge their all-time highs.
Why
sell in May is crucial this year (short):
Fundamental
Headlines
Yesterday’s
economic data was mixed: month to date retail chain store sales were quite
poor, the March Markit services PMI was up versus its February reading, while the
March ISM services index was slightly better than anticipated. In addition, the Atlanta Fed lowers its first
quarter GDP growth estimate again.
Overseas,
February German factory orders declined, most major EU countries’ March
services PMI declined and the IMF was out talking about slowing global growth. On the monetary front, the Bank of India lowered
key rates and a governor of the Bank of Japan reiterated the potential for
further monetary ease.
***overnight, the March
Chinese services PMI was better than expected; and Kuwait and Russia suggested
that an agreement on an oil production freeze could be reached at the upcoming
OPEC meeting---now undoubtedly poised to begin selling their longs and going
short.
There
were also two Market related news stories:
(1)
the so called Panama Papers, a list of shell companies
domiciled overseas that were seemingly used to hide money of the rich, were
released. To be clear, most of those
individuals outed in these documents are foreigners; and those Americans that
are listed are not prominent business or political figures. However, I count this as Market related
because a major underlying political theme in the US of late has been how the
rich are getting richer and not paying their fair share of taxes. This is the kind of news that can be seized upon
by populists politicians and can potentially lead to shoot-from-the-hip economically inefficient tax policies---which
is the last thing the US needs when already saddled with a complicated, special
interest oriented tax code,
The Panama Papers: all you wanted to know but were
afraid to ask.
The US: all you
wanted to know but were afraid to ask about the globe’s largest TX haven. This isn’t going to help the political
discourse. (medium):
(2)
the US Treasury
markedly changed the tax laws related to tax inversion merger activity [a US
company gets acquired by a foreign company headquartered in a country with a much
lower corporate tax rate than the US].
There is no doubt that many of these transactions are for tax related
purposes. However, the reason for trying
to avoid taxes is because the US’s tax rates are high relative other countries,
making it economically uncompetitive as a domicile for many corporations.
And just to be clear, Obama and all the other headline
seeking politicians are wrong when they call the practice un-American and insidious. That is a load of crap. These companies are operating within the rules
set by congress and the treasury. All
they are doing is dealing with an antiquated US tax system within the legal bounds
of that system. However, as with the
Panama Papers, there is a big political element to this issue which has the
risk of being solved by legislation/regulations that only makes doing business
in the US all the more difficult.
***overnight, Pfizer and Allegan
called off their merger. In additional
blows to the risk arb community (1) the US Justice Department is rumored to be
about to file a lawsuit to stop Haliburton’s acquisition of Baker Hughes and
(2) the chairman of the house transportation and infrastructure committee has
come out against the Canadian Pacific/Norfolk southern merger.
Bottom line: the US economy continues to limp along while
the global economy continues to drop like a rock. Meanwhile the central bankers pursue a series
on policies that haven’t worked in eight years.
Plus, we now may have to deal with the potential political/economic
fallout from the Panama Papers and tax inversions.
How central bank
policies drive asset mispricing and misallocation (medium):
http://www.zerohedge.com/news/2016-04-05/ecb%E2%80%99s-monetary-policy-now-creating-rush-derivatives
With the
Averages a short hair away from their highs, what is an investor to do? Lots and lots of financial advisors insist
that Market timing doesn’t work, so the best strategy is to continue to
buy/stay long because in the long run stocks go up. And if you want to play golf and not be
bothered by price fluctuations or if you think that you can day trade, that is
a decent strategy.
However, it
doesn’t take a rocket scientist to construct a simple valuation model or look
at a long term chart of the S&P or a stock to know when valuations/prices
are at extremes. I am not talking about
switching between investment strategies or market sectors or companies within a
market sector on the assumption that you discern relative value---I certainly
can’t do that.
But I do think that you can discern
valuation/price extremes. Notice I didn’t
say pin point. Can a Market that is at
24 times earnings go to 26 times? Sure. But if the historical mean valuation of the
Market is 18 times; and the Market always mean reverts, why should you care if
you sell at 24 times or 26 times earnings, if you know that you ultimately will
have the chance to buy at 18 times or lower---and avoid the anxiety inherent in
stocks going from 24 times to 18 times?
That is unless
you can’t stand the thought of not selling at top---in which case you should
follow the advice to go play golf and never look at your portfolio. Because you haven’t learned that investing is
a business of being wrong. The key is
being less wrong. Yes, if you sell a
stock at 24 times earnings and it goes to 26 times, you are wrong. But if goes to 26 times, you don’t sell and
it then goes to 18 times, you are more wrong.
The question is how wrong do you want to be?
That is all I am
trying to do. I am suggesting selling
stocks that have reached valuation extremes.
Not the entire positions. But
enough to provide some stability of principal to your portfolio and cash
reserves to buy more attractive stocks when valuations mean revert.
Investing for Survival
Managing
your equity curve.
News on Stocks in Our Portfolios
·
Revenue of $684.1M
(-3.2% Y/Y) misses by $2.57M.
Economics
This Week’s Data
Month
to date retail chain store sales came in less than half the prior week.
The
March Markit services PMI was up versus its February reading.
The
March ISM services index was reported at 54.5 versus forecasts of 54.0.
In
a reversal of last week’s data, weekly mortgage applications rose 2.7% but
purchase application fell 2.0%
Other
Atlanta
Fed lowers its first quarter GDP growth estimate to 0.4%, down from 0.7% and
the fourth decrease in as many weeks.
More
unemployment data (short):
Was
The Donald wrong about recession (medium)?
Update
on auto loan market (medium):
Politics
Domestic
Unemployment not
a low wage rate is what causes poverty (short):
International
Greece:
when the end justifies the means (medium):
From
Iran with love (medium):
From
the US with love (medium):
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