The Morning Call
5/5/16
I have a lot going on in the next
couple of weeks. Friday we leave to be
with our daughter on Mother’s Day. So no
Morning Call tomorrow or Closing Bell.
Next week, courtesy of new FINRA regulations, I need to obtain an
additional registration; so I will be studying for the qualifying exam and then
take it. I will be doing it on line; so I
will be in the office and aware of what is transpiring in the Market. If communication is needed, I will send out a
Subscriber Alert.
The
Market
Technical
The indices
(DJIA 17651, S&P 2051) continued to decline on flat volume and weakening
breadth. Of note is that the flow of
funds indicator has broken an uptrend. The
VIX was up another 3%; it continues to act as if it has made a bottom.
The Dow closed
[a] above its 100 day moving average, now support, [b] above its 200 day moving
average, now support, [c] below the lower boundary of its short term uptrend for
the second day {17782-18736}; if it remains there through the close on today,
it will reset to a trading range, [c] in an intermediate term trading range
{15842-18295} and [d] in a long term uptrend {5541-19413}.
The S&P
finished [a] above its 100 day moving average, now support, [b] above its 200
day moving average, now support, [c] in a short term trading range {2039-2110},
[d] in an intermediate term trading range {1867-2134} and [e] in a long term
uptrend {830-2218}.
The long
Treasury was up again, ending above a key Fibonacci level but remains within an
area of congestion dating back to early February.
GLD was down,
closing right on its recent high (a key Fibonacci level). A break below that level would suggest more
weakness. However, it also finished
above its 100 day moving average and within a short term uptrend.
Bottom line: the
Dow will reset to a trading range today if it can’t recover above the lower
boundary of its short term uptrend (about 130 points away). If that
happens, there is almost no visible support other than the lower boundaries of
the newly reset trading ranges between current prices and the August
2015/February 2016 lows. Today’s close
clearly has some technical importance.
Market
to nowhere (medium):
Fundamental
Headlines
Yesterday’s
US economic news took a turn for the better: the April PMI services index, the
April ISM services index, March factory orders and the May US trade deficit were
all better than forecast. However,
weekly mortgage and purchase applications were mixed and the April ADP private
payroll report was disappointing. Score
one for the optimists.
Nevertheless,
for the week to date that leaves the data mixed: plus---weekly purchase
applications, the May trade deficit, the April PMI services index, the April ISM
nonmanufacturing index, March factory orders, April light vehicle sales and
first quarter nonfarm productivity; negative---weekly mortgage applications,
the April ADP private payroll report, April ISM manufacturing index, March
construction spending, month to date retail chain store sales, weekly jobless
claims and first quarter unit labor costs.
The primary
indicators were also mixed: March factory orders (+), March construction spending
(-) with first quarter productivity (+) and unit labor costs (-)
offsetting.
If
the week ended today, then the score for the last 35 weeks, would be seven
positive to upbeat, twenty six negative and two neutral. However, there are two datapoints yet to be released;
one of which (April jobs report) is quite important. So how this week stacks up overall is still
uncertain.
Overseas,
the picture was much clearer. Most of
the stats were lousy---a dramatic reversal from the prior week. Given the long term trend, one has to assume
at the moment that last week was an outlier.
However, I think that a couple more weeks of numbers are needed to
confirm that.
***overnight,
the April Caixin (Chinese) services PMI came in below estimates.
Thankfully,
the central banks were quiet. But that
does nothing to remove the onus of the overall impact of irresponsible monetary
policies and their results---the gross mispricing and misallocation of assets.
Bottom line: yesterday’s
economic reports were very upbeat; but that only served to keep the week to
date from being a total bust. There remains
a couple of stats yet to be reported that could move the needle in either
direction. But even assuming the best
case, the US economy would still have delivered only eight positive data weeks
in the last 35.
On the other hand,
the global numbers were solidly back in the negative camp. The European stats were a complete turnaround
and the Chinese data refuted all the recent happy talk about a recovery. If last week was indeed an outlier and this
trend continues, then it will remain difficult for the US to avoid recession,
especially if the best the data can get in the next 35 weeks is eight positive
ones.
In the meantime,
stocks remain very overvalued. It makes
sense, in my opinion, to continue to sell a portion of any stock that has done
well for you and all of any loser.
Staying
with the theme of minimizing trading costs and maximizing your long term
performance, it is very important to set realistic return objectives. Part of that is ignoring the promises of
guaranteed returns or of the long term track record of some money manager and
then base your assumptions of annual returns on those promises. As a former partner of mine used to say ‘if
you want a guarantee, go buy a refrigerator from Sears’. To be sure, the stock market has produced 7-8%
annual returns over a long period of time---the operative words being ‘over a
long period of time’. However (1) short
term things can get messy and (2) those long term returns are free of fees,
commissions and trading friction.
My first
objective is not achieving a return, it is preservation of capital. My second objective is to create a growing income
stream from high quality investments. I
could care less what the hedge funds are doing or that I might underperform the
Market in any one year. What I want is
to always be in the game and my income growing.
There couldn’t be a better time to keep your
expectations under control than now.
Interest rates are extremely low.
So investors can’t have the same expectations from the fixed income
investments that they did in the past.
Of course, they can buy junk bonds which provide higher yields. But those yields aren’t what they used to be;
more important, they carry a much higher risk than investment grade
securities. The temptation is to ignore
or minimize that risk for the sake of a higher yield. But that doesn’t make the risk any less. And when risk materializes which it
inevitably does, the capital losses resulting from lower prices can quickly
wipe away any of the gains received from a higher yield.
The same goes
for stocks. The argument to buy stocks
as a way to improve income is financial malpractice as far as I am
concerned. Stocks carry more risk than
junk bonds for the simple reason that they have a lesser claim on a company’s
cash flow than its debt. Yes, the dividend
of very financially sound companies may have less risk of not being paid than
the bonds of a high risk company. But
you are still accepting more risk; just not as much as with a junk bond. It is still risk. Arguing that it is OK to buy stocks because the
Market will always come back is true as long as you want to suffer the interim
discomfort. Just ask anyone who owned
stocks in 2000 or 2008.
Stanley
Druckenmiller on the Fed, stocks and gold (medium):
Citi
is none too happy either (medium):
A
look at the new normal (medium):
http://www.zerohedge.com/news/2016-05-04/eight-new-normal-charts-are-insanely-abnormal-and-dangerous
Investing for Survival
Big
returns, narrow doors.
News on Stocks in Our Portfolios
Revenue of $1B (+4.9%
Y/Y) beats by $162.39M
Revenue of $3.07B (+49.8% Y/Y) in-line
Economics
This Week’s Data
The
April PMI services index came in at 52.8 versus expectations of 52.0.
March
factory orders were up 1.1% versus estimates of up 0.6%.
The
April ISM services index was reported at 55.7 versus projections of 54.7.
Weekly
jobless claims rose 17,000 versus forecasts of up 5,000.
Other
Free
trade in trouble in the US (medium):
Politics
Domestic
International
Thoughts on Russian aggression rom
Pat Buchanan (medium):
Visit Investing
for Survival’s website (http://investingforsurvival.com/home)
to learn more about our Investment Strategy, Prices Disciplines and Subscriber
Service.
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