Thursday, July 14, 2016

The Morning Call---Another round of QE euphoria

The Morning Call


The Market

The indices (DJIA 18372, S&P 2152) took a bit of a rest yesterday, though nothing about which the bulls should be alarmed.  Volume remained skimpy but breadth was strong.  The VIX fell 4%, continuing its challenge of the lower boundary of its short term trading range.

The Dow closed [a] above rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] above the upper boundary of its a short term trading range {17498-18167} for the third day, resetting to an uptrend {17250-19000}, [c] above the upper boundary of its intermediate term trading range {15842-18350}; if it remains there through the close next Monday, it will reset to an uptrend and [d] in a long term uptrend {5541-19431}.

The S&P finished [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2011-2250}, [d] above the upper boundary of its intermediate term trading range {1867-2134} for the third day; if it remains there through the close on today, it will reset to an uptrend and [e] in a long term uptrend {862-2246}. 

The long Treasury rebounded 1.1%, continuing to trade above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends. 

GLD bounced 1%, ending above its 100 day moving average and within short term and intermediate term uptrends.

Bottom line:  bulls couldn’t have asked for better pin action in an overbought Market, i.e. pausing instead of retracing some of the gains.  So I expect more upside momentum; and that means more resistance levels will likely be successfully challenged.  Neither volume nor the VIX are providing much support; but price is the key and its direction at this moment is clearly up. 

I have noted several times that (1) I thought that the Averages would likely challenge the upper boundaries of their short and intermediate term trading ranges, but (2) wouldn’t be successful.  They are clearly in the midst of those challenges; and to date, they have been quite successful.


            Yesterday’s economic stats were a bit more mixed than Monday/Tuesday’s: weekly mortgage applications rose but the more important purchase applications were flat; June import prices were well above expectations but export prices were well below; the June US budget was in surplus but year to date the deficit is 26% ahead of last year’s.

            In addition, the Fed released its latest Beige Book which portrayed an economy that continues to make modest progress with few inflationary pressures---likely a good sign that there are no rate hikes on the horizon.

            That helps sustain the primary theme underlying the Market---lots of free money.  That got some additional help from the Cleveland Fed chief who suggested in a speech that  ‘helicopter’ money is a legitimate policy alternative (medium):

            In addition, investors are eagerly anticipating today’s meeting of the Bank of England during which it is hoped that additional QE will be forthcoming to ward off any potential negative consequences of Brexit.

            Since Bernanke is in Japan, likely lobbying for ‘helicopter’ money, it is only appropriate that the Bank of Japan mimic his tactics by issuing a series of conflicting statements regarding ‘helicopter’ in order to keep the Markets off balance until the deed is done.

            ***but overnight in Japan, dissention arose in the ranks.

            Here be dragons (medium and a must read):

            The source of the Italian banking problem (short):

Overseas, both June Chinese exports and imports fell while Japan lowered its outlook for economic growth and inflation.

Bottom line: the Averages short term trading ranges have reset and their intermediate term trading ranges are in the midst of challenges---with the odds clearly in favor them resetting also. 

That puts stock valuations (as calculated by our Valuation Model) further into nose bleed territory.  As you know, stock prices have remained rich far longer than I ever thought; and this latest surge in momentum likely means that they will get even richer for longer. 

The question is, has something occurred either by way of the fundamentals or the rationale for historic valuations that would impact our Model sufficiently to warrant altering my current investment stance?  As to the former, I go to lengths recording not just the economic data (including corporate profitability) in the US but also abroad---and nothing has changed.  As to the latter, the current low (sometimes negative) interest rates have an impact on P/E’s.  But those rates are artificially induced by an aggressive, experimental central bank policy, the consequences of which I haven’t a clue. 

So my choice is to assume valuation parameters have been positively altered (it is different this time) or that they are simply at an extreme more pronounced than anything we have experienced.   I have been around too long and seen too much money lost to accept ‘it is different this time’ as a viable explanation.  Maybe it will be different this time; but I think prudence argues against chasing prices higher.  Besides as I noted yesterday our Portfolios are still 50% invested; so they are benefitting from the current euphoria.  Plus the additional holding of GDX, which has more than doubled in the last eight months, helps offset the opportunity costs on the other 50% of our Portfolios.

            I continue to believe that given the current price levels, it is an excellent opportunity to sell a portion of your winners and all of your losers.

            The latest from Doug Kass (medium):

       Subscriber Alert

            In the recent quarterly fundamental review of Amerigas Ptrs (APU-$48), it failed to meet the quality criteria that qualifies it for inclusion in the High Yield Universe.  Accordingly, it is being Removed from the High Yield Universe and Sold by the High Yield Portfolio at the Market open.

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            As simple approach to growing your wealth.

    News on Stocks in Our Portfolios
BlackRock (NYSE:BLK): Q2 EPS of $4.78 beats by $0.01.
Revenue of $2.8B (-3.4% Y/Y) in-line.


   This Week’s Data

            The latest Beige Book didn’t vary much from past narratives---everything is improving modestly and inflation is under control.

            The June Treasury budget was in surplus by $6.3 billion; but year to date, it is in deficit by $401 billion versus $316 billion at this point last year.

            Weekly jobless claims were unchanged versus an anticipated rise of 11,000.

            June PPI came in up 0.5% versus expectations of a 0.3% rise; ex food and energy, it was up 0.4% versus a forecast of up 0.2%.


            Update on the national debt (short):



A review of the code of conduct for US judges (short):

A review of Comey’s decision (a bit long but worth the read):

How illegal immigrants profit from US food stamp program (short):

  International War Against Radical Islam

            French intel chief warns of civil war (short):

            Gangster islam (5 minute video):

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