Thursday, February 27, 2020

The Morning Call---The Market hates uncertainty; and we have lots of that.


The Morning Call

2/27/20

The Market
         
    Technical

The Averages  (26957, 3116)  continued their high volume challenge of multiple support levels yesterday.  (1) the Dow ended below both its 100 DMA for a third day, reverting to resistance and its 200 DMA for a second day [now support; if it remains there through the close on Friday, it will revert to resistance] and (2) the S&P finished below its 100 DMA for a second day [now support; if it remains there through the close today, it will revert to resistance] and the lower boundary of its short term uptrend [if it remains there through the close on Friday, it will reset to a trading range].

The above is a lot of resistance to get through especially when the indices appear to have exhausted themselves on the downside.  That is not to suggest that prices won’t go lower (and I think that they will) but just to observe that the Averages are extremely oversold on a very short term basis.  So, something more than a pathetic intraday rally seems likely somewhere in our near future. 

That said, the momentum that has taken stocks to current levels has not likely dissipated.  My conviction for this assumption stems from the pin action in the long bond, gold and the dollar which continues to point to a weakening global economy/need for safety.  So, I think it reasonable to assume that the above support levels will get successfully challenged. 

            Time to be very careful.

            Wednesday in the charts.

    Fundamental

       Headlines

            Yesterday was a slow day for data.  Weekly mortgage and purchase applications were up and January new home sales were very strong.

            Bottom line: both the live and print media were dominated by coronavirus headlines yesterday.  Which understandably have citizens/investors concerned and that is not helping psychology.
            ***overnight news on the coronavirus.

From the Market’s standpoint, it hates uncertainty and we still have no idea about the timing and extent to which the economic impact of the coronavirus will start showing up in the numbers. 

However, that is not the only unknown.  We still don’t know what the TLT, GLD and UUP markets have been discounting (remember they started their tear long before we ever heard of the coronavirus), whether they are correct and how that gets reflected in equity prices. 

Finally, we don’t know what the fiscal/monetary policy reaction will be to this crisis.  But we do know that easy fiscal and, especially easy monetary policies have heretofore played an enormous role in the pricing of risk.  Does anyone doubt that Fed won’t crank up the volume if the virus creates economic turmoil?  The questions are, will it do any good  and/or will the Market care?

            Those unknowns will likely continue to make the Market the main story.

            What is the Fed to do?

            Because what it has done to date has been a failure.

            Helicopter money has arrived.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            January new home sales rose 7.9% versus estimates of up 3.5%.

                The Q4 GDP growth second estimate was +2.1%, in line; the PCE price deflator was +1.3% versus forecasts of +1.6%.

            January durable goods orders fell 0.2% versus expectations of -1.5%; ex transportation, they were up 0.9% versus +0.2%.

            Weekly jobless claims increased 8,000 versus consensus of +1,000.

           



     International

            February EU business confidence came in at -0.04 versus forecasts of -.28; consumer confidence was -6.6, in line; economic sentiment was 103.5 versus 102.8; industrial sentiment was -6.1 versus -7.3; services sentiment was 11.2, in line.

    Other

What I am reading today

           

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Wednesday, February 26, 2020

The Morning Call--When does the Fed step in?


The Morning Call

2/26/20

The Market
         
    Technical

The Averages’ (27081, 3128) plunge continued on heavy volume yesterday reaching levels at which important support levels are starting to be challenged; (1) both negated their very short term uptrends, (2) the Dow ended below both its 100 DMA for a second day [now support; if it remains there through the close today, it will revert to resistance] and its 200 DMA [now support; if it remains there through the close on Friday, it will revert to resistance] and (3) the S&P finished below its 100 DMA [now support; if it remains there through the close on Thursday, it will revert to resistance] and right on the lower boundary of its short term uptrend.

            Update on margin debt.

However, challenges are significant only if they are successful; and right now, the only real damage is the voiding of the very short term uptrends.  So, at this moment, the Averages are, technically speaking, in OK shape but on the threshold of serious technical impairment.  Making matters all the worse is the pin action over the last two months of the TLT, GLD and UUP markets which have been shouting that the global economy was in significant danger of slipping into a recession or something worse.  And it now looks like equity investors are starting to acknowledge the problems currently being discounted in those markets. 

Of course, that doesn’t mean that

(1)   stocks can’t rally in the short term.  Indeed, [a] they are dramatically oversold right now, [b] gold and the dollar have consolidated over the last two days taking some downward pressure off of stock prices and [c] and there is the magnetic pull of Monday’s high gap down open,

(2)   bonds, gold and the dollar are discounting everything correctly.  Assuming their major worry is economic growth, we still don’t know exactly what they were concerned about before the coronavirus raised its ugly head and, now, how much worse the coronavirus will make it.   I do believe that as long as the long bond, gold and the dollar continue to rise, equities have an uncertain future.

Tuesday in the charts.

    Fundamental

       Headlines

            Yesterday’s datapoints were all negative.  The December Case Shiller home price index, February consumer confidence, month to date retail chain store sales and the February Dallas and Richmond Feds’ manufacturing indices were all disappointing.

            Quantifying the panic.
           
            The probability of recession.

Barry Ritholtz still doesn’t think that we are in a recession.

            Overseas, the news was a little better.  Q4 Japanese leading economic indicators and Q4 German GDP growth were both in line.

            When China sneezes.
           
            Bottom line: in a month or so, the economic impact of the coronavirus will start showing up in the number.  And at that point, we will, at least, have to stop all the guessing.

In the meantime, the Market is the main story.   In my opinion, it could easily remain that way until we know what the TLT, GLD and UUP markets have been discounting (remember they started their tear long before we ever heard of the coronavirus), whether they are correct and how that gets reflected in equity prices. 

Keep in mind that there is more to the Market’s story than just the recent pin action in TLT, GLD, and UUP.  As you know, it has heretofore been largely determined by (easier) fiscal and monetary policies coming to its rescue.  Does anyone doubt that it won’t happen again?  The question is, will the Market care?


    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            February consumer confidence came in at 130.7 versus projections of 132.0.

            The February Richmond Fed manufacturing index was -2 versus estimates of +13.

            Weekly mortgage applications rose 1.5% while purchase applications advanced 5.7%.

     International

    Other



What I am reading today

            Why sleep I is so important.

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Tuesday, February 25, 2020

The Morning Call---The Market is the story


The Morning Call

2/25/20

The Market
         
    Technical

The Averages (27960, 3225) got carpet bombed on heavy volume yesterday.  Both ended below the lower boundaries of their very short term uptrends; if they remain there through the close   today, those trends will be negated.  The Dow also finished below its prior low and its 100 DMA (now support; if it remains there through the close on Wednesday, it will revert to resistance). 

Clearly, upside momentum has been lost.  But keep in mind that the broken uptrends were very short term, hardly a reason to get major league beared up.  In addition, they both experienced huge gap down opens which, as you know, I believe have to be filled.  So, to date, nothing really bad has occurred.  Supporting my initial technical assumption following a breakdown like we just had is that a period of consolidation is ahead.

True, the suddenness and ferocity of the reversal in equity prices plus the fact that for the last two months, the bond, gold and dollar markets have been aggressively pointing to something amiss in Mudville, suggests that there is a chance that there could be more at work here than just a technical selloff.  While their message has been quite powerful, the Averages are going to have to begin breaking major uptrends before it is proven correct.

            Yield curve inverted again.

            Recession tipping point triggered.

            Gold gets hammered on the close.

            Monday in the charts.

    Fundamental

       Headlines

Yesterday’s stats were mixed.  The February Dallas manufacturing index was quite disappointing while the January Chicago Fed national activity index was poor but not as much as expected.

Overseas, the February German business climate index came slightly better than anticipated.

            Bottom line: while there were plenty of headlines driving it yesterday, the Market was the main story.   In my opinion, it could easily remain that way until we know what the TLT, GLD and UUP markets have been discounting (remember they started their tear long before we ever heard of the coronavirus), whether they are correct and how that gets reflected in equity prices. 

    News on Stocks in Our Portfolios
 
Bank of Nova Scotia (NYSE:BNS): Q1 Non-GAAP EPS of C$1.83 beats by C$0.08; GAAP EPS of C$1.84 misses by C$0.08.
Revenue of C$8.14B (+7.1% Y/Y) beats by C$110M.

Bank of Nova Scotia (NYSE:BNS) declares CAD 0.90/share quarterly dividend, in line with previous.   

Home Depot (NYSE:HD): Q4 GAAP EPS of $2.28 beats by $0.17.
Revenue of $25.78B (-2.7% Y/Y) in-line.

Home Depot (NYSE:HD) declares  $1.50/share quarterly dividend, 10.3% increase from prior dividend of $1.36.

Economics

   This Week’s Data

      US

The February Dallas manufacturing index came in at 1.2 versus expectations of 11.8.

Month to date retail chain store sales declined at the same pace as in the prior week.

The December Case Shiller home price index was unchanged..

     International

            Q4 Japanese leading economic indicators were reported at 91.6, in line.

            Q4 German GDP growth came in at 0.0%, in line.

    Other

            How the $23 trillion national debt effects your own money.

                What if rates keep declining?
               

What I am reading today

            Quote of the day.

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Monday, February 24, 2020

Monday Morning Chartology


The Morning Call

2/24/20

The Market
         
    Technical

            The S&P had a couple of bad days at the end of the week.  However, it managed to hold the former high (3337).  At first glance, I would call this a normal correction.  The problem is what is going on in the other markets I follow.

            TLT, GLD and UUP are all toying with making new highs.  To be sure, they haven’t done it yet; but as I have been pointing out all week, investors in these groups are sending a strong message that they believe that all is not right with the global economy.  I not going to claim that I even know what they are worried about though a more devastating impact of the coronavirus or loss of faith in the central bank QE policies come to mind.  Whatever it is, investors are piling into three renown safety trades. 

            That said, it is too soon to be calling the beginning of the end.  All three of the aforementioned indicators could stall at critical levels and back off while the equity markets resume what has been a relentless move to the upside.  In short, we have to watch 148.89 on the dollar, 148.89 on the long bond and 155.22 on gold as well the multiple boundaries and DMA’s of the S&P as signals that pessimism is growing.  On the other hand, if TLT, UUP and GLD fail at resistance and the S&P resumes its upside momentum, this dichotomy in performance will have been nothing but a head fake.  As a final note, in a circumstance like this, don’t watch the news flow, watch the price action.



            On Friday, the long bond (148.04) finished above the upper boundary of its long term uptrend and is about to challenge the upper boundary of its very short term trading range (148.89).  If that is successful, it will make a 25 year  price high (low yield).  The next resistance would be at the upper boundary of its intermediate term uptrend (163.3).



            The dollar (26.83) successfully challenged its short term downtrend this week, resetting to a trading range.  As you can see, the new upper boundary of the short term trading (27.19) is less than a point away.  More importantly, that boundary is also the upper boundary of UUP’s long term trading range, a breach of which would push the dollar into uncharted territory, with the next resistance level at the upper boundary of its intermediate term uptrend (29.64)



            GLD (154.7) spiked hard on Friday on decent volume.  It now has the challenge of busting through the upper boundaries of both its very short term and short term uptrends (155.22).  That should take some work/time.  Plus, it made a gap up open on Friday that needs to be filled.  However, if it successfully overcomes those two boundaries, the next visible resistance level is the upper boundary of its long term trading range (185.55).



            As you might expect, the VIX was up on Friday.  However, the distinguishing aspect of this chart is that while stocks were recording new highs, the VIX didn’t make a new low.  Indeed, it couldn’t even successfully challenge its 100 DMA.



    Fundamental

       Headlines

            Latest on the coronavirus from around the globe.
           

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            The January Chicago Fed national activity index was reported at -.25 versus forecasts of -92.

     International

            The February German business climate index came in at 96.1 versus estimates of 95.3

    Other

What I am reading today

           

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Saturday, February 22, 2020

The Closing Bell



2/22/20


Statistical Summary

   Current Economic Forecast
                       
2019 estimates (revised)

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2%
                        Corporate Profits                                                                6-9%

            2020

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2.5%
                        Corporate Profits                                                                5-6%


   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 24905-37367
Intermediate Term Uptrend                     16100-32301
Long Term Uptrend                                  6860-38078

                        2019     Year End Fair Value                                   14500-14700

                        2020     Year End Fair Value                                   15100-15300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     3102-3597
                                    Intermediate Term Uptrend                         2744-4244                                                          Long Term Uptrend                                     1329-4964
                       
2019 Year End Fair Value                                     1790-1810

2020 Year End Fair Value                                       1870-1890         
                       

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                           56%
            High Yield Portfolio                                     55%
            Aggressive Growth Portfolio                        56%

Economics/Politics
           
With the signing of the US/China and USMCA trade treaties, the Trump economy is a slight positive for equity valuations.   

The total dataflow this week was negative again; but the primary indicators (three) were all upbeat.  I am calling it a positive.  Score: in the last 229 weeks, seventy-six were positive, one hundred and three negative and fifty neutral. 

The erratic pattern in the numbers persists.  It seems likely that the signing of the two trade treaties would have had a positive influence of business/consumer psychology which would  in turn increase the willingness to invest and spend.  But if the result is simply that the economy continues to struggle to grow, that is probably not going to be much help when the impact of the coronavirus becomes manifest.

Of course, nobody has a clue as to the effect that the virus will have on global growth. We do know that China lowered the reported infection and death growth rates this week; but we don’t know how much of that is bulls**t.  We know that Japan and South Korea have seen a pickup in infections/deaths; but those numbers are relatively small, at least for the moment.  In short, we don’t know diddily about the ultimate economic outcome of the coronavirus.  As you know my conclusion is that this virus will have a temporary effect on global growth but that dissipate over time. For the moment, I am not altering my longer term view that the coronavirus will not impact secular economic growth; but I got there by the WAG [wild ass guess] method.

Hence, I am also not altering my long term economic outlook, which is that the economy will continue to grow at a subpar rate due to the twin burdens of egregiously irresponsible fiscal and monetary policies.

Overseas data was slightly negative.  My concern is that it will only get worse as the influence of the coronavirus works its way into the numbers.   But as of the end of this week, the global economy is supportive of US economic growth.



           



Bottom line:  on a secular basis, the US economy is growing at an historically below average rate. The driving causes behind my below average growth outlook are totally irresponsible fiscal (running monstrous deficits at full employment adding to too much debt) and monetary (pushing liquidity into the financial system that has done little to help the economy but has led to the gross mispricing and misallocation of assets) policies.

Cyclically, the US economy continues to limp along.  However, short term the coronavirus will almost surely have a negative impact on global economy growth.  The questions are (1) are what are the stats going to look like when the impact of the coronavirus becomes manifest?  At the minimum, it would seem reasonable to assume that there will be a period of weak numbers, and (2) how long will that effect last?  My assumption is that any decline/slowdown in economic activity will be short lived.  In other words, it will almost surely influence 2020 growth estimates but the impact will dissipate through the year.

The Market-Disciplined Investing
           
  Technical

The Averages (28992, 3337) got whacked yesterday.  The good news was that the S&P held above its former all-time high.  The bad news is that the rest of the indicators that I follow are pointing at a need for safety. 

GLD, TLT and UUP maintained their strong move as safety trades and they all are either making or about to make new highs.  I think this is potentially ominous signal.  Though it is too soon to act.  They need to successfully challenge those boundaries; and the S&P needs to start busting through some support levels before we can be sure that this is not a head fake (i.e. that economic outlook is about to turn negative). 

                There remains an apparent dichotomy between the economic expectations of equity investors and those in GLD, TLT, and UUP.  Somebody is going to be wrong.
           

                Friday in the charts.

Fundamental-A Dividend Growth Investment Strategy

The DJIA and the S&P are well above ‘Fair Value’ (as calculated by our Valuation Model).  At the moment, the important factors bearing on Fair Value (corporate profitability and the rate at which it is discounted) are:

(1)   the extent to which the economy is growing.  My forecast remains that the economy continues to struggle forward against multiple headwinds.  Though  the signing of the US/China and USMCA trade agreements reinforces my conviction that it will bolster the secular growth rate of the economy. That should keep secular corporate profit growth on a somewhat even keel which is a plus for stock prices.

On the other hand, the coronavirus epidemic will almost surely have a negative effect on short/intermediate term economic growth.  That said, exogenous events with a short shelf life rarely have a lasting influence on long term equity valuations.  Furthermore, as long as the Fed and its fellow central banks continue to pump money into the financial system, the Market impact should be contained,

(2)   the resumption of QE by the global central banks.  In an attempt to offset the economic impact of the coronavirus, the Bank of China continued to shovel liquidity into the Chinese financial system with both hands.

As long as that remains the case AND investors believe that it is a plus for the Market, stock prices should maintain their upward bias irrespective of valuations.

That said,  I believe that QEInfinity has, is and will continue to create distortions in pricing of risk which, in turn, leads to the mispricing and misallocation of assets.  As such, it is a negative for the efficient growth of the economy.
      
Nonetheless, on a short term basis, QE, QEInfinity and NotQE have been and remain Market friendly.  Meaning stocks should continue to do well until the Fed either reverses its policy or investors figure out just how punitive that policy has been for the economy.


Whether or not the changes occurring in the technical landscape are a sign of that occurring remains to be seen.  But clearly, they need to be watched closely.

Bottom line:  I believe that Averages are grossly overvalued [as determined by my Valuation Model]---which will continue to count for little as long as the global central banks are pumping liquidity into the financial system.

            As prices continue to rise, I will be primarily focused on those stocks that trade into their Sell Half Range or fail to meet the minimum financial quality criteria for inclusion in our Universes and act accordingly. Despite the Averages being near all-time highs, there are certain segments of the economy/Market that have been punished severely (e.g. health care) with the stocks of the companies serving those industries down 30-70%.  I am compiling a list of potential Buy candidates that can be bought on any correction in the Market; even a minor one.  As you know, I recently added AbbVie to the Dividend Growth and High Yield Buy Lists and Kroger to the Dividend Growth Buy List.

As a reminder, my Portfolio’s cash position didn’t reach its current level as a result of the Valuation Models estimate of Fair Value for the Averages.  Rather I apply it to each stock in my Portfolio and when a stock reaches its Sell Half Range (overvalued), I reduce the size of that holding.  That forces me to recognize a portion of the profit of a successful investment and, just as important, build a reserve to buy stocks cheaply when the inevitable decline occurs.