Tuesday, June 30, 2020

The Morning Call--You can't keep a Fed fueled Market down

The Morning Call


The Market

The Averages  (25595, 3053) recouped a lot of Friday’s trashing, though volume was weak and breadth mixed.  (1) the S&P voided Friday’s break which put it again out of sync with the Dow; meaning stocks aren’t going to trend in either direction until this condition is corrected, however, (2) both indices are in very short term downtrends and (3) they still have those ‘island tops’ weighing on them.

The short term the technical picture remains shaky; and the indices are stuck in a narrow trading range marked by the upper boundary of their very short term downtrend (on the upside) and their DMA’s (on the downside).  Nonetheless, I am sticking with my assumption that the Market’s bias is to the upside---at least until/unless the Averages revert their DMA’s to resistance.

            How stocks predict presidential elections.

Gold was up fractionally, maintaining its upward momentum.  The long bond was down slightly but that did not negate its reset to the upside.  The dollar was up one cent.  It was still unable to make a second higher high.  Higher gold and bond prices and a lower dollar suggest a weakening economy.

            Monday in the charts.



            The economy

Yesterday’s two data releases were upbeat.  May pending home sales and the June Dallas Fed manufacturing index were well above estimates.

Overseas, it was just the opposite.  May UK consumer credit, June EU economic sentiment, industrial sentiment, services sentiment and June German inflation were disappointing.  June EU consumer confidence was in line.

            The coronavirus

            Data update (deaths are down).

            Fearmongering in Houston.

            The Swedish experience.  To be fair, this post should also include decline in employment, decline in GDP, increased deaths from untreated ailments and  increased drug, alcohol use and related deaths.


            US/China trade relations get nasty.

                        Another flu virus appears in China.

                        Xi signs national security law for Hong Kong.

                        Forget ‘cooling off’, India and China are building their military presence in disputed area.

The Fed

Powell testifies before the house today.  His prepared remarks have been released.  There is nothing new; but if you want to read them, go for it.

                        Bottom line.  You can’t keep a Fed liquidity fueled Market down.
            No revenues, no profits, no problem.

            Mean reversion is a powerful force.

    News on Stocks in Our Portfolios


   This Week’s Data


Month to date retail chain store sales declined less than in the prior week.

May pending home sales rose 44.3% versus consensus of up 18.9%.

The June Dallas Fed manufacturing index came in at -6.1 versus estimates of -26.0.


            May Japanese unemployment came in at 2.9% versus forecasts of 2.8%; industrial production fell 8.4% versus down 5.6%; YoY housing starts were off 12.3% versus -15.0%; construction orders were down 6.1% versus -12.3%.

            The June Chinese manufacturing PMI was reported at 50.9 versus expectations of 50.4; the nonmanufacturing PMI was 54.4 versus 52.1.

            Final Q1 UK GDP growth was -2.2% versus projections of -2.0%; business investment was -0.3% versus 0.0%.


            Why Modern Monetary Theory does not work.

            The declining role of the Council of Economic Advisors.

            Six high frequency indicators on the recovery.

What I am reading today

            A brief look at the life of Wyatt Earp.

            Trust the experts.

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

Monday, June 29, 2020

Monday Morning Chartology

The Morning Call


The Market

Last week was a rough one for the S&P.  On Wednesday, it established a new very short term downtrend.  Then on Friday, it broke below its 200 DMA (now support).  Of course, that break won’t be confirmed until the close on Wednesday.  Also, as you can see, it has unsuccessfully challenged its MA twice---on 6/11 and again on last Thursday. So, there is clearly major support at this level  On the other hand, the Dow has already reverted its 200 DMA to resistance.  That said, until both indices successfully challenge their 100 DMA’s, I think the bias in stock prices is to the upside.

The long bond finally looks like it has broken out of its two month funk.  Of course, it still needs to push above that 4/21 high to really cement a firm short term uptrend.  Meanwhile, the long term technical picture has remained reasonably solid.

            On Friday, GLD traded back to Tuesday’s seven year high.  So, its chart remains strong both on a short and long term basis.  The assumption has to be that gold’s price is going higher.

            The dollar’s chart continues to be the worst of the lot.  There is a touch of good news---it tested the lower boundary of its short term trading range bounced and then made a higher low.  Still if investors are coming to believe that the economy is weakening again, the gold and bonds up and the dollar down would reflect that scenario.

            The VIX pin action is really surprising to me.  On Friday’s 700+ point down day in the Dow, the VIX’s performance was remarkedly docile.  That suggests that investors are not as alarmed as stocks would indicate.  This could possibly be explained by either the Robinhood day traders remaining active in options markets or the FAANG stocks accounting for a disproportionate share of Friday’s price decline.  Whatever the reason, this is something to watch as hint for Market direction.




    News on Stocks in Our Portfolios
AT&T (NYSE:T) declares $0.52/share quarterly dividend, in line with previous.


   This Week’s Data



            May UK consumer credit fell L4.59 billion versus estimates of -L2.5 billion.

            June EU economic sentiment was reported at 75.7 versus forecasts of 80.0; consumer confidence was 14.7, in line; industrial sentiment was -21.7 versus -20.0; servicers sentiment was -35.6 versus -20.0.

            June German inflation was 0.7% versus expectations of 0.4%.


            Global trade recovery could be impacted by numerous disputes.

            Update on the oil market.

What I am reading today

            I hate it when this happens.

            The Kennedy assassination. Part 2

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

Saturday, June 27, 2020

The Closing Bell


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%


Real Growth in Gross Domestic Product                               ?
                        Inflation                                                                                  ?
                        Corporate Profits                                                                    ?

   Current Market Forecast
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Trading Range                      18210-29540
Intermediate Term Uptrend                     16100-32301
Long Term Uptrend                                  7006-38224

                        2019     Year End Fair Value                                   14500-14700

                        2020     Year End Fair Value                                   15100-15300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Trading Range                          2188-3398
                                    Intermediate Term Trading Range              1813-3398                                                          Long Term Uptrend                                     1352-4987
2019 Year End Fair Value                                     1790-1810

2020 Year End Fair Value                                       1870-1890         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                           48%
            High Yield Portfolio                                     50%
            Aggressive Growth Portfolio                        54%

The economic dataflow continues to come in better (less bad) than consensus, meaning that while the US is in a recession [a] the worst is probably behind us and [b] it was likely not as deep and will not be as long as originally anticipated.  That said, there are too many unknowns to make any semblance of a forecast.  In my opinion, the economy will be a question mark at best until there is some visibility to the magnitude and extent of a recovery as well as the impact that the virus/lockdown will have on American work, social and spending patterns.

The data (and primary indicators) this week was upbeat again while the overseas stats were overwhelmingly positive.

Short term,  the economic recovery continues though the question of progress was raised this week as the second wave of coronavirus infections appear to be upon us albeit sooner than many anticipated.  How well it is contained will almost certainly affect the shape of the recovery (V, U, W, etc.).

 Longer term, the economic growth will be influenced by how quickly virus treatments and a vaccine are discovered as well as the permanent impact this disease/government reaction will have on the spending and work habits of the nation. 

Whatever the shape of the recovery, I am not altering my belief that long term economy will grow at a historically subpar secular rate due to the twin burdens of egregiously irresponsible fiscal and monetary policies---which, by the way, are becoming even more egregiously irresponsible as a result of measures being taken by the government and the Fed in dealing with the current crisis.

The Market-Disciplined Investing

The Averages  (25015, 3009) got beaten like a rented mule yesterday on elevated volume and horrible breadth.  Plus (1) the S&P closed below its 200 DMA; now support.  If it remains there through the close next Wednesday, it will revert to resistance and put it back in sync with the Dow [i.e. acting as resistance], (2) both indices are in very short term downtrends and (3) they still have those ‘island tops’ weighing on them. There was one potential bright spot---the VIX’s pin action was quite subdued for such a big down day, suggesting that investors may be less alarmed than stocks indicate.

Hence, the short term the technical picture has gotten shakier.  Nonetheless, I am sticking with my assumption that the Market’s bias is to the upside---at least until/unless the Averages revert their DMA’s to resistance.

Gold jumped back to the level of Tuesday’s seven year high which was clearly a positive.  The long bond was also strong, greatly improving its short term technical picture.  The dollar was also up again, but only fractionally so.  It was unable to make a second higher high.  Higher gold and bond prices and a lower dollar suggest a weakening economy.

                 Friday in the charts.

Fundamental-A Dividend Growth Investment Strategy

The DJIA and the S&P are 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.  The recent data clearly shows that  a bounce off of a recessionary low is occurring---which is clearly a plus.  However, there are negatives to temper our optimism [a] the collapse in economic activity has been so pronounced that any recovery will have to be significant just to regain the prior level of economic activity, [b] a second wave of the virus appears to be up on us; the question is, how much will it impact the current rebound.  The good news is that we will know the answer reasonably soon, [c] we have no idea about either the ultimate magnitude of the economic consequences of the government/Fed’s actions to combat the virus in terms of lost wages, sales and profits or how much this whole coronavirus affair will alter Americans’ long term living/spending habits.  In short, the economy may have seen the worst but we have idea about what is to come.                    

More coronavirus data.

In my opinion, those factors will also ultimately play a key role in determining the Market’s Fair Value [as determined by my Valuation Model].  But, as I noted above, there remains so much about them that we simply do not know; so, any attempt to determine Fair Value would of necessity be by the WAG [wild ass guess] method.  In the meantime, investors are pricing many equities near the same valuations of pre-coronavirus, pre-US/Chinese trade tensions and pre-riots levels.  That seems  overly optimistic to me.

There are two other factors to consider. 

[a] short term, US relations with China remain tenuous.  The risk here, of course, is a major schism {or worse}with a huge trading partner which would certainly be a negative for the economy and potentially the Markets.,

[b] longer term, with all the spending to offset the results of a national lockdown {and it seems likely that yet another stimulus bill will be enacted}, the budget deficit/national debt has gotten out of hand.  As you know, I believe that once the national debt reaches a certain size relative to GDP {the US, the EU and Japan are already there}, the debt has a stifling effect on economic growth.  Even under the current best case {‘V’ shaped} recovery scenario, that extra debt will still be there, usurping capital from the private sector and inhibiting its growth and profitability.  I believe that the resulting stunted economic growth will ultimately work its way into equity valuations.

(2)   QEInfinity/Forever.  That was helped along this week by the FDIC loosening the restrictions of Volcker Rule, the net effect of which was to allow banks to increase the leverage on their capital---just what this asset price bubble needs.  The good news is that the Fed imposed restrictions on stock buybacks and dividends for at least the third quarter [for all the good that will do].

As you know, I believe that massive injections of liquidity by the global central banks’ QEInfinity policies have done little to spur economic growth and, indeed, have inhibited it by destroying the functionality of the pricing of risk and the efficient allocation of capital; and that there will be an ultimate price to pay both for the economy and the securities markets. 

That said, throughout the entire QEInfinity experiment, investors have shown a complete disregard for its consequences and instead have used the increased liquidity to bid up asset prices to grossly inflated valuations.  Until that changes, the bias in stock prices will remain to the upside.

Bottom line:  I believe that the Averages and most segments of the Market are overvalued [as determined by my Valuation Model].  This is not a time to be buying equities.
            Nonetheless, there are certain segments of the Market that have been punished severely  with the stocks of the companies serving those industries down 30-70%.  As a result, I will be putting cash to work in these beaten up stocks on any Market decline. 
As a reminder, my Portfolio’s cash position did not 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.

Friday, June 26, 2020

The Morning Call--More help for the banks---like they need it.

The Morning Call


The Market

The Averages  (25745, 3083) had a roller coaster day, but ended nicely to the upside.  However, they (1) remain out of sync on their 200 DMA’s [though intraday, the S&P challenged its 200 DMA but bounced to stay above it---that is a positive], (2) are in very short term downtrends and (3) still have those ‘island tops’ weighing on them.

The short term the technical picture remains shaky; but for the moment, I am sticking with my assumption that the Market’s bias is to the upside---at least until/unless the Averages revert their DMA’s to resistance.

            The Market begins to internalize reality.

Gold was off again fractionally again, but remained above its prior (before Tuesday’s) seven year high.  The long bond was up for a second day, but still has more work to do to overcome the struggle to break out of its month long soft spell.  The dollar was also up again and is close to resetting last week’s uptrend.

            Thursday in the charts.



            The economy

The economic releases yesterday were weighed to the plus side. The final Q1 corporate profits, June Kansas City Fed manufacturing index, May durable goods orders and May wholesale inventories were ahead of expectations; weekly jobless claims and the final Q1 price index were disappointing; and final Q1 GDP growth was in line.

            So much for the ‘V’ recovery.

            Overseas, the April Japanese leading economic indicators and July German consumer confidence were better than anticipated.

            Historic decline in April world trade volumes.

            The coronavirus

            ***overnight update.

            Why re-opening is not enough to save the economy.
            Coronavirus death rates continue to decline.

            Not so in Arizona.

            The Fed

            The Fed announced the results of its latest stress test.  Two important takeaways:

(1)   for the third quarter, it suspended bank stock buybacks and capped the banks’ ability to pay dividends---the exact impact on each bank will not be known until Monday when the banks will report their individual results,

(2)   it will require the banks to submit a second stress test later in the year incorporating the latest data on the coronavirus pandemic.

The full press release.

In another development, the FDIC eased the restrictions of the Volcker Rule.  In an interview on CNBC, Sheila Bair, former head of the FDIC, said that the net effect is to lower banks’ capital base.  As you probably remember, the regulators allowing banks to increase their balance sheet leverage is one of the major causes of the 2008/2009 financial crisis.  To be sure, this easing still leaves the banking system’s capital basis considerably higher than before that financial crisis.  However, adding leverage to the financial system when the Fed has drastically increased the leverage of its own balance sheet, just serves to blow the bubble that much larger.

            Bottom line.  the financial system ruled the headlines yesterday.  The FDIC allowing banks to increase the leverage on their balance sheet ups the liquidity in the system, i.e. provides yet more money with which to misallocate and misprice assets.  That, of course, is great news for stocks. 

            The Fed’s actions, while more responsible than the FDIC’s, had the effect of maximizing the banks’ capital (lending capacity) which is also a plus for the Market.

            More on valuations.

Still more.

    News on Stocks in Our Portfolios
Nike (NYSE:NKE): Q4 GAAP EPS of -$0.51 misses by $0.54.
Revenue of $6.31B (-38.0% Y/Y) misses by $950M.


   This Week’s Data


May personal income fell 4.2% versus forecasts of down 6.0%; personal spending rose 8.2 versus +9.0%.

The June Kansas City Fed manufacturing index came in at 2 versus estimates of -8.


            June Japanese YoY CPI increased 0.3% versus expectations of up 0.6%; core CPI was up 0.2%, in line.


            The June hotel occupancy rate down over 41%.
What I am reading today

            Saharan dust storm to raise air pollution in US to dangerous levels.

            Scientists have linked volcano eruptions to periods of political instability.

            Time to take back your ownership.

            The most important social security chart that you will ever see.

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