Investing for Survival

Wednesday, April 3, 2013

The Morning Call--Weak market internals

The Morning Call

4/3/13

The Market

Technical

Stocks rebounded yesterday. The DJIA (14662) closed above its former all time high (14190) and the upper boundary of its short term uptrend (13866-14561); while the S&P remained below these comparable levels (1576) and (1516-1590). This leaves the Averages out of sync, with no S&P confirmation of the Dow’s breakout to new highs.

Both of the indices finished within their intermediate term uptrends (13611-18611, 1404-2038) and their long term uptrends (4783-17500, 688-1750).

Volume rose slightly and breadth improved somewhat. However, advance/declines were negative as was the Russell 2000. None of this is indicative of Market strength. The VIX fell and remains within both its short and intermediate term downtrends.

GLD got whacked. It remains within its short term downtrend; however, the developing support level is still in tact.

Bottom line: the S&P continues to be unable to surmount its former all time high and join the Dow’s move to the upside. Meanwhile overall breadth is weak-ish and doesn’t appear to be supportive of the surging Dow. The question remains, is the Market topping or forming a base for another push upwards? I favor the former and, hence, continue to focus on the Sell side.

Fundamental

Headlines

Yesterday’s economic news was decent and I am sure contributed to continuing investor optimism: weekly retail sales were strong as were February factory orders; but March vehicle sales were flat.

Save the Cypriot finance minister resigning, there were not a lot new headlines from that country.

Ron Paul on the great Cyprus bank robbery (medium):

http://www.zerohedge.com/news/2013-04-02/ron-paul-great-cyprus-bank-robbery

Elsewhere in the EU, I noted yesterday morning that employment and manufacturing data were dismal. In addition, there was some rough news out of one of the supposed lions of the EU:

Holland’s economy---on the brink (short):

http://www.zerohedge.com/news/2013-04-02/holland-economy-brink

Bottom line: our economy continues to perform as well as I could expect. However, as good as it is, stocks are overvalued by roughly 11% on our positive economic outlook. Indeed, that overvaluation is at the point where the exercise of our Sell Discipline has pushed cash to 40% of our Portfolios total value---a level that normally would make me extremely nervous even if stocks are 11% overvalued.

However, I am not nervous because of a couple of tail risks: (1) a decision by the Markets that the current Fed nuclear powered money machine will ultimately cause us a lot of pain and (2) a spark that could lead to an explosion among the EU’s over indebted sovereigns/over leveraged banks. Neither may occur; but the probabilities that they will are high enough that 40% cash feels good.

Tuesday, April 2, 2013

ATT (T) 2013 Review

AT&T is one of the world’s largest telecommunications companies. The company has grown profits and dividends at a 5% pace over the past five years earning approximately 10-12% return on equity. T went through a rough period (2008-2011) as the growth of its traditional wireline business slowed and margins came under pressure. Looking forward profits should regain momentum as a result of:

(1) momentum in both is wireline and wireless businesses,

(2) building the most technologically advanced digital networks systems in the industry. It will include voice, video and internet in a vast wireline (U-verse) and wireless infrastructure and has resulted in increased penetration of both the business and household markets,

(3) acquisitions,

Negatives:

(1) intense competition,

(2) growth in voice over IP,

(3) highly regulated industry,

(4) loss of its exclusive hold on iPhone.

T is rated A++ by Value Line, carries a 33% debt to equity ratio and its stock yields 5.3%.

Statistical Summary

Stock Dividend Payout # Increases

Yield Growth Rate Ratio Since 2003

T 5.3% 3% 69 9

Ind Ave 4.6 5* 58 NA

Debt/ EPS Down Net Value Line

Equity ROE Since 2003 Margin Rating

T 33% 14% 4 11% A++

Ind Ave 46 11 NA 6 NA

*many companies in T industry do not pay a dividend

Chart

Note: T stock made good progress off its March 2009 low, quickly surpassing the downtrend off its May 2008 high (red line) and the November 2008 trading high (green line). Long term, T is in an uptrend (straight blue lines). Intermediate term, it is in an uptrend (purple lines). Short term, it is in an uptrend (brown lines). The wiggly blue line is on balance volume. The High Yield Portfolio owns a full position in T. The upper boundary of its Buy Value Range is $28; the lower boundary of its Sell Half Range is $45.

http://finance.yahoo.com/q?s=T

4/13

The latest from Marc Faber

The latest from Jack Bogel

Morning Journal--the stability of the central bank era

Economics

This Week’s Data

The March Institute for Supply Management’s manufacturing index was reported at 51.3---a positive reading but below expectations of 54.0 and February’s reading (54.2).

http://scottgrannis.blogspot.com/2013/04/manufacturing-index-points-to-2-3-gdp.html

February constructions spending rose 1.2% versus estimates of an increase of 1.1%.

Other

Nouriel Roubini surveys the world’s economies (medium):

http://www.project-syndicate.org/commentary/surveying-the-world-economy-s-myriad-problems-by-nouriel-roubini

For the optimists amongst you (medium):

http://www.aei-ideas.org/2013/03/if-profits-are-the-mothers-milk-of-stocks-weve-got-a-stock-market-rally-that-could-be-sustainable-for-a-long-time/

The stability of the central bank era (short):

http://www.zerohedge.com/news/2013-04-01/so-much-stability-centrally-banked-fiat-era

Politics

Domestic

Tuesday morning humor (3 minute video):

http://www.clubforgrowth.org/perm/?postID=16115

More crony capitalism (medium):

http://www.zerohedge.com/news/2013-04-01/fed-lies-record-protect-bank-america-pulls-testimony

Speaking of which, here is David Stockman’s latest armor piercing bullet (medium):

http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html?pagewanted=all&_r=1&

The Morning Call---the S&P still can't make new highs

The Morning Call

4/2/13

The Market

Technical

The DJIA (14572) continues to trade above its former all time high (14190) and the upper boundary of its short term uptrend (13859-14539). It remains out of sync with the S&P (1562) which has failed to date in surpassing its comparable levels (1576) and (1515-1589) respectively.

Both of the Averages are within their intermediate term uptrends (13608-18608, 1440-2034) and their long term uptrends (4783-17500, 688-1750).

Volume was anemic; breadth much more negative than I would have expected. The VIX popped about 7% but remains within its short and intermediate term downtrends.

http://www.bespokeinvest.com/thinkbig/2013/4/1/weak-breadth.html

GLD was up and finished within its short term downtrend. The good news is that the developing support level continues to build.

http://www.minyanville.com/sectors/precious-metals/articles/Why-Have-Investors-Lost-Interest-in/4/1/2013/id/48964

Bottom line: the S&P continues to be unable to surmount its former all time high and join the Dow’s move to the upside. Until that occurs or the DJIA stages a substantial sell off, the question remains open on whether the Market is topping or forming a base for another push upwards. I continue to focus on the Sell side.

Fundamental

Headlines

Yesterday’s economic news was so so: the March ISM manufacturing index was down though still positive while February construction spending was up a tad more than anticipated. The ISM number was likely the main contributing factor to yesterday’s down Market.

Cyprus and the implications of the ‘Cyprus template’ continue to dominate the media and investors’ attention. I keep hearing that its economy is too small to have an effect on the EU much less the global economy. While there is no question that it is a wart on goat’s ass, I have argued that the problem is not Cyprus but the implications of the ‘Cyprus template’ on EU investor psychology and, by extension, the stability of the EU financial system and the growth rate (or lack thereof) of Europe’s economy. I am not going to beat this horse beyond the above repetition of my concerns.

The confusion generated by EU bailouts (medium):

http://www.zerohedge.com/news/2013-04-01/eurozone-roulette

The latest on the Cyprus contagion (medium):

http://www.zerohedge.com/news/2013-04-01/tragic-cyprus-contagion-cripple-1600-greek-businesses

The highlights of the Troika’s terms for the Cyprus bailout (medium):

http://www.zerohedge.com/news/2013-04-01/cyprus-pain-only-just-starting

***over night EU employment and manufacturing data came in at depressed levels (short):

http://www.zerohedge.com/news/2013-04-02/chart-day-euro-area-unemployment-hits-new-record-high

Bottom line: despite my worries about the fall out from Cyprus, I am also encouraged that (1) uncertainty over the validity of deposit insurance and over capital controls will likely drive money to the US, (2) as long as the EU financial system is in a state of flux, the Fed is apt to keep the pedal to the metal [though as you know, I do not consider this a long term positive] and (3) the eurocrats have finally taken steps that are half way sensible [making risk takers versus taxpayers responsible for bank defaults].

‘Yes, there is going to be pain that likely extends far beyond

Cyprus

. But there was going to be pain anyway, sooner or later. In my opinion, anyone who assumed that after years of totally irresponsible fiscal policies that somehow the EU ‘muddling through’ scenario would not involve some pain, at times severe, is suffering from an acute case of naiveté.

So I guess where I part company with those who were pumping up stock prices ... is that I believe (assuming the EU/ECB doesn’t slap another monetary band aid over the next sovereign/bank problem but uses the Cyprus template) that the pain will come near term. True that will mean flows into the dollar which will be a positive. But there will still likely be heartburn sufficient enough to sound the derivative counterparty alarms. Plus Europe will continue to deteriorate economically and that is not going to help the profits of US companies. I don’t believe that this combination of events will play well in an overvalued

stock market.’

Valuation update (short):

http://advisorperspectives.com/dshort/updates/Market-Valuation-Overview.php

http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

http://advisorperspectives.com/dshort/updates/Crestmont-PE-Ratio.php

http://advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php

Negative earnings guidance (short):

http://www.thereformedbroker.com/2013/03/29/factset-negative-earnings-guidance-at-seven-year-highs/

The problem with reaching for yield (medium):

http://www.zerohedge.com/news/2013-04-01/exuberant-reach-yield-spain-leaves-retail-96-losses

The economy/Market disconnect---another great piece of analysis by Lance Roberts (medium and today’s must read):

http://www.zerohedge.com/news/2013-04-01/guest-post-great-disconnect-markets-vs-economy

Morgan Stanley looks at earnings ahead of reporting season (medium):

http://www.zerohedge.com/news/2013-04-01/just-six-charts-ahead-earnings

Investing for Survival

Ten things your financial advisor won’t tell you (medium/long):

http://www.marketwatch.com/story/10-things-financial-advisers-wont-say-2013-03-29

Monday, April 1, 2013

Monday Morning Chartology

The Morning Call

4/1/13

The Market

Technical

Monday Morning Chartology

The S&P remains in its short and intermediate term uptrends but has yet to challenge its former all time high (1576) (the purple line).

GLD remains solidly within its short term downtrend. However, the developing support level continues in place.

http://www.zerohedge.com/news/2013-03-31/guest-post-preparing-inflationary-times

The VIX continues to trade well within its short and intermediate term downtrends.

Over the weekend, I played around with our internal indicator and found something interesting. First, when our stocks are run against their all time highs: in a 144 stock Universe, 101 are above those highs, 26 are not and 17 are too close to call. So they continue to tell us that our Universe has broken out to the upside.

However, when I run a study comparing our stocks to their highs of the last three months: 56 are above those highs, 67 are not and 21 are too close to calls. In other words, our Universe appears to have lost momentum and is starting to roll over.

Another bullish technical indicator (short):

http://advisorperspectives.com/dshort/guest/Dominic-Cimino-130327-Russell-2000-Update.php

Update on ‘the best stock market indicator ever’ (short):

http://advisorperspectives.com/dshort/guest/John-Carlucci-Best-Indicator-Ever-Update.php

Fundamental

Leading expert on sovereign debt restructuring on Cyprus and what is next (10 minute video---must watch):

http://www.zerohedge.com/news/2013-03-28/buchheit-cyprus-situation-spiralling-down

Why the Cyprus template helps get rid of too big to fail (medium):

http://www.zerohedge.com/news/2013-03-28/guest-post-cyprus-deal-and-unraveling-fractional-reserve-banking

The Cyprus bailout from a somewhat different perspective (medium):

http://www.zerohedge.com/news/2013-03-31/guest-post-how-big-bailout-cyprus-hint-trick-question

Cyprus, who knew? (short):