The Morning Call---The results are in but are they significant?

The Morning Call

1/9/14

The Market

           

    Technical

            Day five of the January effect and the indices (DJIA 16462, S&P 1837) were down on the day as well as for the first five days.  Nonetheless, they remain within major uptrends across all timeframes: short term (15728-20728, 1779-1932), intermediate term (15728-20728, 1676-2257) and long term (5050-17400, 728-1900).

            Volume was up; breadth deteriorated.  The VIX declined (unusual for a down price day), finishing near the lower boundary of its short term trading range.  It is also within an intermediate term downtrend.

            The long Treasury fell, continuing within a short term trading range, an intermediate term downtrend and the construction of a head and shoulders formation.

            GLD inched lower for a second day, but closed above the upper boundary of the very short term downtrend.  However, it is also within both short and intermediate term downtrends.  Without more strength to the upside, our Portfolios will remain on the sidelines.

Bottom line:  the timeframe for the January effect is over and the results are negative.  I have quoted and linked to statistical studies that suggest that this can be an ill omen for 2014 pin action. 

More on the January effect (short):

http://blog.stocktradersalmanac.com/post/SPX-First-Five-Days-Down-But-Spotty-Record-in-Midterm-Years

On the other hand, I also noted that most of the negative technical axioms of the Market have not delivered the specified results over the last year.  Plus there is some statistical significance to studies showing that performance in years following a 25% up years is positive. 

So there are technical cross currents that need to be accounted for over the near term.  Perhaps the most important factor at this moment is that the Averages aren’t even close to challenging the lower boundaries of any of the major uptrends.  Until that occurs, the January effect is meaningless and I have to assume that sooner or later the upper boundaries of the indices long term uptrends (17400, 1900) remain a viable target.

Nonetheless, I will continue to use any advance as an opportunity for our Portfolios to take advantage of our Sell Price Discipline.

            A study on the probability of a bear market commencing anytime soon (medium):

            http://advisorperspectives.com/dshort/guest/Robert-Lamy-140108-Market-Cycle.php

            Update on sentiment (short):

            http://www.bespokeinvest.com/thinkbig/2014/1/9/bullish-sentiment-increases-slightly.html

    Fundamental

    

     Headlines

            US economic news commanded the bulk of investor attention yesterday.  The ADP private payroll report was much better than expected; so in the world of good news is bad news (more/faster Fed tightening), this indicator got the Market off on the wrong foot and it stayed there the rest of the day.  Bear in mind that we get weekly jobless claims to day (down more than expected, see below) and December nonfarm payrolls tomorrow.  So expect more fireworks if the numbers are ‘too good’.  Weekly mortgage and purchase applications were also released---the former up, the latter down.

            http://scottgrannis.blogspot.com/2014/01/a-stronger-adp-report-is-not-cause-for.html

            The Fed also released the minutes of its last FOMC meeting.  They contained a long on-the-one-hand, on-the-other-hand discussion of Fed tapering; and concluded with the message delivered by Bernanke at the post meeting news conference---the Fed will proceed cautiously in implementing the ‘taper’.  In other words, nothing new (you will find a link to the relevant excerpts below).

            Overseas the EU unemployment number was unchanged but near a record high while the German trade surplus grew---not a great thing when it comes to intra-EU politics.

Bottom line:  the economy continues to progress in line with our forecast.  Fiscal policy remains a mess, but that is in our Models.  Monetary policy is worse; and it is here that the risk to the economy lies.

The Market risk is largely a function of extreme overvaluation and that won’t be cured by anything other than time or a correction.  Either way, I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            Investor returns (short):

            http://www.thereformedbroker.com/2014/01/08/chart-o-the-day-investor-returns/

            Goldman’s list of risks for 2014 (long but a must read):

            http://www.zerohedge.com/news/2014-01-08/what-keeps-goldman-night

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Morning Journal--Milton Friedman on Obamacare

Economics

   This Week’s Data

            The International Council of Shopping Centers reported weekly sales of major retailers down 5.4% versus the prior week but up 1.7% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales up 4.1% on a year over year basis.

            Weekly mortgage applications rose 2.6% but purchase applications fell 1.0%.

            The December ADP private payrolls report showed a jump of 238,000 jobs versus forecasts of an increase of 205,000.

            http://www.zerohedge.com/news/2014-01-08/adp-payrolls-add-238k-jobs-december-construction-surge-highest-print-november-2012

           

   Other

Politics

  Domestic

Milton Friedman on Obamacare (3 minute video):

http://www.aei-ideas.org/2014/01/what-would-milton-friedman-think-of-obamacare-there-is-no-special-role-for-government-in-the-medical-care-field-at-all/

  International

            The demise of European democracy (medium and a must read):

            http://www.nakedcapitalism.com/2014/01/death-thousand-cuts-silent-assassination-european-democracy.html

The Morning Call---The senate doesn't get it

The Morning Call

1/8/14 

The Market

           

    Technical

            The indices (DJIA 16530, S&P 1837) put in a rebound yesterday, remaining within major uptrends across all timeframes: short term (15690-20690, 1774-1930), intermediate term (15690-20690, 1676-2257) and long term (5050-17400, 728-1900).  However, related to the January effect, stocks are still down through the first four trading days of the year.

            Volume fell; breadth improved.  The VIX declined, finishing within its short term trading range and intermediate term and continuing to provide little information on stock price direction.

            January sentiment survey (a bit long but a must read):

            http://shortsideoflong.com/2014/01/january-sentiment-summary/

            The long Treasury rose, closing within its short term trading range, its intermediate term downtrend and continuing to build a head and shoulders formation.

            GLD fell but remained above the upper boundary of a very short term downtrend.  Nevertheless, it is also well within short and intermediate term downtrends.

Bottom line:  yesterday, the Averages recovered some of its early 2014 losses but are still down for the year.  By rule, the January effect ends today.  So it will be interesting to see how stocks close.  As I noted yesterday, there are plenty of technical reasons for stocks to continue their advance even if the January effect proves negative.  If so, my target is still the upper boundaries of the indices long term uptrends (17400, 1900).

In any case I will continue to use any advance as an opportunity for our Portfolios to take advantage of our Sell Price Discipline.

    Fundamental

    

     Headlines

            Yesterday was quiet.  US economic data was comprised of secondary indicators: the November US trade deficit was smaller than expected (think declining energy imports) and weekly retail sales were mixed.  Nothing there.

            On the political front, the senate passed a procedural motion that allows debate to begin on the six month extension of the unemployment benefits (the eleventh time in five years for those counting) ---which, of course, potentially (depending on where they get the funds) busts the budget agreement made a mere month ago.  To be sure, the house also has a vote and it has been a bit more miserly than our illustrious senior body. 

Forgetting the argument about the economic soundness of said policy and whether or how the house responds, if an extension is approved, it would be a perfect example of why fiscal policy remains high up on our list of potential risks to the economy.  I can understand some dyed in the wool liberal proposing an extension (despite the fact that the prior ten did no good) of unemployment benefits; but if the senate approves, it speaks to the fact that these guys just don’t get it; and until they are replaced with those who do, our government will go ever deeper into debt, consume an ever larger percent of the country’s productive capacity and create a burden our children and grandchildren can not possibly pay.

           

The media and pundits paid little attention to that and spent the day contemplating today’s release of the minutes from the last FOMC meeting and Friday’s nonfarm payroll report and its potential impact on Fed policy.  Judging by the pin action, investors are either convinced of a goldilocks scenario or they are too busy counting their chips to care.

            http://advisorperspectives.com/commentaries/allianz_010714.php

           

            The problem with Fed policy (medium and today’s must read):

            http://www.zerohedge.com/news/2014-01-07/austrian-wolf-keynesian-sheeps-clothing

Bottom line:  I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            The latest from John Hussman (medium):

            http://advisorperspectives.com/commentaries/hussman_010614.php

            Will capital spending propel the economy in 2014? (medium):

            http://www.zerohedge.com/news/2014-01-07/will-corporate-spending-float-economy-2014

            

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Microsoft (MSFT) 2014 Review

Microsoft is the world’s largest independent developer and seller of computer software products for a wide range of computing devices. It also sells the Xbox video game console.  The company has earned between 25-40% return on equity over the last 10 years and has grown its earnings and dividends at a 13-14% pace over the last five years. MSFT was impacted by the recent economic down turn, but is returning to above average earnings growth as a result of:

(1) its dominant position in the PC market,

(2) expansion into the mobile space,

(3) Microsoft is taking market share in the server business and is profiting from the enterprise refresh cycle,

(4) the Xbox is growing at an above average pace,

(5) acquisitions,

(6) the Bing search engine is taking market share.

Negatives:

(1) softness in the core computing market,

(2) intense competition along with lagging sales in the mobile computing market.

MSFT is rated A++ by Value Line, the company has 13% debt to equity ratio and its stock yields 3.1%.

  Statistical Summary

                 Stock      Dividend         Payout      # Increases  

               Yield        Growth Rate     Ratio       Since 2004

MSFT        3.1%           16%               39%             9

Ind Ave      2.0              10*                38               NA 

                Debt/                     EPS Down       Net        Value Line

              Equity         ROE      Since 2004      Margin       Rating

MSFT        13%          25%            2                27%          A++

Ind Ave      18             16              NA              16            NA

* the vast majority of companies in MSFT industry do not pay a dividend

     Chart

            Note:  MSFT stock made good progress off its March 2009 low, quickly surpassing the downtrend off its October 2007 high (red line) and the November 2008 trading high (green line).  Long term, the stock is in a trading range (straight blue line); intermediate term, it is in an uptrend (purple lines).  The wiggly blue line is on balance volume.  The Aggressive Growth Portfolio owns a 50% position in MSFT.  The upper boundary of its Buy Value Range is $17; the lower boundary of its Sell Half Range is $45.

  

 

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

1/14

Morning Journal---A look at the global economies in 2014

Economics

   This Week’s Data

            November factory orders rose 1.8% versus expectations of an increase of 1.1%.

            http://scottgrannis.blogspot.com/2014/01/the-economy-keeps-on-ordering.html

            The December ISM nonmanufacturing index came in at 53.0 versus estimates of 54.8.

            http://advisorperspectives.com/dshort/updates/ISM-Non-Manufacturing.php

            The November US trade deficit was $34.4 billion versus forecasts of $39.9 billion.

   Other

            A look at global economics in 2014 (medium):

            http://www.thefiscaltimes.com/Columns/2014/01/06/Why-Global-Economy-Could-Go-Rails-2014

The Morning Call---Will the January effect have an effect?

The Morning Call

1/7/14

The Market

           

    Technical

            The indices (DJIA 16245, S&P 1826) continue to consolidate from an over bought position, finishing within all major uptrends: short term (15663-20663, 1773-1926), intermediate term (15663-20633, 1673-2254) and long term (5050-17400, 728-1900).  Yesterday’s pin action puts the Averages down for the first three trading days of January.

            More on the January barometer (short):

            http://www.thereformedbroker.com/2014/01/06/definitive-data-on-the-january-barometer/

            And:

            http://blog.yardeni.com/2014/01/januarys-effect-earnings-season-excerpt.html

            Volume was low---as it has been for the last two weeks; breadth was mixed.  The VIX fell, leaving it within a short term trading range and an intermediate term downtrend,

            The long Treasury was up, closing within a short term trading range and an intermediate term downtrend.  It continues to build a head and shoulders formation---the neckline being the lower boundary of its short term trading range.

            GLD was up, finishing within its short and intermediate term downtrends, but above the lower boundary of its very short term downtrend.  The latter is a mild positive especially after GLD bouncing off a very well defined double bottom.  I need more strength to the upside before beginning to re-establish this position.

Bottom line:  the Averages didn’t make it to the upper boundaries of their long term uptrend during 2013’s seasonally positive Holiday trading.  Certainly, they still could, although the first three trading days of the new year are not auguring well for such a prospect (January effect). 

On the other hand, (1) stocks were very overbought at year’s ends, so a sell off was not unexpected,  (2) they are in an uptrend and will be unitl they are not, (3) statistically, stocks tend to trend higher in a year following an up +25% year [like 2013] and (4) over the last two years, most of the negative technical signals [outside down days] and axioms [sell in May and go away] haven’t worked.  So technically speaking, there are a number of arguments for ignoring the January effect, assuming the first five trading days are negative.

In any case I will continue to use any advance as an opportunity for our Portfolios to take advantage of our Sell Price Discipline.

    Fundamental

    

     Headlines

            Mixed economic news yesterday.  In the US, November factory orders were better than forecast while the December ISM nonmanufacturing index was disappointing.  Overseas, the Chinese service PMI was down to 50.9 from a prior reading of 52.5 while the EU PMI was up to 52.1 from 51.7.

George Soros on China (medium):

            http://www.theguardian.com/business/2014/jan/05/george-soros-chinese-slowdown-biggest-worry

            On the political front, Janet Yellen was approved as the new Fed chief.

            So nothing earth shattering that would have a Market impact.

Bottom line: while the Holidays diverted investor attention from the uncertainties of Fed policy, their focus should sharpen on the 2014 Fed issues: (1) will it prove effective in unwinding QE without causing economic disruptions?  (2) will it even matter to the Markets if current overvaluations persist or get more extreme?  I await the answers.

That said, I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            Latest data on stock allocation of individual’s (short):

            http://pragcap.com/individual-investor-stock-allocation-hits-post-crisis-high

            Outlook for the global bond markets in 2014 (medium):

            http://www.bloomberg.com/news/2014-01-06/bond-tab-for-biggest-economies-seen-at-7-43-trillion-for-2014.html

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Monday Morning Chartology

The Morning Call

1/6/14

The Market

           

    Technical

      Monday Morning Chartology

            The S&P keeps on truckin’, remaining well within all major uptrends.  The rough first two days of trading isn’t surprising, given the magnitude of how overbought the Market is.  That said, bear in mind that the first five days of trading determines stocks’ January performance 78% of the time; and the January performance determines stocks’ performance for the year 82% of the time.  So the next three days’ pin action is statistically important.

            http://blog.stocktradersalmanac.com/post/Santa-Claus-is-Back-in-Town-SPY-DIA-QQQ

Update on sentiment (short):

http://www.bespokeinvest.com/thinkbig/2014/1/2/bullish-sentiment-among-individual-investors-declines.html

                For the bulls (short):

            http://blog.yardeni.com/2014/01/buybacks-great-rotation-and-melt-up.html

            The long Treasury continues to construct a head and shoulders formation.  The lower boundary (lower brown line) of its short term trading range is the neck line.  A break below that level would suggest a test of the lower boundary of its intermediate term uptrend (purple line).

            GLD’s chart remains pretty ugly.  But it did just make a double bottom.  If it can break some resistance levels on the upside, our Portfolios will likely start to re-establish their positions.

            The VIX continues to meander within a year long trading range, providing little information on future stock price movement.

    Fundamental

  

            The era of central bank driven equity rallies (short):

            http://www.zerohedge.com/news/2014-01-01/jpmorgan-presents-era-central-bank-driven-equity-rallies

            Update on valuation (short, must read):

            http://www.zerohedge.com/news/2014-01-03/jpmorgan-reveals-stocks-are-more-expensive-now-their-2007-peak

            And (medium):

            http://advisorperspectives.com/commentaries/dshort_010214.php

       News on Stocks in Our Portfolios

 

Economics

   This Week’s Data

   Other

            Draghi’s nightmare (medium):

            http://www.zerohedge.com/news/2014-01-03/no-waking-draghis-monetary-nightmare-eurozone-credit-creation-tumbles-new-all-time-l

Politics

  Domestic

The redistribution of wealth in the US (medium):

http://www.zerohedge.com/news/2014-01-02/biggest-redistribution-wealth-middle-class-and-poor-rich-ever-explained

Quote of the day (short):

http://cafehayek.com/2014/01/quotation-of-the-day-862.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

  International War Against Radical Islam

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.