Investing for Survival

Wednesday, May 7, 2014

Investing for Survival

Investing for Survival---from Dynamic Hedge

When you travel to a different country one of the first things you notice is the change of tempo. Ask anyone from a small town about their first trip to New York and they will tell you that the pace of the city is in their face from the moment they arrive. Similarly, anyone from a big city visiting the South of France or Italian countryside will immediately be disarmed by the relatively slow way of life. Your internalized tempo is out of sync with the place you’re visiting. You can feel it, but there’s no empirical evidence to support your claims. To deal with the change of tempo you can choose one of the following:

Take your cue from your surroundings and adjust your internal tempo. When in Rome.
Disrupt your new environment by maintaining your foreign pace and hope that the locals catch on. The Footloose strategy.
Leave

It can be pretty funny watching an out-of-towner yield to every pedestrian in Manhattan. If you happen to be driving behind this courteous fellow, you’ll soon be insanely annoyed. Conversely, I’ve gone on vacation and found myself getting frustrated over things that no man should be frustrated about while on vacation. Schedules, timing, food availability all somehow conspiring against me. Yet it was just my tempo out of sync with a new environment. Given enough time the tourist starts driving like a madman and the uptight city-slicker finally puts on a pair of flip flops and relaxes. Very seldom does a personality with enough dominance come along and act as a pacesetter to an entire region. When it does happen, they write books about it.
The market has many different tempos. One of the most obvious is between different instruments. Think about the difference in tempo between pairs trading and directional trading. Even within pairs trading there’s a big difference between a sleepy insurance pair like $ACE – $CB and a fertilizer/ag-chem pair like $MOS – $POT. On the directional side, there’s a huge difference between trading Russell 2000 futures $TF_F and 30-Year Bonds $ZB_F — or say Xerox $XRX vs Netflix $NFLX. If you try to trade one instrument like the other you’re likely to either get chopped to pieces or bled dry from commissions.
The most difficult tempo change of all is the tempo of the market itself. The difference between a bear market and a bull market is like the difference between being in NYC and the South of France. If you don’t heed the subtle warning signs of changing market you’ll find yourself wandering around on the beach in a parka yelling at Frenchmen. Not a good look. Just slightly out or sync with your surroundings. Unlike the tourist, the trader and investor has greater consequences than just looking foolish. So what are our choices?

Realize that there has been a market change and make the necessary adjustments to position size or time frame
Leave (stop trading and wait for your market)

That’s it. Just two. There’s no trying to disrupt your environment by continuing to act in a foreign manner. That’s just fighting the market. Chances are you’re not Paulson, and they won’t be writing a book about your next trade. With that in mind, always consider the market to be the local and you the visitor. Better yet, consider Ms. Market to be the lead dance partner. Get in sync fast because the tempo is constantly changing. Become acutely aware of the changes in emotion, listen carefully to the changes in rhythm, and watch the changes in energy. If it sounds very squishy, unquantifiable, and unscientific, that’s because it is. The market is trying to tell you something in its own subtle language. The same subtle language of mass human psychology. Charts and indicators and stochastic mathematics are helpful at giving clues, but what it really comes down to is being in the right tempo.

Morning Journal--Why QE won't work in the EU

News on Stocks in Our Portfolios

Western Gas Partners beats by $0.07, misses on revenue

o Western Gas Partners (WES): Q1 EPS of $0.54 beats by $0.07.

o Revenue of $288.7M (+25.7% Y/Y) misses by $4.83M.

Marathon Oil beats by $0.17, beats on revenue

Marathon Oil (MRO): Q1 EPS of $0.88 beats by $0.17.
Revenue of $3.53B (-12.2% Y/Y) beats by $150M.

Oneok Partners beats by $0.15

· Oneok Partners (OKS): Q1 EPS of $0.81 beats by $0.15.

Economics

This Week’s Data

The International Council of Shopping Centers reported weekly sales of major retailers down 2.0% versus the prior week but up 2.0% on a year over year basis; Redbook Research reported month to date retail chain store sales up 4.4% versus the comparable period last year.

Weekly mortgage applications rose 5.3% while purchase applications were up 9.0%.

First quarter nonfarm productivity fell 1.7% versus expectations of a drop on 1.2%; unit labor costs soared 4.2% versus estimates of +2.8%.

Other

Here is some details of the EU growth prospects that I cited in yesterday’s Morning Call. Note the last sentence pertaining to the risk to the forecast (medium):

http://blogs.wsj.com/moneybeat/2014/05/05/brussels-sees-broader-deeper-eu-economic-recovery/?mod=WSJBlog

Why EU QE won’t work (medium):

http://www.zerohedge.com/news/2014-05-06/why-european-qe-will-not-help-2-simple-charts

Update on recession probability model (short):

http://advisorperspectives.com/dshort/guest/Ted-Kavadas-140506-Recession-Probability-Models.php

A look at future US government debt and inflation (short):

http://advisorperspectives.com/dshort/guest/Michael-Lombardi-140506-Exponential-Price-Rises.php

Politics

Domestic

This is the depth to which our higher education system has sunk (medium):

http://www.nationalreview.com/corner/377165/exclusive-rice-withdraws-rutgers-commencement-nro-staff

The Morning Call--More investor schizophrenia

The Morning Call

5/7/14

The Market

Technical

The indices (DJIA 16401, S&P 1867) turned in another volatile day in what has become trading range since the first of the year. However, none of the technical factors changed: both remained above their 50 day moving averages, both are above their late April lows---keeping a very short term uptrend in place; however, they clearly are no closer to either their all-time highs and the S&P is still developing a head and shoulders formation.

The S&P closed within uptrends across all timeframes: short (1824-1991), intermediate (1778-2578) and long (739-1910). The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405). They continue out of sync in their short and intermediate term trends.

Volume was flat (and low): breadth was down. The VIX rose but remains within its short term trading range, its intermediate term downtrend and below its 50 day moving average.

More divergences (short):

http://www.capitalspectator.com/small-cap-breakdown/#more-3553

http://www.bespokeinvest.com/thinkbig/2014/5/6/russell-closes-below-200-dma.html

The long Treasury resumed its upward march, finishing in a short term uptrend, above its 50 day moving average and within an intermediate term downtrend.

More on bonds. The theories on higher bond prices are coming fast.

http://www.cnbc.com/id/101644084

http://www.zerohedge.com/news/2014-05-06/stumped-deutsche-bank-has-11-reasons-or-excuses-why-everyone-buying-treasurys

http://www.zerohedge.com/news/2014-05-07/how-bank-americas-explains-treasury-bid-cold-weather

http://advisorperspectives.com/dshort/guest/Chris-Kimble-140506-New-Twist-on-Sell-in-May.php

GLD fell (again), closing within short and intermediate term downtrends and below its 50 day moving average.

Bottom line: yesterday’s pin action was just as noteworthy as Monday’s; only for the opposite reason. The news flow was generally good both here and abroad; plus it was Tuesday---which has been the strongest day of the week the last couple of months. Most likely both days are simply reflective of another round of investor schizophrenia. There have been plenty such occasions throughout this upward trending market; and, to date, they have all been resolved to the upside. While ‘to date’ are the operative words, until proven otherwise, the assumption has to be that we will get the same outcome this time.

That said, given the increasing number of divergences (not the least of which is the rising bond market), sooner or later that pattern will change. However, until it does, I see no reason to alter the thought that the Averages will challenge the upper boundaries of their long term uptrends.

Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

Price movement by the day of the week (short):

http://blog.stocktradersalmanac.com/post/Mondays-and-Fridays-Most-Important-SPY-Days-of-Week

Regression to trend (short and a must read):

http://advisorperspectives.com/dshort/updates/Regression-to-Trend.php

Fundamental

Headlines

There were only two secondary US economic indicators reported yesterday: weekly retail sales were mixed and the March trade deficit was less than anticipated. Hardly worth mentioning.

Overseas, there was not much going. The EU reported April PMI better than expected. Even Ukraine was more quiet than usual.

Latest from Ukraine:

http://www.zerohedge.com/news/2014-05-06/russia-accuses-kiev-committing-genocide-russian-ukrainian-people

http://www.zerohedge.com/news/2014-05-07/putin-talks-spark-another-de-escalation-fueled-hope-bounce-stocks

Is this more fallout from (our mishandling of) Ukraine (short):

http://www.zerohedge.com/news/2014-05-06/china-sends-oil-rig-disputed-waters

Bottom line: Almost no news---so there was no changes in the fundamentals. Virtually no volume and there was little change in the technicals. Stocks remain overvalued but momentum still lies with the bulls. So I think that until investors get really worried about something for more than a day or two, prices will likely continue to rise. The question is, is the bond market telling us that ‘something to worry about’ is upon us. We will know soon enough.

My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

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.

Bear in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

It is a cautionary note not to chase this rally.

Tuesday, May 6, 2014

Sherwin Williams (SHW) 2014 Review

Sherwin Williams Co. is one of the largest producers of paints, varnishes and application equipment, much of its sold through 3500+ retail paint and wall covering stores; in addition, it produces auto coatings which are sold through auto coatings outlets. The company has grown profits and dividends at an 11% pace over the last 10 years earning a 20%+ return on equity. The company’s revenues and profits are negatively impacted by weakness in the construction and housing markets. However, it should still grow at an above average pace as a result of:

(1) improving US and international sales in autos, OEM product finishes and protective and marine coatings,

(2) aggressive expansion overseas,

(3) a major re-organization that will reduce costs, improve productivity and generate cash flow that will be used to reduce debt and buy back stock.

(4) acquisitions.

Negatives

(1) its retail paint stores are being impacted by US economic weakness,

(2) a poor pricing environment in the consumer segment,

(3) rising material costs

(4) currency fluctuations.

SHW is rated A+ by Value Line, has a 39% debt to equity ratio and its stock yields 1.1%.

Statistical Summary

Stock Dividend Payout # Increases

Yield Growth Rate Ratio Since 2004

SHW 1.1% 16% 25% 10

Ind Ave 1.5 14 37 NA

Debt/ EPS Down Net Value Line

Equity ROE Since 2004 Margin Rating

SHW 39% 41% 3 9% A+

Ind Ave 27 31 NA 8 NA.

Chart

Note: SHW stock made great progress off its March 2009 low, quickly surpassing the downtrend off its July 2007 high (straight red line) and the November 2008 trading high (green line). Long term, the stock is in an uptrend (blue lines). Intermediate term, it is in an uptrend (purple lines). Short term, it is in an uptrend (brown line). The wiggly red line is the 50 day moving average. The Dividend Growth Portfolio owns a 50% in SHW, having Sold Half in mid-2013. The upper boundary of its Buy Value Range is $91; the lower boundary of its Sell Half Range is $185.

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

5/14

Morning Journal--Don't bet on rising wages

News on Stocks in Our Portfolios

Emerson Electric misses by $0.01, misses on revenue

· Emerson Electric (EMR): FQ2 EPS of $0.80 misses by $0.01.

· Revenue of $5.81B (-2.5% Y/Y) misses by $90M.

HollyFrontier misses by $0.01, beats on revenue

· HollyFrontier (HFC): Q1 EPS of $0.76 misses by $0.01.

· Revenue of $4.79B (+1.7% Y/Y) beats by $610M.

EOG Resources beats by $0.21, beats on revenue

EOG Resources (EOG): Q1 EPS of $1.40 beats by $0.21.
Revenue of $4.08B (+21.4% Y/Y) beats by $300M.

Balchem misses by $0.08, misses on revenue

· Balchem (BCPC): Q1 EPS of $0.29 misses by $0.08.

· Revenue of $85.99M (+1.6% Y/Y) misses by $3.61M.

Economics

This Week’s Data

The April Markit PMI services index was reported at 55.0 versus expectations of 55.3.

The April ISM nonmanufacturing index came in at 55.2 versus estimates of 54.2.

http://www.calculatedriskblog.com/2014/05/ism-non-manufacturing-index-increased.html

The March US trade deficit narrowed to $40.4 billion ($42.3 billion in February) versus forecasts of $40.5 billion.

Other

How low is inflation (short)?

http://pragcap.com/yes-inflation-really-is-low

Don’t bet on rising wages (medium):

http://www.zerohedge.com/news/2014-05-05/bank-america-has-some-words-david-rosenberg-dont-hold-your-breath-rising-wages

Real earnings of private employees (medium):

http://advisorperspectives.com/dshort/updates/Employment-Wages-and-Hours.php

Politics

Domestic

Quote of the day (short):

http://cafehayek.com/2014/05/quotation-of-the-day-981.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

International

EU economists are predicting more growth and less inflation (medium):

http://www.ft.com/intl/cms/s/0/fa14f6bc-d429-11e3-a122-00144feabdc0.html?siteedition=intl#axzz30rsLzHux

The Morning Call--Yesterday's turn around was a plus

The Morning Call

5/6/14

The Market

Technical

The indices (DJIA 16520, S&P 1884) opened down big yesterday, then rallied through the day to close in the plus column. The good news about this pin action is both Averages made a third higher low and remained above their 50 day moving averages; the bad news is that the Dow still has to overcome a triple top and the S&P hasn’t negated its developing head and shoulders pattern.

The S&P closed within uptrends across all timeframes: short (1824-1951), intermediate (1778-2578) and long (739-1910). The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405). They continue out of sync in their short and intermediate term trends.

Volume fell; breadth was mixed. The VIX was up but remains within its short term trading range, below its 50 day moving average and within its intermediate term downtrend.

More divergences:

http://chartsetcetera.blogspot.com/2014/05/risk-appetite-indicator-not-confirming.html

Expect more volatility (medium):

http://www.minyanville.com/special-features/random-thoughts/articles/Todd-Harrison-Prepare-for-the-Return/5/5/2014/id/54796

The long Treasury was down, but continues to trade within a short term uptrend, above its 50 day moving average and within an intermediate term downtrend. I have spent a lot of space in this note noodling over the recent unusual performance of bonds. Here is a reasonable thesis:

http://www.zerohedge.com/news/2014-05-05/reason-relentless-treasury-bid

Latest from Bill Gross:

http://www.bloomberg.com/news/2014-05-02/gross-says-no-asset-bubbles-given-2-fed-long-term-rate.html

GLD traded up but still ended within short and intermediate term downtrends and below its 50 day moving average.

Bottom line: yesterday’s intraday recovery was noteworthy; on the other hand, neither index has overcome its all-time high and the S&P remains in a developing head and shoulders pattern. That notwithstanding, the technicals still look like the Averages will challenge the upper boundaries of their long term trading ranges---with the caveat that the long bond is not signaling something that the stock guys (me included) at too stupid to see.

Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

Market cycle analysis looks bearish (medium):

http://humblestudentofthemarkets.blogspot.com/2014/05/the-bearish-verdict-from-market-cycle.html

Fundamental

Headlines

Yesterday’s US economic data was tilted to the plus side: both the April Markit service PMI and the ISM nonmanufacturing index came in positive; though the Markit PMI was slightly below estimates while the ISM index was above consensus.

Overseas, the numbers once again weren’t nearly as good: the April Chinese PMI was negative, below expectations but not as bad as the March reading; Chinese home sales plunged; the European Commission raised its economic growth outlook but lowered its inflation expectations (dream on); JP Morgan lowered its global PMI forecast.

And, of course, Ukraine continues in turmoil:

http://www.zerohedge.com/news/2014-05-05/slavyansk-clashes-kill-20-rebels-injure-dozens-civilians-white-house-extremely-conce

http://www.zerohedge.com/news/2014-05-05/moldova-puts-borders-full-alert-latvia-admits-society-has-fear

http://www.zerohedge.com/news/2014-05-05/mapping-360-years-divided-ukraine

***overnight, April EU services PMI showed improvement from March; and this---according to the Hang Seng China Enterprises Index, first quarter revenue of Chinese firms fell 7%.

http://www.zerohedge.com/news/2014-05-05/chinese-firms-see-revenues-collapse-fastest-rate-2009

Bottom line: in short, the US economy continues to move along with no help from our main trading partners. Yesterday’s pin action suggested that investors are tiring of Ukraine as an issue. If the only thing at stake was whose flag flies over the eastern part of the country, I would probably agree. The one thing that bothers me is the capacity of the current administration to fuck up a foreign crisis (Libya, Syria, Benghazi, Afghanistan). That doesn’t mean that they will. I just don’t think that the risk of an act of stupidity that could lead to our public humiliation and/or higher oil prices is as low as the rest of the Market seems to think.

Furthermore, the recent performance of the bond market is potentially I think a signal that negative developments could be in the offing. Topping it all off, stocks are, in my opinion, priced for a Goldilocks environment. I know Goldilocks; and this is no Goldilocks environment.

It is a cautionary note not to chase this rally.

The latest from John Hussman (medium):

http://advisorperspectives.com/commentaries/hussman_050514.php

Your home as an investment (short):

http://www.thereformedbroker.com/2014/05/05/chart-o-the-day-your-home-as-an-investment/

Monday, May 5, 2014

Monday Morning Chartology

The Morning Call

5/514

The Market

Technical

Monday Morning Chartology

The S&P has had a couple of good weeks, so the pause of the last couple of trading days is no surprise. Still, it has not negated the developing head and shoulders nor has it made it to its prior high. I continue to believe that the S&P will challenge the upper boundary of its long term uptrend but it will be a labored effort.

The long Treasury (112.7) continues to be a stellar performer. It is in a short term uptrend, above its 50 day moving average and is ever closer to the upper boundary (113.7) of that intermediate term downtrend. As you know, I am a bit puzzled on what is driving bond prices higher. On Friday, we got a blowout nonfarm payrolls number (yes, the participation rate remains bothersome) suggesting (1) a stronger economy and (2) an increased likelihood of the Fed accelerating the transition to tighter money. In other words, the perfect scenario for higher interest rates (lower bond prices). And, yet.

GLD is not an inspiring chart. It remains in short and intermediate downtrends, below its 50 day moving average and plenty of room to the downside before hitting the lower boundary of its long term trading range (blue line).

Borrrrrrrrrrrrrring! VIX continues to be of no help on Market direction.

Wednesday, May 7, 2014