Thursday, April 3, 2014

The Morning Call--Fed policy keeps getting murkier

The Morning Call

4/3/14

Number one granddaughter and number three grandson arrived last night on their spring break.  So today’s Morning Call is abbreviated; there will not be one tomorrow or a Closing Bell on Saturday.

The Market
           
    Technical

Euphoria continues, driving the indices (DJIA 16573, S&P 1890) ever higher, The S&P closed at another all-time high and within uptrends across all timeframes: short (1790-1967), intermediate (1748-2548) and long (739-1920).  The Dow is approaching its all-time high, but remains (just barely) within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5050-17400).  They continue out of sync in their short and intermediate term trends---which leaves the Market trendless.

Volume once again fell; breadth was mixed.  The VIX declined, closing within its short term trading range and intermediate term downtrend and below its 50 day moving average.

The long Treasury dropped, finishing within a short term trading range and intermediate term downtrend but above its 50 day moving average.

GLD rose slightly, staying within its short and intermediate term downtrends and below its 50 day moving average.

Bottom line:  there is little point in repeating myself; but to summarize: the prices of the Averages are disguising a lot of technical weakness.  Sooner or later, either the rest of the market has to catch up or the indices have to roll over.  Unfortunately, ‘sooner or later’ is not very precise. 

The good news is that I am not pressed to be precise because (1) our Portfolios have a large enough exposure to equities that I don’t feel forced to chase prices up and (2) the risk/reward for stocks right now, as computed by our Valuation Model, is so dismal that it would be foolish of me to chase stocks even if our Portfolios had a much lower equity exposure.

That said, my best guess is that the Averages will challenge the upper boundaries of their long term uptrends but unsuccessfully.

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.

            Breakout or fake out? (short):

            Update on valuation measures:

    Fundamental
    
     Headlines

            US economic data continues on its mixed course: weekly mortgage applications fell but the more important purchase applications rose; the ADP private payroll report showed a rising job count but less than forecast and February factory orders were above estimates.  There was no news from overseas.  There was additional input on Fed policy and it did nothing but add to an already murky picture.

More confusion from the Fed (short):

            ***overnight, Chinese composite PMI hit a 28 month low but the Chinese government announced a stimulus program; the EU composite PMI fell but remained in positive territory and the ECB left interest rates unchanged.

            None of this made any difference because the Market is the news.  The indices are moving higher that seems to be all that matters to investors.
           
Bottom line: investors held on to their upbeat dispositions.  Tuesday, I thought that is was due to Yellen’s Monday dovish comments.  But yesterday another Fed member directly contradicted that policy stance and no one cared.  Meanwhile, stocks are overvalued and the risks from deteriorating conditions in China, Japan and the EU seem to be getting higher. 

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.

            The performance of equities versus real estate (short):

            Do you need commodities in your portfolio? (short):

            Why Markets always crash (medium and today’s must read):

            Goldman’s 2014 S&P target for 2014 is 10 points away (short):

      News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            February factory orders rose 1.6% versus expectations of up 1.2%.

            Weekly jobless claims rose 16,000 versus estimates of up 9,000.

            The US February trade gap came in at $42.3 billion versus forecasts of $38.8 billion.

   Other

            The problems with CPI (medium):

Politics

  Domestic

The inexorable rise of entitlement payments (medium):

  International

            Russia and Iran close (I got your sanctions right here) trade deal (medium):

                Thursday morning humor (short):












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.


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.

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