The Morning Call
6/5/14
The Market
Technical
The
indices (DJIA 16737, S&P 1927) rose modestly yesterday; but I think
investors were largely on the sidelines awaiting the Thursday ECB meeting and
the nonfarm payrolls number on Friday. They
closed above their 50 day moving averages and in uptrends across all time
frames: short (16021-17500, 1862-2029), intermediate (16162-20519, 1810-2610)
and long (5081-18193, 748-1960).
Volume
was flat; breadth improved. The VIX
rose, finishing within short and intermediate term downtrends and below its 50
day moving average. The indicator
continues to be a plus for stocks. A
check of our internal indicator shows that in a 143 stock Universe, 37 are at
all-time highs, 24 are close and 82 are neither.
Stock prices,
implied volatility and credit spreads (short):
More
(short):
The
long Treasury dropped markedly again. It
has now negated its very short term uptrend; it is nearing the lower boundary of
its short term uptrend. It remains
within its intermediate term trading range and is well above its 50 day moving
average. This pin action leaves open (1)
the issue of whether the recent break above the upper boundary of the intermediate
term downtrend was a head fake and (2)
the question of whether bonds have made a low in yields.
GLD
was down, again. It remains in very
short term, short term and intermediate term downtrends and below its 50 day moving
average.
Bottom
line: the Averages were calm again
yesterday, reflecting (1) the need to work off an overbought conditions and (2)
hesitancy to get aggressive in front of the ECB meeting and the nonfarm
payrolls number. This sort of pin action
had a positive feel to it; and barring some truly unexpected negative surprises
from the aforementioned events, it seems likely that the Averages are still on
track to challenge the upper boundaries of their long term uptrends. However, I believe that the existing
divergences will prevent the indices from breaking through those barriers.
The nifty fifty
market (medium):
Our strategy remains to do nothing save taking
advantage of the current momentum to lighten up on stocks whose prices are
pushed into their Sell Half Range or whose underlying company’s fundamentals
have deteriorated.
Fundamental
Headlines
The
problem with yesterday’s US economic data was that (1) it was almost totally
negative---offsetting Tuesday positive dataflow and (2) there was lots of
it. Weekly mortgage and purchase
applications, the May ADP private payrolls report, the April trade deficit,
first quarter nonfarm productivity and unit labor costs were all below
expectations.
Not
unsurprisingly, investors latched on to the one upbeat stat of the day---the May
ISM nonmanufacturing index---and kept their positive mood. Further, the latest Fed Beige Book was
released; and while it was slightly more constructive than its prior edition,
there was nothing really unexpected in its analysis.
However,
as I noted above, investors were primarily on the sidelines awaiting the ECB
meeting and the Friday jobs report.
***the
ECB announced rate cuts including a facility rate that allows banks to charge (versus
pay) interest on deposits. Given the very
low rates already in effect, I am not sure what good this will do. As for the facility rate, I am not sure that
will do anything but encourage depositors to move their funds overseas. In the subsequent press conference, the ECB
announced that it would expand its loan program to banks (buying assets on the
condition of repurchase at a later date).
That should help bank liquidity, though it may not help loan volume (it
didn’t the first time, though in building bank liquidity, however temporary, it
did ease concerns about bank failures). No permanent purchases (QE) were
announced.
Finally,
there was some not so positive news out of China:
China
should panic about housing (medium):
Maybe
it should also panic about all the missing copper and aluminum (medium):
***overnight,
the Chinese service PMI printed at 50.7, the lowest level since August 2011.
Bottom line: yesterday’s
economic releases were more in line with last week’s disappointments than
Tuesday’s upbeat reports. As you know
last week, I plugged back in the flashing yellow light---which certainly puts
me out of the main stream. To be sure
Draghi’s action today or a gangbusters job reports could soften my
attitude. But even if it does, the
economy is not about to start soaring; and even if it does, stocks are already
discounting an economy far more robust than currently exists. More importantly, there is no room in
valuations for a Fed (or other central bank) mistake as QEInfinity is wound
down, a housing collapse in China, deflation in the EU or higher oil prices
resulting from turmoil in any number of potential political/military hotspots.
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.
Corporate
profits are peaking (short):
Company Highlight
Brown Forman (BFB ) produces and markets Jack Daniel’s, Southern
Comfort, Finlandia, Canadian Mist, and Korbel.
The company has earned a 20-30%+ return on equity and grown profits and
dividends between 10% and 11% over the past 10 years. Historically, BFB
has managed to increase earnings per share through even the toughest economic
period and should continue to do so as a result of:
(1) the
competitive advantage offered by its strong portfolio of brands,
(2) geographic
expansion into developed [France ]
as well as emerging [Russia ,
Poland ,
Mexico ]
markets,
(3) broadening
of its Jack Daniels product offerings [Gentleman Jack, Jack Daniels Single
Barrel],
(4) a stock buyback
program.
Negatives:
(1) its products
are sensitive to economic developments,
(2) a highly
competitive industry,
(3) distilled
spirits are subject to excise taxes in various countries; increases can have an
adverse effect on the company’s financial results.
Brown Forman is
rated A+ by Value Line, has a 40% debt to equity ratio and its stock yields 1.4%
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2004
Ind Ave 2.3 10 38 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2004 Margin Rating
Ind Ave 37 24 NA 14 NA
Chart
Note: BFB stock made great progress off its March
2009 low, quickly surpassing the downtrend off its August 2008 high (straight
red line) and the November 2008 trading high (green line). Long term, it is in an uptrend (blue lines); intermediate
term it is in an uptrend (purple lines).
The wiggly red line is the 50 day moving average. The Dividend Growth Portfolio owns a 50%
position in BFB, having Sold Half in mid-2012.
The upper boundary of its Buy Value Range is $35; the lower boundary of
its Sell Half Range is $63.
6/14
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
May ISM nonmanufacturing index came in at 56.3 versus expectations of 55.3.
The latest Fed Beige Book
was more boring reading. The major
takeaway was that the economy is improving in all 12 Fed districts.
Weekly jobless claims
rose 8,000 versus estimates of an increase of 10,000.
Other
The
problem with stealing technology versus innovating (medium):
The
outlook for growth this year (short):
The
continuing repackaging of junk (medium):
Politics
Domestic
More on the Obamacare
joke (medium):
International War Against Radical Islam
Tax
dollars for terrorists (medium):
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