Thursday, June 19, 2014

The Morning Call--Nothing

The Morning Call

6/19/14

The Market
           
    Technical

     The indices (DJIA 16902, S&P 1956) got all jiggy yesterday as Yellen proclaimed the inflation numbers ‘noise’ and stocks ‘bubbleless’.  They closed up, above their 50 day moving averages and within uptrends across all time frames: short (16045-17524, 1877-2044), intermediate (16263-20624, 1821-2621) and long (5081-18193, 757-1974). 

            Volume rose slightly; breadth was strong. 

The VIX (10.61) fell 12%, finishing within very short term, short term and intermediate term downtrends and below its 50 day moving average.  It is nearing the lower boundary of its long term trading range (9.8) which should present a tough barrier to break.

            The long Treasury continues its schizophrenic behavior, closing back above both the lower boundary of its short term uptrend and the upper boundary of its former intermediate term downtrend.  It is also above its 50 day moving average and within a new intermediate term trading range.  I can only assume that TLT’s recent performance reflects a bond community that is just as confused as I am.  I await clarity.

            GLD was up, finishing above the upper boundary of its very short term downtrend.  Our time and distance discipline now kicks in.  The break of the very short term trend will be confirmed at the close Friday.  It remains within short and intermediate term downtrends and below its 50 day moving average.

Bottom line:  the Fed gave investors all that they needed to remain giddy---accommodation as far as the eye can see. I assume that means that good news will remain good news and bad news will remain good news.  Gold investors seem to be agreeing with that assessment while the bond markets are giving off mixed signals.  However, it sure seems like systems are on go for an assault on the upper boundaries of their long term uptrends, if not the next set of ‘round numbers’ (Dow 18,000/S&P 2000). 

 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.

            Update on sentiment (short):
    Fundamental
 
     Headlines

            Yesterday’s economic releases were both disappointing but secondary indicators: mortgage and purchase applications were down and the first quarter US trade deficit was larger than expected.

            The news, of course, was the FOMC meeting, its subsequent statement and Yellen’s press conference.  By way of summary, I am reminded of the Seinfeld episode in which he and George make the presentation for a new show and George says that he can summarize about the show’s plot in one word: nothing.

            The FOMC’s economic summary was largely unchanged---economy improving, labor market improving, housing improving, inflation within objectives (more on this later).  And its actions were just as most expected: tapering purchases of another $10 billion a month. 

It did lower its 2014 economic growth estimate as a result of the first quarter weather’ problems---which appeared to heighten investor ecstasy presumably because it means QEInfinity just keeps on going.  I had to scratch my head on that one in as much as one of the big debates on the Street since the release of first quarter GDP has been whether or not the US would slip into deflation/recession.  Why anyone would expect this Fed to do anything but remain highly accommodative after that GDP number is beyond me.  So surely this couldn’t have been a surprise.  Indeed, I was thinking that there was a chance that there would be a ‘sell the news’ response.  But then, any news is good news.

The FOMC statement also suggested that interest rates might rise sooner than previous estimates; but in Yellen’s news conference, the answer to every question regarding the timing of such an event was ‘it depends’---meaning nothing is in the works, so feel free to continue to assume that QEInfinity remains as such. 

Also in the Yellen news conference (1) she dismissed the notion that inflation was now at the Fed’s target by declaring the rise as ‘noise’ and (2) she said that she sees no bubble in stock prices.  In sum, I would judge FOMC and Yellen’s comments as full of platitudes, demonstrated that the Fed has no idea what to do [‘it depends’] and that its default position remains to say or do nothing new that would upset the Markets---forget about what is best for the economy. 

            The complete statement (medium):

            The range of estimates from individual FOMC members (short):

            Hilsenrath’s summary (medium):

            About that ‘noise’:

Is inflation here at last? (medium):

            And:

And, inflation and the Market (medium, a must read):

In other news, the hope for a slowdown in the escalation of violence in Iraq that I expressed in yesterday’s Morning Call appears to have been just that---only a hope.  The latest from Iraq:

Bottom line: I thought that the FOMC and Yellen’s performance yesterday demonstrated that it is clueless.  The one hard number going into this meeting that should have generated some discussion was inflation.  But the FOMC chose to ignore it and rather stated that inflation was within its guidelines; and, when asked about it, Yellen swatted it aside as ‘noise’.  The other obvious issue was how to reconcile stock prices with its own economic forecasts.  Even if she interprets the maze of conflicting data in a positive way, one would expect her to say something more than ‘there is no bubble’. 

So the answer to the question I posed in yesterday’s Morning Call is that the Fed will remain accommodative which in turn means that the Market ‘goldilocks’ scenario will remain the consensus forecast and stocks will continue to advance. 

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.
            

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