Tuesday, April 21, 2015

The Morning Call & Subscriber Alert--More global QE

The Morning Call

4/21/15

The Market
           
    Technical

The indices (DJIA 18034, S&P 2100) recovered a big part of Friday’s decline yesterday.  Both remain above their 100 day moving averages but below their prior highs---keeping the series of lower highs intact.

Longer term, the indices remained well within their uptrends across all timeframes: short term (17003-19800, 1989-2970), intermediate term (17123-22249, 1796-2567 and long term (5369-18873, 797-2129).  

Another sentiment indicator (short):

            Cyclical top in 2015? (short):

April trading pattern (short):

Volume fell; breadth improved. The VIX declined, leaving it right on the lower boundary of a (now in question) developing pennant formation.  It remained within its short term trading range, its intermediate term downtrend, its long term trading range and below its 100 day moving average.  I continue to think that the VIX remains a reasonably priced hedge. 

The long Treasury declined, finishing within its very short term and short term trading ranges, its intermediate and long term uptrends and above its 100 day moving average. 

GLD’s dropped, closing within its short and intermediate term trading ranges, its long term downtrend and below its 100 day moving average.  A head and shoulders pattern continues to develop.

Bottom line: Friday’s pin action created a second lower high for both of the indices, but yesterday they bounced off their 100 day moving averages once again.  One of these two trends must ultimately be broken; and with only a 40 point spread in the S&P, that should happen sooner rather than later.           

That said, longer term, the trends are solidly up and will be so until the short term uptrends, at the very least, are negated.
           
    Fundamental

       Headlines

            We started the week with another lousy economic stat: the Chicago National Activity index was down versus an anticipated increase. 

            Overseas, the Bank of China lowered bank reserve requirements.  This is a very aggressive easing move and is another contribution to global QE.  Surprisingly, the Chinese equity markets traded down on this bullish move---which seems a bit ominous for a stock market that has been smoking to the upside of late.

            ***overnight, China allowed the first state owned company to default on onshore bonds (three have defaulted on offshore bonds).

            The geopolitical news keeps getting worse with the Greek government confiscating reserves of municipalities, the CEO of Gazprom visiting Athens and the US sending yet more naval vessels into the Red Sea.  See below for articles on each.

Bottom line: QE got yet another boost yesterday as (1) US economic news continues to disappoint---hence bringing hope of more delay in Fed interest rate increases and (2) the Bank of China implemented a cut in bank reserve requirement---a policy tool that historically has been proven to be very effective in producing the results desired from easing monetary policy. 

Somewhat surprisingly, Chinese investors didn’t get all that jiggy with their government’s more aggressive move to monetary easing.  Although perhaps, there remains a hangover from last week’s rise in margin requirement.  Or maybe they are just confused. 

On the other hand, if yesterday’s US pin action is an indication, investors here apparently continue to be absolutely enthralled ever more QE.  I keep wondering about their motivation, though.  By that I mean, if rate hikes are getting pushed out because the economy is weakening, how are investors going to respond if the economy actually slips into a recession or if corporate margins can’t hold up in the midst of a global policy of beggar thy neighbor?  

My point here is that while neither may occur, the numbers are telling us that they have a growing likelihood of happening---which somehow ought to be factored into stock prices. 

And that says nothing about a Grexit or an escalation of discord in Ukraine or the Middle East (you can pick the country). 

 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.

Of the 59 S&P 500 companies that had reported by last week, 75 percent had topped profit expectations, above the 70 percent average for the last four quarters. However, only 45 percent of companies beat revenues estimates, compared with 58 percent in the last four quarters.

            The biggest margin call in history? (medium):

        Subscriber Alert

            In our periodic review of Altria (MO), the company failed to meet the minimum financial requirements for inclusion in the High Yield Universe.  Accordingly, it is being Removed from that Universe and will be Sold out of the High Yield Portfolio at the Market open.

        Investing for Survival

            Political bias gets in the way of economic analysis (medium):

       Company Highlights
           
Western Gas Ptrs LP acquires, owns and operates midstream energy assets in east and west Texas, the Rocky Mountains and the mid-continent.  It gathers, treats and transports natural gas from its parent, Anadarko Petroleum Corp.  While profits have been somewhat erratic 10% over the last five years, the partnership has grown dividends at a 30%+ rate in the same time period while earning a 6-10% return on equity.  While the rate of increase in dividends will slow in the future, the partnership should continue to grow its payout at a sound rate because:

(1)    a very secure customer base [i.e. its parent],

(2)    acquisitions.

Negatives:

(1)    fluctuations in commodity prices,

(2)    demand is subject to seasonal and weather factors,

(3)    potential impact of new energy regulations.

            WES is rated A by Value Line, has a 45% debt to equity ratio and its stock yields 4.0%.

  Statistical Summary

                  Stock      Dividend        Payout      # Increases  
                  Yield      Growth Rate     Ratio       Since 2008

WES          4.0%            17%             61% *           5
Ind Ave      5.9                4                 68               NA 

                Debt/                        EPS Down       Net        Value Line
                Equity         ROE      Since 2008      Margin       Rating

WES         45%             9%            2                   20%            A
Ind Ave     50               14              NA                11              NA

            *this is a percentage of cash flow

     Chart
           
            Note: WES stock made great progress off its October 2008 low, quickly surpassing the downtrend off its June 2008 high (straight red line) and its November trading high (green line).  It recently broke its long term uptrend (black lines) and is currently in an intermediate term trading range (purple lines).  The wiggly red line is the 100 day moving average.  The High Yield Portfolio owns a full position in WES.  The upper boundary of its Buy Value Range is $54; the lower boundary of its Sell Half Range is $105.   




4/15


    News on Stocks in Our Portfolios
·         Illinois Tool Works (NYSE:ITW): Q1 EPS of $1.21 beats by $0.03.
·         Revenue of $3.34B (-6.4% Y/Y) misses by $130M.
·         Kimberly-Clark (NYSE:KMB): Q1 EPS of $1.42 beats by $0.09.
·         Revenue of $4.69B (-4.1% Y/Y) beats by $80M.
·         United Technologies (NYSE:UTX): Q1 EPS of $1.51 beats by $0.06.
·         Revenue of $14.54B (-1.4% Y/Y) misses by $350M.
·         Canadian National Railway (NYSE:CNI): Q1 EPS of C$0.86 beats by C$0.01.
·         Revenue of C$3.1B (+15.2% Y/Y) beats by C$40M.

Economics

   This Week’s Data

   Other

            LA port traffic up big following end of labor dispute (short):

            Are rising tax receipts a problem? (medium):

Politics

  Domestic

  International

            The latest from Yemen (short):

                        Greek central government confiscates local government reserves (medium):

                        Gazprom CEO now in Athens (medium):








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