Tuesday, May 5, 2015

The Morning Call--Is the long Treasury trying to tell us something?

The Morning Call

5/5/15

The Market
           
    Technical

The indices (DJIA 18070, S&P 2114) rallied yesterday.  The S&P remained above its 100 day moving average and rose above its prior high---this is the second attempt to break this trend.  A close above it today will negate it---though remember last time, it negated the trend, then reversed sharply the following day.  The Dow closed above its 100 day moving average (it bounced off this support level on Friday) and below its prior high.  So the Averages may once again be out of sync with respect to their recent trend of lower highs.

Longer term, the indices remained well within their uptrends across all timeframes: short term (17091-19888, 2003-2984), intermediate term (17213-22339, 1807-2580 and long term (5369-18873, 797-2129).  

Volume fell sharply (UK and Japanese markets were closed); breadth was mixed.  The VIX rose slightly, finishing below its 100 day moving average and within short and intermediate term trading ranges.  Its pin action remains supportive of rising stock prices.

Seasonal MACD sell signal (short):

The long Treasury was seriously pounded again, ending below its 100 day moving average and the lower boundaries of its short term trading range and intermediate term uptrend.  If TLT remains below these boundaries, the short term trading range will be negated today and the intermediate uptrend tomorrow.

As I noted last week, a break of the intermediate trend would raise questions about our underlying fundamental assumptions, i.e. a weak economy/potential deflation.  What could account for rising rates?: (1) an anticipated burst of inflation, though GLD performance belies that, (2) an improving US economy of which there is little evidence, (3) investors are sick and tired of getting paid little to nothing and are fearful that others may feel the same; then what about stocks?  (4) an improving EU economy prompting a shift by investors from dollar assets to EU assets.  This is a possibility.  It is supported by [a] a weakening dollar [b] a stronger bund and [c] better numbers from Europe of late; though I think it way too early to soon to make the call of a recovery, especially with the Greek bailout talks unresolved.  Nevertheless, it seems that TLT is potentially signaling that changes are afoot.  I am not convinced of any scenario yet; but if our muni bond holdings in the ETF Portfolio break a major trend, I will lighten up.

GLD was up but closed below its 100 day moving average and continued to build a head and shoulders formation.

Bottom line: the S&P is back challenging the recent trend of lower highs.  If it is successful and the Dow can confirm the break, I remain doubtful that the Averages can break above the upper boundaries of their long term uptrends in any meaningful way.

The long Treasury seems to be alerting us that times, they are a’changin’.   To that I would add that historically, the bonds guys have been smarter than stock guys in anticipating an alteration in trend.  May not happen this time; indeed, nothing may be happening.  But the warning light is flashing and I am watchful

    Fundamental
   
       Headlines

            We got one US economic indicator yesterday: March factory orders which were up and in line.  Positive news is always welcome.

            Overseas, the April Chinese and EU PMI’s were below expectations (more of the same); and according to Greek officials, progress is being made in that country’s bail out negotiations with the Troika.

            Although the IMF apparently didn’t get the memo (medium):

            ***overnight, Australia’s central bank lowered its key interest rate; and the EU raised in 2015 economic growth forecast (see above).

Bottom line:  nothing in yesterday’s news suggests any improvement in the global economy or in any particular country.  Nor were there any changes in monetary/fiscal/regulatory policies to offer hope of some subsequent advance.  What did occur was that stocks got more expensive while a key component of the discount factor (interest rates) used for their valuation rose.  And there is a whiff in the air that a key element (inflation) of that component may also be moving higher.  To be clear, I am not making an inflation call; I am saying that there is evidence that it may be about to rise and we need to pay attention. 

 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.

            The latest from Bill Gross (medium and a must read):

            How does a bursting bubble sound? (medium):

            Stephen Roach on central bankers’ delusions (medium and today’s must read):
            http://www.zerohedge.com/news/2015-05-04/stephen-roach-derides-central-bankers-mass-delusion

            Update on valuation:

Of the S&P 500 members that have already released results this season, 73 percent beat profit projections and 49 percent topped sales estimates. Analysts have tempered their predictions for a corporate profit slump, now projecting a first-quarter drop of 0.4 percent, compared with April 17 calls for a 4.3 percent decline.

On the other hand, estimates continue to drop (short):

       Company Highlight

The Bank of Nova Scotia (Scotiabank) is Canada’s third largest bank with operations in Canada, the US and 50 foreign countries. BNS has earned a 14-20% return on equity over the last ten years and has grown profits and dividends at a 9-11% pace. While the 2008-2009 financial credit crisis impacted BNS, it weathered the storm much better than most large US banks and should continue to grow earnings and dividends as a result of:

(1) an improving Canadian economy,

(2) a very strict cost control program,

Negatives:

(1) a slowdown in the Canadian mortgage market,

(2) increased losses in the Caribbean and Puerto Rico,

(3) margin pressures.

BNS is rated A by Value Line, carries a 15% debt to equity ratio and its stock yields 4.3%

    Statistical Summary

                   Stock      Dividend         Payout      # Increases  
                   Yield      Growth Rate     Ratio       Since 2005

BNS            4.3%           9%             48%               9
Ind Ave       2.6              11               35                NA 

                 Debt/                         EPS Down       Net        Value Line
                 Equity        ROE       Since 2005      Margin       Rating

BNS          15%           14%            2                 NA*            A
Ind Ave     28              10              NA               NA*           NA

*banks’ income statements don’t provide a Net Margin number

Chart

            Note: BNS stock made good progress off its March 2009 low, surpassing the downtrend off its October 2007 high (straight red line) and its November 2008 trading high (green line).  Long term, it is in an uptrend (blue lines),   Intermediate term, it is in a trading range (purple lines).  The wiggly red line is the 100 day moving average.   The High Yield Portfolio owns an 85% position in BNS.  The upper boundary of its Buy Value Range is $33; the lower boundary of its Sell Half Range is $84. 
   
   

5/15

      Investing for Survival

            12 things I have learned from Morgan Housel: Part 2

2. “There are no points awarded for difficulty.”
The best investors make frequent use of a “too hard” pile when it comes to investing.  One of the many things that investors like Morgan Housel have learned from great investors like Charlie Munger is how much investing performance can be improved by just avoiding some of the boneheaded mistakes made by other investors. For example, there is no shame in admitting that a given business can’t be valued. There are plenty of other businesses that are understandable which present investment decisions that are not very difficult.  Most of the time what an investor should do is nothing. And there is no better time to do nothing than when something is difficult.
On this point Warren Buffett likes to say “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” These 1-foot bar jumping opportunities with big financial payoffs don’t appear very often, but when they do, it is wise to bet big.
  
      News on Stocks in Our Portfolios

o    Emerson Electric (NYSE:EMR): FQ2 EPS of $0.65 misses by $0.11.
o    Revenue of $5.4B (-7.1% Y/Y) misses by $20M.
·         AmeriGas Partners (NYSE:APU): FQ2 EPS of $2.17 misses by $0.34.
·         Revenue of $1.1B (-26.2% Y/Y) misses by $60M.
·         EOG Resources (NYSE:EOG): Q1 EPS of $0.03 beats by $0.03.
·         Revenue of $2.32B (-43.1% Y/Y) misses by $390M.

Economics

   This Week’s Data

            March factory orders came in at +2.1%, in line.

            The April US trade deficit was $51.4 billion versus expectations of $42.0 billion.

   Other

            The liquidity paradox (medium):

            David Einhorn on the price of oil and oil company balance sheets (medium):

            Is the ECB running out of bonds to buy? (medium):

Politics

  Domestic

  International War Against Radical Islam








No comments:

Post a Comment