The Morning Call
6/2/16
The
Market
Technical
The indices
(DJIA 17789, S&P 2099) repeated Tuesday’s pin action, selling off early in
the day, then recovering later.
Yesterday, they rebounded sufficiently to close up on the day. Volume fell while breadth continued weak. The
VIX was up fractionally, finishing between the lower boundary of its short term
trading range and the 100 day moving average.
The Dow closed
[a] above its 100 day moving average, now support, [b] above its 200 day moving
average, now support, [c] within a short term trading range {17498-18736}, [c]
in an intermediate term trading range {15842-18295} and [d] in a long term
uptrend {5541-19413}.
The S&P
finished [a] above its 100 day moving average, now support, [b] above its 200
day moving average, now support, [c] in a short term trading range {2039-2110},
[d] in an intermediate term trading range {1867-2134} and [e] in a long term
uptrend {830-2218}.
The long
Treasury was up again, challenging but failing to penetrate the upper boundary of
a very short term downtrend. However, it
ended above its 100 day moving average and a key Fibonacci level. It is encouraging that TLT seems little
impacted by the threat of a coming Fed rate hike. However, it still has much work to do on the upside
in order to break out of the current trading range.
GLD fell
slightly, dropping back below the level of its 100 day moving average. But it
remained above the lower boundary of its short term trading range. It remains on the edge of a significant breakdown.
Bottom line: the
Averages appear to be digesting recent gains.
Both Tuesday’s and Wednesday’s intraday recoveries are positive signals that
there could be a further move higher. At
this point, my assumption is that the indices will at least challenge the upper
boundaries of their short term trading ranges.
A break in GLD
below its 100 day moving average and the lower boundary of its short term
trading range will likely lead to a paring of the Aggressive Growth Portfolio’s position in GDX.
For
the bulls (short):
For
the bears (short):
Update
on NYSE margin debt (medium):
Fundamental
Headlines
Yesterday’s
US economic news was more upbeat than Tuesday’s: weekly mortgage and purchase applications
were down, the March/April construction spending combo was flat and May light
vehicle sales were in line (though down year over year) but month to date
retail chain store sales, the May Markit PMI and the May ISM manufacturing
index were better than anticipated. In
addition, the latest Fed Beige Book was released and it reflected modest
economic growth since its last report (medium):
Overseas, the numbers
were a bit more dicey: May Japanese manufacturing PMI declined; May Chinese manufacturing
PMI was unchanged while the services PMI slowed in growth and the Caixin
manufacturing PMI fell for the 15th consecutive month; the EU
manufacturing PMI was flat; and the Swiss first quarter GDP was below expectations.
Also, Abe made
it official---no sales tax hike till mid-2019.
Not exactly a resounding endorsement of the Japanese economy. Adding insult to injury, an official of the
Bank of Japan predicted that the Japanese economy will not achieve the government’s
growth objective.
And
in yet another vote of confidence for an improving global economy, the ECB left
rates unchanged and said that it will begin additional bond purchases on June
8.
In
sum, a mixed performance and nothing to warrant the everything-is-awesome story
line now being peddled by the Fed. That
is not say that the Fed won’t raise rates anyway; although I believe the odds
are less than consensus opinion. June
seems completely out because it is right in front of the Brexit vote---which if
negative, could result in economic turmoil that would make a rate hike seem ill
conceived. July could be on the table;
but that is a long time in Market action terms (the only piece of data on which
the Fed is dependent).
Bottom line: the
economy continues to stumble along.
Whether it is stumbling on an upward or downward path may become an
issue if there is more improvement in the data.
Whatever occurs, it will still be stuck in a stagnant growth
environment. In other words, nothing
that would warrant optimism regarding corporate profitability. Meanwhile the Fed is threatening higher
rates---which the last time I checked usually results in a higher discount
factor (lower P/E). That is not a
winning formula for higher stock prices. And it totally ignores the ultimate
unwinding of asset mispricing and misallocation.
I
continue to believe that every portfolio should own more than a token cash
position.
The
latest from John Hussman (medium):
The
same return for three times the risk (short):
My thought for the day: many may
view my current focus on equity overvaluation as making me some sort of
doomsayer. But that is not
accurate. I simply want to buy stocks
that offer attractive returns given the current risk/reward equation defined by
the underlying company’s fundamentals in the economic/political environment. Advocating a large cash position in the current
environment is ultimately a matter of value, that is, what is received in
return for capital invested. In that
context, downward price volatility is not something to be avoided. In fact, it brings prices to attractive buying
levels. But does it an investor no good
if he/she doesn’t have the financial resources to buy equities when that occurs.
This is why our Price
Disciplines are so important because they instill patience and focus as invaluable
assets to an investor. In
addition, they keep to a minimum the risk associated with paying too much for
an investment. Adverse markets come and
go, as do market liquidity and confidence, but it is a universal truth that
long-term investments are better made in adverse markets than in euphoric
markets because good values are more pervasive.
In the end, what makes a good
investment is its price. Price is everything. You need to receive value (i.e.
the cash return delivered to you in the future) in excess of the price paid. But since value is an imprecise measurement,
the best one can do is to build in a margin of safety by buying investments
that are at deep discounts to a reasonable estimated value.
Investing for Survival
Animal
spirits in the real estate market.
News on Stocks in Our Portfolios
Revenue of $571.3M
(-0.7% Y/Y) beats by $20.51M
Economics
This Week’s Data
The
May Markit PMI came in at 50.7 versus expectations of 50.5.
The
May ISM manufacturing index was reported at 51.3 versus estimates of 50.6.
April
construction spending fell 1.8% versus forecasts of +0.6%; however, the March
reading was revised upwards significantly.
Net, net, spending was flat for those two months.
May
light vehicle sales were in line with forecasts, though down on a year over
year basis.
The
May ADP private payroll report showed job gains of 173,000 versus consensus of
175,000.
Weekly
jobless claims fell 1,000, in line.
Other
How
companies are planning on spending their money this year (short):
http://thereformedbroker.com/2016/06/01/chart-o-the-day-how-companies-plan-to-spend-money-this-year/
The
death of the virtuous cycle (medium):
Politics
Domestic
International War Against Radical
Islam
US
strategy in the Middle East---there is none (medium):
Visit Investing
for Survival’s website (http://investingforsurvival.com/home)
to learn more about our Investment Strategy, Prices Disciplines and Subscriber
Service.
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