Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

EQUITIES

THAT LOUSY TRUMP BULL

In over 40 years in the business, the only technical analysis service I have been willing to pay for is Lowry’s Research for its simple, sensible, down-to-earth, yet smart analysis. During the last year, as valuations got less appealing, Lowry’s analysis remained positive. However, their last piece was surprisingly upbeat (my emphasis):

(…) as of Sept. 22nd, the spread, or distance, between the forces of Demand and Supply was only 10 points, the lowest reading in over a year. This narrowing spread between the Indexes serves as continuing evidence that the primary trend of the market is actually growing increasingly positive. And, based on the long history of the Lowry Analysis, a crossing of the Buying Power and Selling Pressure Indexes, with Buying Power rising to the dominant position, would qualify as a major buy signal in line with the terms of Buying Control No. 2 and would provide important confirmation of a robust bull market that is actually showing signs of strengthening. (…)

At present, though, both the S&P Mid and Small Cap Adv-Dec Lines have reached new bull market highs and are leading gains in their respective price indexes. Historically, new highs across the spectrum of small, mid and large cap Adv-Dec Lines have been a sign of ongoing market strength.

Heck! It’s like we are about to embark on a new, stronger bull market.

I dug into these Buying Power and Selling Pressure Indexes and found these rather interesting factoids presented in chronological order since 2007 to help you appreciate their usefulness:

  • Lowry’s Selling Pressure Index (SPI) was high and well above its Buying Power Index (BPI) through most of 2007. The gap widened in the fall of 2007 and throughout 2008 to reach nearly 800 points in November 2008.
  • The gap began to narrow in mid-2009 as the SPI started to decline against a flattening BPI through January 2010.
  • In December 2010, the BPI crossed over the SPI.
  • They re-crossed in August 2011 as demand waned rapidly until December 2012.
  • In 2013, demand firmed up while the SPI dropped rapidly and crossed below the BPI in May. It remained so until July 2015 when the SPI firmed up while the BPI dropped rapidly and relentlessly until November 8, 2016.
  • During the first 4 weeks following Nov. 8, both selling and buying trend lines converged to narrow the gap from about 175 to 100 points by early December.
  • Since then, that is over the last 10 months, the continued narrowing of the gap to its present 10 points has only been due to a relentless decline in selling pressures while buying power remained unchanged.

What really happened November 8 is a one month burst in the BPI to the 150 level where it has remained ever since. Meanwhile, the Selling Pressure Index, which had hovered around 275 since mid-2015 declined almost continually as 2017 progressed to reach its current 160 level, prompting the above upbeat comments from Lowry’s Research analysts.

The truth is that the last 400 points (12%) rise in the S&P 500 Index were mainly the result of diminishing supply against stable but rather low demand. In other words, equities were too expensive to generate increased demand but investors stopped selling right after the elections.

Why? Because the promised new tax plan, reducing the number of tax brackets from seven to three and repealing the alternative minimum tax, would reduce the capital gains tax by 15-20% by some estimates.

Add these other biz-friendly promises…

  • A $1 trillion infrastructure plan.
  • For every new federal regulation, two existing regulations must be eliminated
  • Cut red tape at the FDA to speed approval of new drugs
  • Lower the business tax rate from 35% to 15%
  • Allow trillions of dollars of American corporate money overseas to be brought back at a 10% tax rate

…to rising corporate profits, an ok economy, slow inflation and a reasonably quiet Fed and you get all the reasons to defer selling and booking your eight-year bull market capital gains, especially since TINA (there is no alternative) remains in everybody’s mind. The closer to the end of the year, the fewer taxable people willing to sell. So Lowry’s could well get its major buy signal for reasons that would have little to do with renewed buying enthusiasm.

In reality, this has been a Trump bull all along. The initial, short-lived buying enthusiasm based on a potential economic revival has been replaced by equity hoarding by self-centered investors, starving the prowling bear but continuously enfeebling the bull. There was no such thing as “buying the dips” rallies”, rather “stop selling the dips” upturns. This is an ailing, lousy, weak bull, so focused on making it to year-end, he is totally oblivious to what’s happening in this crazy political world. He even totally disregards companies reporting better than expected earnings.

As we get into 2018, unless something magically boosts the economy, we know that one of two things will happen:

  1. Nothing significant happens fiscally and investors get disillusioned and/or fed up. The hold outs sell while nothing happens to trigger new marginal buying. 
  2. Trump gets his tax plan approved, effective in 2018. The hold outs sell while nothing happens to trigger new marginal buying.

All along, the bears have been growling about repugnant equities. But there was nobody to feed the poor beasts. The survivors are so weak now, nobody hears their whine. But some will remain and, in a few months, they may get fed again. Strengthening bears against weak bulls. In fact, the bulls are so weak, they could get dizzy and suddenly feed the bears, who knows?

Who wants to wager on that lousy bull?

This is why I don’t buy Lowry’s analysis that

a crossing of the Buying Power and Selling Pressure Indexes, with Buying Power rising to the dominant position, would qualify as a major buy signal (…) and would provide important confirmation of a robust bull market that is actually showing signs of strengthening.

Yes, the crossing of the Buying Power and Selling Pressure Indexes may be happening, but really only because the selling has dried up so much that it is crawling itself under the Buying Power Index. There is no real demand here. We will see in a few months which of the starved bear or that lousy Trump bull can rise to the dominant position.

Meanwhile, this guy has announced his wager:

(…) The founder and chief executive officer of the world’s biggest social media company expects to sell 35 million to 75 million shares, Menlo Park, California-based Facebook said Friday in a regulatory filing. The stock ended the week at $170.54, valuing 75 million shares at $12.8 billion. (…)

Facebook scrapped plans to create a new class of shares that would have allowed Zuckerberg to sell almost all of his stock without losing voting control of the company, a move that aggrieved some shareholders.

As to the rest of Trump’s promises still keeping investors hoping while fearing TINA:

You can’t con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don’t deliver the goods, people will eventually catch on. (D. Trump, “The Art of the Deal”)

And they will eventually cash in.

THE DAILY EDGE (19 January 2017): Inflation Watch

Inflation Gauge Tops 2%, Supporting Fed’s Plan to Raise Rates

The Consumer Price Index during all of 2016 increased 2.1% from December-to-December, the quickest y/y gain since June 2014. The 2.2% advance in prices excluding food & energy compared to a 2.1% rise in 2015. During December alone, the CPI increased 0.3% following a 0.2% November gain. The rise equaled expectations in the Action Economic Forecast Survey. Prices excluding food & energy rose a stable 0.2%, as expected. (…)

Prices for services provided another area of strength with a 3.1% y/y increase, up from 2.6% during all of 2015. The 3.6% y/y rise in shelter prices accelerated, compared to price deflation in 2010. Owners’ equivalent rent of residences rose 3.6% y/y and rents of primary residences advanced 3.6% y/y. Medical care prices inched 0.1% higher last month, but the 3.9% y/y gain accelerated from 2.9% in 2015. Recreation services prices strengthened 2.9% y/y after a 2.5% rise in 2015. Education & communication prices were fairly stable y/y, and public transportation costs fell 2.3% last year following a 1.0% decline in 2014.

Heightened competition kept inflation in the goods-producing sector under wraps last year. Prices for goods excluding food & energy eased 0.6% y/y, and have been falling since 2012. Home furnishing prices declined 2.2% y/y, down nearly 10.0% since 2010. Appliance prices fell 4.4% y/y and have been working lower since 2009. Apparel prices dropped 0.7% last month, about as they did in November. They eased 0.1% y/y for a second yearly decline. Recreation product prices were off 3.5% y/y, continuing the price deflation in place for several years. New vehicle prices remained little changed all year, but medical care goods prices surged 4.7% during the year.

Declining food prices added to last year’s price weakness. They were little changed during the last three months, and slightly lower y/y. Meat prices eased slightly during the last four months and moved 4.2% lower during the year. Egg prices declined by more than one-third versus December 2015; and dairy product prices fell 1.3%, continuing the price deflation of 2015. Fruit & vegetable prices fell 2.4% y/y, and cereal prices eased 0.7% y/y.

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Core CPI is up 2.2% YoY. Its annualized trend was +2.0% in Q4 and +2.4% in the last 2 months of the year.

Philly Fed Soars As Prices Paid Spike To 5 Year Highs

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  • Most firms (61 percent) reported an increase in underlying demand, but 56 percent characterized the increase as moderate. Sixty-three percent of the firms anticipate increasing production in the first quarter, and 25 percent expect to cut production.
  • Both the delivery times and unfilled orders indexes were positive for the third consecutive month, suggesting longer delivery times and an increase in unfilled orders.
  • With respect to prices received for firms’ own manufactured goods, 31 percent of the firms reported higher prices, up from 16 percent in December. The prices received index increased 19 points to its highest reading since July 2008.

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Yesterday’s NY Fed survey showed similar trends:

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Housing Starts Beat On Jump In Rental Units, Single-Family Permits Rise To Highest Since 2007
UNEMPLOYMENT CLAIMS LOWEST SINCE 1973

In the week ending January 14, the advance figure for seasonally adjusted initial claims was 234,000, a decrease of 15,000 from the previous week’s revised level. The previous week’s level was revised up by 2,000 from 247,000 to 249,000. The 4-week moving average was 246,750, a decrease of 10,250 from the previous week’s revised average. This is the lowest level for this average since November 3, 1973 when it was 244,000. (Chart from CalculatedRisk)

There are Purchasing Managers with their surveys. There are also Sales Managers with their own surveys, generally preceding production:

Resurgent US Economic Growth Continues into the New Year

The Headline Sales Managers’ Index (SMI) continues to grow further in January, recording an index level of 52.5. Buoyant levels of business confidence persist on the back of strong holiday sales and rising prices. The Economy as a whole exhibited steady economic growth during the period, improved from the levels reported in Quarter 4. Prices for goods and services continue to increase in the U.S., at around the 2% mark but with little impact on profit margins.

Headline Sales Managers’ Index (USA)

Prices Charged Index 

Punch Not really conditions that require any more stimulus. Hence

Fed officials prepare ground to cut bank’s $4.5tn balance sheet

(…) A series of Fed speakers have sent up trial balloons in recent days talking of the possibility of reducing the size of the central bank’s $4.5tn balance sheet. Patrick Harker, Philadelphia Fed chief, suggested the topic would become central once short-term interest rates hit 1 per cent — something the Fed is on course to achieve this year if its current forecasts are borne out. (…)

In effect, as David Rosenberg illustrates, the Fed is already draining liquidity at the margin:

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Go back to your stock charts to see what happened in late 2014, mid-2015 and early 2016…

ECB Keeps Stimulus on High Even as Economy Picks Up
Commerce Nominee Offers Preview of Trade Policy

(…) “I think tariffs play a role both as a negotiating tool and if necessary to punish offenders who don’t play by the rules,” Mr. Ross said.

The billionaire private-equity investor didn’t threaten the unilateral, pre-emptive tariffs on U.S. imports from China and Mexico that Mr. Trump repeatedly warned of during the election. (…)

Mr. Ross didn’t rule out the use of broad tariffs, but focused his testimony on the rapid processing of cases against foreign companies accused of benefiting from subsidies or dumping products on the U.S. market below their fair value.

The Trump administration would seek to “self-initiate” such cases, Mr. Ross said, which often lead to punitive tariffs on particular companies or industries, when it makes sense, rather than waiting for the affected industries to bring cases against rivals in China or other countries. (…)

To be sure, Mr. Ross is only one of Mr. Trump’s key trade advisers. His picks for U.S. trade representative—trade lawyer Robert Lighthizer—and the head of a new White House council on trade—economist Peter Navarro—have expressed more hawkish views on breaking with global trade rules to confront Beijing. (…)

The FT has a hawkish view:

EUROPE VS U.S. EQUITIES, YET AGAIN!

This potentially enticing chart from Top Down Charts via ValueWalk:

High five Relative valuation measures are meaningless without relative growth and profitability measures. From The Economist:

What went wrong? Slow growth in Europe has not helped, and a strong dollar has made American firms’ domestic operations more valuable. But four other factors also explain the slide. First, Europe picked the wrong businesses. It focused on old industries such as commodities and steel, and on banking, where new rules have caused a depression in cross-border lending. Europe has gone backwards in technology—it hasn’t created any firms of the scale of Facebook or Google. From the early 2000s its tech-and-telecoms incumbents proved to be poor at reinventing themselves, even as American contemporaries, including Cisco and Microsoft, learned how to evolve.

The second explanation is that Europe focused on the wrong parts of the world. The continent’s firms are skewed towards emerging markets, which generate 31% of their revenues, according to Morgan Stanley, a bank. For American firms the figure is 17%. As the developing world has slowed, it has hit corporate Europe disproportionately hard, from banks to cognac distillers and makers of luxury handbags.

Third, Europe stopped doing deals even as the rest of the world continued to consolidate. The share of global deals by European acquirers fell from a third before the financial crisis to a fifth after it. Meanwhile, American firms have continued to bulk up at home, seeking to dominate their huge domestic market.

Last, European managers’ less aggressive attitude towards shareholder value may account for the difference in market values between Europe and America. European firms generate a lower return on equity and return less cash to shareholders through dividends and buy-backs. That may explain why for every dollar of expected profits and of capital invested, European firms are awarded a lower valuation. (…)

Yet corporate Europe’s waning scale is still a concern. Investment in research and development (R&D) tends to be disproportionately done by multinational firms. Of the world’s top 50 R&D spenders only 13 are European (down from 19 in 2006) while 26 are American. (…)

An obvious response is a renewed push for consolidation within Europe. But such deals are often a nightmare because nationalist emotions boil over. The attempted takeover of BAE Systems, a British defence firm, by Airbus in 2012 collapsed after political arguments; the proposed takeover of the London Stock Exchange by Deutsche Börse could be cancelled after the Brexit vote. The union last year of Lafarge and Holcim, a French cement firm and a Swiss rival, has been mired in rows.

The difficulty of pushing through recent transactions echoes the past. Many careers have been wrecked by pan-European deals. Of the 50 biggest such transactions attempted in the past 20 years, about a third have failed to materialise. The rest have often been bruising to implement. (…)

But if it wants to create giants, Europe may have to restrain more than its nationalist instincts—it may have to temper its tougher approach to antitrust, too. The secret of some big American firms is that they have created oligopolies at home. For example, America has allowed broadband provision to be dominated by a few firms, and profits are high. Europe has scores of operators and its regulators have pushed prices and margins lower. (…)

Contact: edgeandodds [at] gmail.com