Inflation Up, Bond Yields Down?

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

The monthly Long Term update was posted on Wed. and follows immediately below this post.

Economy:

Initial jobless claims for the prior week were 376K, a new pandemic low.  The CPI for May was +.6%, while the increase over the past year was 4.2%. 

The big news for the week was the hot CPI numbers, yet the bond market didn’t budge.  The yield on the 10 year Treasury bond was under 1.5%, down from 1.75% a couple of months ago.  It does not appear that the reaction of the bond market is rational, unless they BELIEVE the Fed that the inflation pressure we see today is transient.  They may change their mind in three or six months, but for now they believe the Fed.  And in the short run, that is good for stocks because it means the Fed will not be prompted to raise rates sooner than anticipated.  The Fed meets next week and will have a press conference on Wed., so stay tuned.

Geo-Political:

The G7 is meeting in England.  One topic is a floor of 15% for corporate taxes, to prevent countries from trying to attract companies with lower tax rates, setting up a “race to the bottom”.  China is not in the G7, and how to deal with China here in the west is under discussion.

Why might the bond market believe the Fed that inflation pressures are transient?  Let’s look at a few charts.

The first is oil.  There is NO inflation in oil.  The price went way down when the pandemic hit and the economy was shut down, and since then it has recovered.  Oil is always subject to six month variations because that is how long it takes for drilling to bring new supplies online for the shale producers in N. Dakota.

Oil Price

Next let’s look at lumber. 

Lumber Price

Lumber peeked in early May and has been in a sharp decline since then.  Builders may be refusing to pay the price, and that would force producers to eventually drop the price.  This is not definitive, but it at least gives the Fed some credibility to say the inflation pressure in temporary.

Technical Analysis:

For the week the S&P 500 was up half of a percent and set a new record high close in the process.  It is notable that the price action is taking place in a very tight range and the new record is only marginally higher.

Technically (see chart below) the market looks positive, but tired and just creeping ahead.  RSI at the top of the chart is neutral at 62, but its climbing.  Momentum shown by MACD at the bottom of the chart is positive and climbing slowly.  The price action is positive and climbing slowly.  The price remains in the rising wedge formation, and as the wedge narrows down, the price action compresses.  The rising wedge is generally considered a negative form in technical analysis, but on any given day, the market can do anything.  Given that, I remain somewhat cautious.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I bought a few ETFs like XLK, XLV, and OIH, and placed trailing stop loss percent orders under them (because as I said above, I’m somewhat cautious because of the rising wedge).  I bought a little AMZN.  I had some BIIB stock, so when the FDA approved its drug to treat Alzheimers, I did well.  Those shares were backing a covered call I sold, so my profit was capped at the call’s strike price, but I had collected a fat premium and if the drug had not been approved and gone down, I would not have lost money on the deal.  That is a nice trade, either break even, or win.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Long Term – June 2021

Once a month, on the second Wednesday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP (This section was not changed from May) GDP increased at an annual rate of 6.4% in the first quarter of 2021 . 

The virus surged in February, but the vaccine rollout was very good and the nation looks much better regarding Covid19.  That is helping the economy.

Congress passed the $1.9 trillion Covid relief bill in December, with extended unemployment benefits, rent assistance, plus cash payments; it will help carry the economy into summer.  Now Congress goes to haggling (oh, I mean “governing”) over a proposed $2 trillion infrastructure bill and how to pay for it.  Materials and construction stocks have moved up.

This is bullish for the stock market. 

YearQuarterGDP %
2021Q16.4%
2020Year0.1
2020Q44.0
2020Q333.4
2020Q2-32
2020Q1-5.0
2019Year2.3
2018Year2.9
2017Year2.6
2016Year2.0

Fed interest rates –  The Fed has held the Fed Funds rate near zero since March 2020, and Jerome Powell said in the winter that he did not see the Fed raising interest rates this year (2021).  They continue to buy bonds and are very accommodative.

The Fed announced in June that it will sell the corporate bonds in bought last year.  They are still buying $80 billion per month of Treasury bonds, and $40 billion per month of mortgage backed securities.  The Fed meets June 15-16 and is expected to say something about their plan to taper their asset purchase program sometime in the future.

There are also signs that inflation is picking up, which is not unusual as we come out of last year’s recession.  The Fed has said it is willing to let inflation run a bit above the long term target of 2% annually.  If it rises too fast, inflation could force the Fed to act sooner than they currently plan.  Higher rates could put a drag on the economy.

Fed policy is strongly accommodative and hence it is bullish. 

DateFed Funds Rate5 Year Treasury10 Year Treasury30 Year Treasury
Jun 20210.2.81.52.2
May 20210.2.81.62.4
Apr 20210.2.81.62.3
Mar 20210.2.81.52.3
Feb 20210.2.51.21.9
Jan 20210.2.51.11.9
2020 Q40.20.40.91.6
2020 Q30.20.30.71.4
2020 Q20.20.30.71.4
2020 Q11.21.31.42.0
     
2019 Year Avg2.21.92.22.6
2018 Year Avg1.82.82.93.1
2017 Year Avg1.01.92.32.9

Valuation:

S&P earnings – The Factset forecast for Q2 earnings for the S&P 500 is 61% above Q2 2020.  Of course, Q2 2020 was when the economy was shut down for Covid19.  The Factset forward PE on the S&P is 21.1, compared to their ten year average of 16, so things are richly valued.

The outlook for earnings is bullish.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 33:1, up slightly from 32 last month.  I used 4 quarters of earnings with the most recent being Q1 2021. 

This metric is dangerously overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be substantially overvalued.  Above 30 would be dangerously overvalued.

This indicator is bearish.

Age of primary move, bull or bear market – The bull market is 12.2 years old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind.

Geo-Political:

COVID-19:  This is looking better in the US and selected countries like the UK, where the vaccine has been rolling out.  The new more transmissible variants are taking a heavy toll in countries without the means to roll the vaccine out.  It will be better if everyone can beat this virus.

Liquidity:  Congress had made money available to businesses and individuals to help through the Covid pandemic.  The national savings rate is very high for 2020 since people did not drive to work, they did not eat out, bypassed vacations, did not shop at malls, etc.  That money earns nothing in money market accounts per Fed policy so it is making its way into the stock market.  The risk is that we blow up a bubble in the stock market.

All over the world, banks are reducing interest rates and providing liquidity including bond purchases, helping to hold stock markets up.  How long can that continue, and what will be the after effects of such high levels of central bank money printing?

Oil:  The price of oil has doubled since the pandemic low last summer.  Many people had stopped driving, demand fell and drove the price down.  Smaller producers around the world went bankrupt so a lot of production went offline.  Saudi cut their production and with some economic recovery, oil prices have climbed back to pre-pandemic levels.

Global geo-politics forces have moderated since last month, due to improvement in Covid infection rates in the US and western Europe.  Banks continue to provide liquidity.  Inflation is peaking out, but maybe its temporary.  Covid is ravaging India and Brazil, and as long as there are hot spots in the world, we don’t have this under control.  Geo-politics is currently neutral.

Technical:

Technically the chart is positive.

RSI at the top of the chart remains overbought at 72.  MACD at the bottom is positive and moving up, but perhaps too quickly.  The price action is clearly positive.  The price action is moving well above the top of the range and that is a bit of a concern so it bears watching.  When you look at the black vertical line I added in the price action on the right side of the chart, I am pointing out how extended to the upside the market has become, relative to the 50 month moving average.  Sooner or later we will need to get some “reversion to the mean”, in other words, a correction.

The rally really took off in January after the FDA approved the Covid vaccines.  People believed that economic activity would pick up to normal levels, but that means a rapid growth rate from the pandemic depressed level.  We are seeing rapid above trend recovery growth.

Ten Year Chart of the S&P 500

Click on this LINK to open the chart in a larger separate window.

This is bullish for stocks in the long run, but cautionary for a correction in the intermediate term. 

Conclusion:

GDP returned to growth for three quarters, so that is bullish.  The Fed has short term rates near zero and plans to hold them there through this year, plus they are buying bonds to keep longer term rates low, and that is bullish (old saying, “don’t fight the Fed”).  S&P earnings for Q2 are projected to be 61% above Q2 2020 (which was the “shut down” quarter), with S&P projecting further improvement in 2021, keeping this factor bullish.   The PE valuation of the S&P based on the 12 month trailing GAAP number is 33, which is overvalued and bearish.   The geo-political factors are upgraded to neutral.   Technically the chart looks bullish.

By that way of looking at it, the market is bullish, with four factors bullish, one neutral and one bearish.  A successful vaccine rollout brightens the outlook for 2021. 

My conclusion is that I am constructive on the market, but with the valuation stretched there is always the risk of a short term correction. 

2020 saw the S&P rise to new highs while earnings fell, fueled by low interest rates from the Fed and cash infusion from Congress and the Fed.  2021 will probably see earnings improve back to 2019 levels, but the stock market may not rise as much in 2021, since it has already priced in some of the recovery.

Long Term Issues to Keep in Mind:

Federal Deficit:  (Updated March 2020) – Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $26 Trillion (late 2020), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

Waiting for the Fed

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

The monthly Long Term update will be posted Wed. the 9th.

Economy:

The ISM manufacturing index rose to 61.2% in May from 60.7% in April (anything over 50 indicates growth).  The ISM services index rose to 64.0 for May, a strong number.  Motor vehicle sales for May dropped to 17 million annualized from 18.5 million in April, slowed by the chip shortage.  Initial jobless claims for the prior week were 385K, a new pandemic low.  Non-farm payrolls increased by 559K, a big jump and almost twice Aprils disappointing level.  The unemployment rate fell to 5.8%.

The US auto industry needs to learn a lesson about inventory of supplies and parts.  For a few decades industry has optimized the cost side of the business by use of “just in time” manufacturing.  In an optimized supply chain, they kept minimal inventory on hand and depended on their suppliers to deliver exactly when they needed the item.  Now there are computer chips controlling several systems in cars, so the chips are essential.  But, chip manufacturing is a lot harder than making an alternator or a battery.  When auto sales fell a year ago, car manufacturers cancelled orders for chips, and the chip manufacturers allocated those uses of the line to other companies.  Now the car companies want the chips, but they have no orders in the queue.  So otherwise completed cars sit in lots waiting on the chips to make them fully operational.  Implementing too much efficiency in the supply chain can be a problem once in a while when it gets disrupted.  The car companies need to realize the new dynamic in their business and adjust to it.

Geo-Political:

Understanding Oil

I’m tired of Washington, and China, and the Middle East and Russia.  Let’s do something different this week. 

Oil is key to operation of the world.  We depend on it for transportation, lubrication, and in making consumer products like plastics.  Transportation consumes about 60% of oil production.

Who has the oil:

If we look at proven reserves, Venezuela is first with 300 billion barrels, followed by Saudi Arabia with 250 billion.  Iraq, Iran Russia and Libya are major holders along with Brazil.  The US ranks #9 in the world with 50 billion barrels, one sixth of Venezuela and one fifth of Saudi Arabia. 

If we look at proven reserves plus “estimated and undiscovered” oil, the US ranks #1 in the world.

https://www.aogr.com/web-exclusives/exclusive-story/u.s.-holds-most-recoverable-oil-reserves

Where would the US “undiscovered” oil be?  Primarily offshore on the Atlantic coast and the Pacific coast, where the states have refused to allow drilling for fear of accidents spoiling their beaches and tourism which are huge revenue sources.  The other source is probably the Alaskan National Wildlife Refuge (ANWR) as well as the seas around Alaska where production is difficult.

Production Methods:

The traditional way of producing oil has been to look for domes of rock or salt that the oil underground cannot seep out of, and drill into those domes to let the oil flow to the surface.  Some of the domes are not productive, making this a risky operation and time consuming as well.  The payoff is that these dome structures can flow oil up for decades.

The US has large stores of oil in porous rock called shale and until the last 20 years we were not good at getting the oil out of the shale.  Techniques have improved rapidly.  The shale is fractured by water, sand and chemicals under pressure, releasing the oil from the pores or openings in the shale.  These wells are much faster to get in operation than drilling into domes, but unfortunately they only produce oil for about 18 months.  Enhanced recovery techniques are extending that to as much as 36 months.

A third major store of oil is the Canadian tar sands in western Canada.  Recovery of the oil is messy and expensive.  Earth movers load the tar sand onto huge trucks.  It is moved to a water pit, heated to separate the oil from the sand, and the oil is skimmed.  It is a thicker type of oil than oil that you drill for, and requires a special refinery to process the oil.

Traditional sources yield oil at lower cost, fracking requires about $40 a barrel to be profitable, and the tar sands require $50 per barrel to be profitable.  So, at different price points in the marketplace, certain sources may become unprofitable and be shut in until prices rise to make production profitable again.

Dynamics of the Market:

This is a complex market.  The Saudis and OPEC have long tried to control production and pricing by agreeing to production quotas per country that allowed them to meet their needs, and keep the price of oil stable and relatively higher than if they all produced to capacity and flooded the world with oil supply.  OPEC had the price of crude in the $70 – 90 range around 2010 and they liked it.  The US frackers got very good at producing oil at the $40 per barrel price point operating in Williston ND, and the price of crude began to fall.  The Williston frackers included many small independent operators, totally uncontrolled by OPEC.  Around 2015, Saudi began to pump more and more crude, finally creating a massive over-supply, and driving the price down to $30 a barrel for a while.  This bankrupted the independent frackers who had borrowed to buy equipment and could no longer make a profit to pay back their loans.  Williston ND is now a bust town, and OPEC has taken control of the oil market back.  

https://www.reuters.com/article/us-usa-energy-bankruptcies/u-s-energy-bankruptcy-wave-surges-despite-recovering-oil-prices-idUSKCN0Y42BK

But, OPEC has to realize that they don’t have total control of the market the way they did in the 70’s and 80’s.  The US can ramp production in the shale fields back up in six to nine months if the oil price gets too high, like over $100 a barrel.  Up to that point, it is advantageous to the traditional US producers to let oil prices remain relatively high at levels ostensibly set by OPEC, because it is good for their profit margins also.  The independent frackers in Williston sold out to the major US oil companies, and we see that production largely offline so we won’t see an oversupply and low oil prices.  Thanks to the US OPEC silent partners!  (If the blog goes dark, you’ll know what happened to me!)

In the chart below of oil prices, you can see the formation of OPEC in the early 1970’s.

The US could meet its own oil needs with shale oil for a decade or two if needed, but beyond that we would have to explore off the Atlantic and Pacific coasts, or get off of oil as the energy source for transportation.  Given the harmful effect of greenhouse gases from burning gasoline in cars, it appears the US is choosing to move to electric vehicles rather than drill in the Atlantic, Pacific and ANWR.  The rest of the world is moving to electric vehicles also, especially China which must import most of its oil.  Europe is moving to EV’s also.

I have a couple of readers who spent 30 – 40 years working for major oil companies, and I am sure they want to chime in with an insider view.  That is probably more than a “comment”, so if anyone wants to respond in more depth, send me an email and I’ll post it in the geo-politics section next week.

Wow, this was a tough couple of hours of work.  How do you organize the information?  What are the facts?  Go look up articles.  Simplify and present a concise statement of reason based on facts, with enough information to be creditable, and brief enough so your readers don’t go to sleep or tune out before the end.  That’s all !!!  It was quite a challenge.

Technical Analysis:

For the week the S&P 500 was up .7% and back near the all-time high.

Technically (see chart below) the market looks flat, having barely made any progress in two months.  RSI at the top of the chart is neutral at 60.  Momentum shown by MACD at the bottom of the chart is neutral and just moving sideways.  The price action is neutral and moving sideways.

The outlook is the same as last week.  The market won’t go sideways forever, eventually it will break out to the upside or correct to the downside.  It’s still a bull market, from the monthly Long Term update.  Inflation is still a concern.  Technically we are still in a rising wedge and it is getting smaller each week.

The Fed meets on 6/15 – 16.  Anything about thinking about tapering asset purchases could produce a little correction.  Any “bad news pre-announcements” would come in late June, but the economy looks vibrant in recovery so I don’t expect anything, except maybe from an auto company that can’t get chips and can’t sell new cars.  Then earnings season begins around July 10 and good earnings should hold the market up or propel it higher.  So, there is some risk from 6/15 – 7/7.  If we get a little correction I would look for buying opportunities.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I had bought some IVV a few weeks ago and I had a small profit so I cashed it in.  I had a better profit in MRNA which was going parabolic, so I cashed it in when it got overbought.  I sold a put option on MSFT at a 230 strike price, in case a correction takes it down.  I bought some MSFT back at a lower price than the 250 price where I had it called away in May and that feels good because I did not leave any money on the table.  I added some CLF and PYPL recently.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate windowIf you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

It’s Quiet Out There

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

Today I am introducing you to a new page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  Clink on it and you will see my first classic on the nature of bull and bear markets.  It has bothered me over time that I have written some pieces that I consider important to investors at any time, and yet they lie buried somewhere in the blog, never to be seen again.  So, I am going to try to fix it.  I know some of the items I want to go find, but if there was one you thought should be in the classics, send me an email (the address is at the top of the About page), and describe it as best you can.  I will try to find it and add it to the classics.  One that I want to add is on the value of the dollar.  I hope this is a valuable addition to the blog, especially for new readers who missed the classic the first time around.

Economy:

New home sales occurred at a seasonally-adjusted annual rate of 863,000 in April, down a bit from March, but much better than a year ago when the govt. had locked down the economy.  Initial jobless claims for the prior week were 406K, another new pandemic low.  Durable goods orders dropped unexpectedly by 1.3% in April for the first time in 11 months as a shortage of computer chips disrupted auto production.  Consumer sentiment edged up slightly to 82.9 in May, as consumers are not comfortable with the inflation rate they see.

New home sales are down because builders are not building homes in light of the high cost of lumber.  They will not sign a contract to build a home because they cannot commit to a price, since lumber is rising so fast.

Geo-Political:

Covid infection rates are low in the US, and it is apparent that the vaccine is working as intended.  People are out doing activities they did not do for a year, especially eating in restaurants.  This shows up in the GDP numbers as above trend growth in the economy.

At the next Fed meeting, they will probably mention something about tapering their asset purchase program in the future.  That will probably cause some market indigestion, a correction, but it will not kill the bull market.

Technical Analysis:

For the week the S&P 500 was up about 1.2%.  It was a quiet week with no large daily moves.

Technically (see chart below) the market looks neutral and uninspired.  RSI at the top of the chart is neutral at 58.  Momentum shown by MACD at the bottom of the chart is neutral and moving sideways.  The price action is neutral.

So, where do we go next?  In Q1 we had a terrific pop in earnings, twice as good as predicted, yet stock prices did not go up nearly as much as they could have.  One of the ways valuations can normalize is “over time”, where earnings improve but stock prices don’t rise much.  Or the market could take a hit and go down.  I don’t know what will happen, but I think the market is richly valued on a P/E basis that presents a risk.  So I remain generally cautious, while trying to participate in areas that are not greatly overvalued.

Inflation is still out there as a risk and is seen in every inflation related statistic that gets reported.  The Fed maintains that it is “transitory” and they may be right, or not.  Oil prices have gone up a lot since last summer, but they are right back where there were in 2019.  That is NOT inflation, that is normalization after the govt. shutdown killed the oil price.  I don’t believe we will see it come back down, nor will we see it spike up for more than six months, which is the time it takes to restart fracking operations in the shale regions.  On other goods, like food and lumber, it remains to be seen if those prices come back down to pre-pandemic levels.

The rising wedge formation still contains the stock price of the S&P, and that is a technical negative.  As the wedge narrows, it is harder for the price of the S&P to remain in the wedge.  Usually it will break down and that would probably usher in a correction.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I am cautious.  I have placed some lowball buy orders but they have not been filled.  An example is FB, I have an order to buy some at 290, far below where it is today.  I am also trying to buy UL, XLF, and XLV.  I still have some IVV (S&P 500 index fund) with a 3% trailing stop loss under it.  I spend a lot of time WAITING.  When I get tired of waiting, I will buy small pieces, about 10% of what I would like to own, to start a position in a stock or ETF.  Then I will add on dips.  Then I use trailing stop loss orders as downside protection.    

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year. 

Rich Comeau, Rich Investing

Fed Thinks About Thinking About Tapering

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Today I am introducing you to a new page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  Clink on it and you will see my first classic on the nature of bull and bear markets.  It has bothered me over time that I have written some pieces that I consider important to investors at any time, and yet they lie buried somewhere in the blog, never to be seen again.  So, I am going to try to fix it.  I know some of the items I want to go find, but if there was one you thought should be in the classics, send me an email (the address is at the top of the About page), and describe it as best you can.  I will try to find it and add it to the classics.  One that I want to add is on the value of the dollar.  I hope this is a valuable addition to the blog, especially for new readers who missed the classic the first time around.

Economy:

Initial jobless claims for the prior week were 444K, a post pandemic low and about half the rate of new claims of last fall (we’re making progress).  The index of leading economic indicators for April was +1.6%, a strong reading forecasting continued growth ahead.  Existing home sales for April were 5.85 million annualized, a healthy and steady pace.

The economic data continues to come in strong in the recovery.  The headwinds are inflation and loose fiscal and monetary policy, with the impact showing up in a weak dollar.

Geo-Political:

We hear the stock market is a forecasting body, looking six to nine months ahead.  I would say the bond traders are also forecasters, six to nine months ahead.  They listen to all the Fed Governors speeches, listening for changes of one or two words, a change in emphasis that may give them a hint of how to position their next bond trade.

The Fed is accommodative on two levels, the Fed Funds interest rate is at zero which anchors the rest of the yield curve, and they are doing QE, buying bonds ($80 billion per month) to keep longer term interest rates low, and buying mortgages ($40 billion per month) to keep the housing market vibrant.  That is a lot of artificial stimulus that does not exist in normal markets.  So, the question exists, when will the Fed begin to withdraw accommodation and what will happen to the stock market when they do?

The Fed has said they “are not thinking about thinking about raising rates”, and that has kept the market calm.  But before the Fed raises rates, they need to taper and then halt the bond and mortgage buying programs.  This week when the minutes of the Fed meeting were released, we found out they are now at least thinking about tapering the asset purchases, and that would likely start with scaling back the mortgage asset purchases.

 “A number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said.

In the past we have seen significant temporary corrections when the Fed first mentions tapering.  Google “2013 taper tantrum” to read more about it, but in the long run the economy survived.

Watch the net asset value if you have long term bond funds and consider selling them before the Fed announces a move that shakes the market.  In the stock market, watch for volatility associated with those statements from the Fed.

Technical Analysis:

For the week the S&P 500 was basically flat.

Technically (see chart below) the market looks fair, with the recent caution in place.  RSI at the top of the chart is neutral at 52 and moving sideways.  Momentum shown by MACD at the bottom of the chart is negative and moving down, but the histograms are shrinking which is mildly positive.  The price action is neutral.

The caution continues to be the rising wedge formed by the top of the long term channel (the upper blue line) and the black line that is rising from the October low.  The rising wedge is a negative formation that usually resolves to the downside as the wedge gets smaller.

Click THIS LINK to open the chart in a separate window.

What am I doing?  Most of my option deals expired 5/21, I had done 56 deals of selling cash secured puts and covered calls.  It was a good month, only 10% of my covered call stocks were called away, which is about usual for me.  I lost my KMI, but at least it was a long term capital gain.  I plan to buy it back.  Stocks are high now and I find it hard to find good bargains.  I bought a little SLB figuring high oil price will be good for the oil service stocks and SLB is the biggest.  I added a little QCOM since it has corrected.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year. 

Rich Comeau, Rich Investing

Quick Correction, Then Rebound

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

This is posted Friday night, since I will play in a charity golf tournament on Saturday.  I have played with these guys each of the last 15 years and it is a fun outing.  It will be my first 18 holes of the year!  I went to the driving range today, and I was horrible.  I’m bringing 3 dozen balls, that should hold me.  I have played with guys that ran out of balls in this tournament, so I can help someone out if necessary.

Economy:

The CPI was hot in April at .8% for one month, and that gave the market some indigestion on Wed.  Initial jobless claims in the prior week were 473K, a big improvement over the fall when they were running over 800K.  Retail sales were flat in April, disappointing amid speculation that the $1,400 per person checks from the govt. were spent in March so there was no follow-thru in April.

Numbers are going to be a little squirrely for a few months during the restart.

Geo-Political:

After being domestically focused for a while, let’s take a look around the world over the coming weeks, starting with China.

April 15, 2021 – BEIJING (Reuters) -China’s economy likely grew at record pace of 19% in the first quarter, rebounding from a pandemic slump early last year as demand recovered at home and abroad and as policy support for ailing smaller firms continued, a Reuters poll showed.

While the reading will be heavily skewed by the plunge in activity a year earlier, the expected jump would be the strongest since at least 1992, when official quarterly records started, according to the median forecasts of 47 economists polled by Reuters.

It would also signal the world’s second-largest economy has continued to gain momentum, after a 6.5% expansion in the last quarter of 2020.

China managed to largely bring the COVID-19 pandemic under control much earlier than many countries as authorities imposed stringent anti-virus curbs and lockdowns in the early phase of the outbreak.

That has helped its economy stage a rapid turnaround, led by stunning export strength as factories raced to fill overseas orders.

“We expect a strong bounce back in Q1 GDP this year, mainly driven by the low base in Q1 2020, but also due to higher exports and improving domestic demand,” said Raphie Hayat, Senior Economist with Rabobank.

“This will moderate later in the year, but we still expect China to easily beat its growth target of ‘above 6%’ for 2021.”

https://www.reuters.com/article/us-china-economy-gdp-poll-idINKBN2C20Q0

Their recovery sounds similar to the US.

Technical Analysis:

For the week the S&P 500 was down about 2% from the all-time high last week.  The correction was down 5%, followed by a 3% recovery on Thursday and Friday.

Technically (see chart below) the market looks good, with a warning.  RSI at the top of the chart remains neutral at 53.  Momentum shown by MACD at the bottom of the chart is moving down and negative in the near term.  The price action is neutral over the last two months, and shorter term it is negative. 

Then we are left with that darn rising wedge formed by the blue line at the top of the long term channel and the rising black line that started at the October low.  The rising wedge is generally a negative pattern.  As the wedge gets smaller and smaller, eventually the price will break out and that should be an intermediate direction.  I thought we might break below on Wednesday, but the market stopped right on the black line, almost like someone told it to.  We stay in the wedge a little longer.

Click THIS LINK to open the chart in a separate window.

The market is correcting by sector.  The super high flyers, the new “stay at home” stocks that soared during the pandemic, have corrected significantly, but some of them probably have farther to go.    Money moved into banking, energy, and some of the decimated “epicenter stocks” like the airlines and hotels.

What am I doing?  When stocks came down hard, I was able to buy back some of the covered calls I had sold that expire 5/21, literally for pennies.  Then I sold new covered calls expiring June 18, getting an extra week or two of time value vs. waiting and allowing it to expire on 5/21.  Some of the stocks I had called on 4/16, I was able to buy back at a lower price, like I hoped when they got called.  In that case I collected a nice option premium in Feb. / March, got a high price for the stock when it was called on 4/16, bought the stock back at a discount, and sold a new covered call.  MSFT is one stock that worked that way.  On Friday I bought IVV and IWM, and put a “trailing stop loss %” under each, trailing at 4%.  They were small-ish buys, and if the market continues higher I will make other smallish buys and protect them with trailing stops. If we make it back up to the top of the channel blue line, I will probably sell, so this is a trade for me, and a short term one at that, if it works out correctly. We’re not overbought on the RSI, but if we hit the top of the channel and don’t break above, that would concern me.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year. 

Rich Comeau, Rich Investing

Long Term – May 2021

Once a month, on the second Wednesday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Maybe the most important thing to figure out in stock market investing is whether you are in a bull market where stock prices generally go up, or in a bear market where stock prices generally go down .  Both moves are a reaction to business conditions that exist over an extended time, months or years.  TV newscasters have redefined a correction as a move down in stock prices of 10% or more, and a bear market as a move down of 20% or more, but this ignores the extended time factor.  Given the rapidity of stock market moves in the computer age, you can have a rapid move down of 20%, that in my opinion is NOT a bear market.

Bear markets occur for a few reasons:

  1. Recession.  A recession is defined as two consecutive quarters of negative GDP.  Negative GDP means the economy is shrinking.  This usually happens as a result of the business cycle becoming unbalanced.  Coming out of a recession, eventually the economy stops going down and begins to grow.  Stocks may not have perceived this and they may still be going down due to public opinion, which remains scared to invest in stocks despite the growing economy.  Eventually investors see the pros driving up stock prices and they join the party.  Now businessmen get loans and start new businesses.  People see businesses succeed and then everyone wants their own business.  The banks are making money on the loans, all businesses are doing well, the stock market is soaring, and finally, there are more businesses producing goods than the consumers want to buy.  Then the weak businesses can’t service their debt and they go bankrupt.  Many times suppliers that sold them goods and will not be paid, they go bankrupt.  If it is broad enough, this ripples through the economy and you are back in recession.  This is the most common form of “business cycle recession” and it has repeated many times.
  2. A Hostile Federal Reserve.  The Federal Reserve is the central bank of the United States.  It has a dual mandate of a stable currency and maximum employment.  These two objectives sometime appear in conflict, so the Fed’s job is not easy.  Eventually one will be prioritized and usually it is maximum employment.  If we go back to the late 1970’s and early ‘80’s, inflation got very high, running 6 -8% a year, and Fed Chairman Paul Volcker raised interest rates, eventually hitting 20% on the Fed Funds rate in June 1981, business activity contracted, businesses failed, a recession happened, and he broke the back of inflation.  Usually such severe rate hikes are not necessary to slow inflation or the business cycle, but they can still tip the economy into recession at levels far below 20%.
  3. External Events.  These events are beyond the control of the economy or central bank.  Pandemics can cause major economic disruption, as well as large wars, major technology changes, and events like global warming that can alter the nations allocation of capital.

Most people don’t look for the guideposts that might signal an approaching recession, they wait until their losses in the stock market hurt real bad, no turnaround appears to be in sight, and then they sell out.  In a bad recession that can have dire consequences and long term plans may have been altered.  If your radar is up and you are looking for this type of problem, you can make better investment decisions and save yourself a lot of grief.

That is why, once a month, I take a look and ask, are we in a bull market or a bear market.

One should behave differently in bull markets vs. bear markets.  In bull markets where stocks are going up, it is good to be in stocks.  In bear markets where stocks are going down, it is good to be out of stocks.  Many investment advisors say to just stay invested all the time because it is too hard to tell if you are in a bull or bear market.  Is that true, or would their income go down too much if you switched out of their mutual funds and ETF’s?  I’m just asking.

Economics:

GDP GDP increased at an annual rate of 6.4% in the first quarter of 2021 . 

The virus surged in February, but the vaccine rollout was very good and the nation looks much better regarding Covid19.  That is helping the economy.

Congress passed the $1.9 trillion Covid relief bill in December, with extended unemployment benefits, rent assistance, plus cash payments; it will help carry the economy into summer.  Now Congress goes to haggling (oh, I mean “governing”) over a proposed $2 trillion infrastructure bill and how to pay for it.  Materials and construction stocks have moved up.

This is bullish for the stock market. 

YearQuarterGDP %
2021Q16.4%
2020Year0.1
2020Q44.0
2020Q333.4
2020Q2-32
2020Q1-5.0
2019Year2.3
2018Year2.9
2017Year2.6
2016Year2.0

Fed interest rates –  The Fed has held the Fed Funds rate near zero since March 2020, and Jerome Powell said in the winter that he did not see the Fed raising interest rates this year (2021).  They continue to buy bonds and are very accommodative.

There are also signs that inflation is picking up, which is not unusual as we come out of last year’s recession.  The Fed has said it is willing to let inflation run a bit above the long term target of 2% annually.  If it rises too fast, inflation could force the Fed to act sooner than they currently plan.  Higher rates could put a drag on the economy.

Fed policy is strongly accommodative and hence it is bullish. 

DateFed Funds Rate5 Year Treasury10 Year Treasury30 Year Treasury
May 20210.2.81.62.4
Apr 20210.2.81.62.3
Mar 20210.2.81.52.3
Feb 20210.2.51.21.9
Jan 20210.2.51.11.9
2020 Q40.20.40.91.6
2020 Q30.20.30.71.4
2020 Q20.20.30.71.4
2020 Q11.21.31.42.0
     
2019 Year Avg2.21.92.22.6
2018 Year Avg1.82.82.93.1
2017 Year Avg1.01.92.32.9

Valuation:

S&P earnings – The Factset blended (88% actual, 12% estimated) Q1 earnings for the S&P 500 is 49% above Q1 2020.  That is double the performance they estimated going into Q1, but remember that 2020 was a poor year.  The Factset forward PE on the S&P is 21.6, compared to their ten year average of 16, so things are richly valued.

The outlook for earnings is bullish.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 32:1, down substantially from 42 last month.  I used 4 quarters of earnings with the most recent being Q1 2021 (86% reported). 

This metric is dangerously overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be substantially overvalued.  Above 30 would be dangerously overvalued.

This indicator is bearish.

Age of primary move, bull or bear market – The bull market is 12.1 years old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind.

Geo-Political:

COVID-19:  This is looking better in the US and selected countries like the UK, where the vaccine has been rolling out.  The new more transmissible variants are taking a heavy toll in countries without the means to roll the vaccine out.  It will be better if everyone can beat this virus.

Liquidity:  Congress had made money available to businesses and individuals to help through the Covid pandemic.  The national savings rate is very high for 2020 since people did not drive to work, they did not eat out, bypassed vacations, did not shop at malls, etc.  That money earns nothing in money market accounts per Fed policy so it is making its way into the stock market.  The risk is that we blow up a bubble in the stock market.

All over the world, banks are reducing interest rates and providing liquidity including bond purchases, helping to hold stock markets up.  How long can that continue, and what will be the after effects of such high levels of central bank money printing?

Oil:  The price of oil has doubled since the pandemic low last summer.  Many people had stopped driving, demand fell and drove the price down.  Smaller producers around the world went bankrupt so a lot of production went offline.  Saudi cut their production and with some economic recovery, oil prices have climbed back above pre-pandemic levels.  The rise in oil prices will increase inflationary pressure.

Global geo-politics forces have moderated since last month, due to improvement in Covid infection rates in the US and western Europe.  Banks continue to provide liquidity.  Inflation is peaking out, but maybe its temporary.  Covid is ravaging India and Brazil, and as long as there are hot spots in the world, we don’t have this under control.  I upgrade Geo-political from bearish to neutral.

Technical:

Technically the chart is positive.

RSI at the top of the chart is overbought at 72.  MACD at the bottom is positive and moving up, but perhaps too quickly.  The price action is clearly positive.  The price action is moving well above the top of the range and that is a bit of a concern so it bears watching.  When you look at the black vertical line I added in the price action on the right side of the chart, I am pointing out how extended to the upside the market has become, relative to the 50 month moving average.  Sooner or later we will need to get some “reversion to the mean”, in other words, a correction.

Ten Year Chart of the S&P 500, Monthly

Click on this LINK to open the chart in a larger separate window.

This is bullish for stocks in the long run, but cautionary for a correction in the intermediate term.  A good earnings season is coming to a close, so without that good news, the risk of a correction is rising.  We’ve had two poor days this week.

Conclusion:

GDP returned to growth for three quarters, so that is bullish.  The Fed has short term rates near zero and plans to hold them there through this year, plus they are buying bonds to keep longer term rates low, and that is bullish (old saying, “don’t fight the Fed”).  S&P earnings for Q1 are 49% above Q1 2020, with S&P projecting further improvement in 2021, keeping this factor bullish.   The PE valuation of the S&P based on the 12 month trailing GAAP number is 32, which is overvalued and bearish.   The geo-political factors are upgraded to neutral.   Technically the chart looks bullish.

By that way of looking at it, the market is bullish, with four factors bullish, one neutral and one bearish.  A successful vaccine rollout brightens that outlook for 2021. 

My conclusion is that I am constructive on the market, but with the valuation stretched there is always the risk of a short term correction. 

2020 saw the S&P rise to new highs while earnings fell, fueled by low interest rates from the Fed and cash infusion from Congress and the Fed.  2021 will probably see earnings improve back to 2019 levels, but the stock market may not rise as much in 2021, since it has already priced in some of the recovery.

Long Term Issues to Keep in Mind:

Federal Deficit:  (Updated March 2020) – Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $26 Trillion (late 2020), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

Disappointing Jobs Report, Stocks Rally

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update will be posted on Wednesday the 12th.

Economy:

The ISM manufacturing index for April was 60.7 (still strong), down from 64.7, while the ISM services index slipped a little to a still strong 62.7 (anything over 50 shows growth).  Motor vehicle sales for April accelerated to an 18.5 million annualized units.  Factory orders for March grew 1.1%.  Initial jobless claims for the prior week were 498K, down from the previous 590K, and a new recovery low. 

The non-farm payroll number for April was a disappointing 266K, far below the estimate of 770K and the prior months 1.0 million.  This was the number the stock market traded on Friday.  Why did the market jump up on a very disappointing number?  The interpretation by the traders is that this poor number would give the Fed a good excuse to keep interest rates low for longer, and that is considered good for the stock market.  Those stock traders are a weird lot, bad news might be good news!

Geo-Political:

With so much talk these days about the effect of interest rates on stock values, you hear every once in a while that this is due to “discounted cash flow analysis”.  That is a fancy sounding name, and if you look it up they have a fancy formula that looks a little intimidating if you are not a math person.  But, in reality the concept is simple and any competent sixth grader can do it.  It is just addition, multiplication, and division.  The fancy formula gives you a quick way to do it, but you may not understand what they are doing, so I am going to show you with a simple example, exactly how this thing works.  The other thing that is required is a little common sense, call it general business skill, in order to name things to set the problem up.

The stock market folks have a way of valuing a stock that says the value is the sum of the future cash flows the company can return to you (pay attention, these numbers are a GUESS).  Money has a “time value” since we can earn interest on our money.  If I asked you if you can have $100 now, or $100 five years from now, you would take the money today, go put it in the bank, and you would have more than $100 in five years.  If you can tell me what interest rate I would earn by putting the money in the bank for five years, I can tell you how much money I would have to put in the bank today (the present value) in order to have $100 in five years.  If you do that on a year by year basis, you have done a discounted cash flow analysis.

So, let’s look at the example:

We assume we will receive $1,000 per year for ten years.  Each year, the Discount Factor increases, because money has time value, and the time value is determined by the prevailing interest rate.

Now, let’s increase the interest rate and see what happens (I built the spreadsheet so I just change the interest rate value, and everything will update and give the new NPV):

So you see, when we increase the interest rate, the future value of the cash slows goes down when they are discounted.  That lowers the net present value.

I hope that de-mystifies discounted cash flow analysis.  It took me an hour to do the example in Excel and write the section, so I hope someone gets a benefit from the work.  I enjoyed doing it, since I had not done one in a while; I had to dust off the cobwebs!

Technical Analysis:

For the week the S&P 500 was up .5%, setting a new all time high.

Technically (see chart below) the market looks fair, mildly improved from last week.  RSI at the top of the chart is in high neutral at 66 and back on the way up.  Momentum shown by MACD at the bottom of the chart is slightly negative as it trends down, but the faster moving line is turning up and the histograms are shrinking.  The price action remains neutral, basically going sideways.  We hit a new high, but just barely.

I updated the chart to change the color of the line to black, the line I have pointed out could be the bottom of a “rising wedge” formation.  If I need to refer to it in the future, it will be clearer which one I am referring to, if it is a different color.

Click THIS LINK to open the chart in a separate window.

The market on Friday focused on one number, the poor non-farm payroll jobs creation number, and concluded instantaneously that the economy was doing worse than data had indicated in the preceding three months and the Fed would leave rates low for longer.  One can see the logic there, IF you think the economy is measured by a single number, the non-farm payroll number, and at that, a single instance of that economic statistic.  BALDERDASH!!!!!!!  That is just stupid.

The number is so far off from the March number, one has to question first if an error occurred.  These numbers get REVISED all the time, in next month’s report, so let’s see what that brings.  In the preceeding three months, traders have focused on signs of inflation picking up, and ONE non-farm payroll number did not change the uptick in inflation.  Now the Fed has said that in order to get unemployment down, they are willing to let inflation run a little hotter than usual, but it depends how bad inflation is getting, and whether the Fed is right and it is just temporary.  It could be wishful thinking because once an inflationary psyche gets in place, it is very hard to break and the only Fed tool to break it is higher interest rates.

The other possible factor in the low non-farm payrolls MIGHT be that with extra unemployment benefits in place until September, people can make more on unemployment than taking jobs.  I’m not sure how you figure out if that is the case, but if it is, Congress may need to end the enhanced benefits in July instead of September.  One guest on TV said he raised the salary above the govt. enhanced benefit, and still could not hire anyone for his restaurant.

Another possible factor could be that people at home are afraid of Covid, they want to protect their family, so they are committed to staying home for now.

All that said, don’t believe that the knee jerk reaction to Friday’s non-farm payroll number is precise and correct.  It may be, but it may not be.

What am I doing?  I’ve raised cash for 3 months, usually by having stocks “called”, where I had sold a covered call option.  I have not minded this, since the market sports a high valuation.  They say buy low and sell high.  But sometimes the market rallies on and it is hard to get back in.  The chart looks like this market is tired, so a pullback could be near.  I sold the IVV I bought recently for a small profit.  Most of my stocks have covered call options sold against them, so I’m not free to sell the stocks until the options expire on 5/21.  I’ve sold Put options against stocks I would like to own at lower prices.  I did buy a little SLB, and sold a put option to buy more if it falls to a good price, and the same with BAC and C.  I have kept a hefty position in KMI for over a year, it has finally gotten back in the black and it throws off a nice dividend.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year. 

Rich Comeau, Rich Investing

A Flat Market on Great Earnings

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

Durable goods orders for March were up .5%.  Initial jobless claims for the prior week were 553K, in line with recent data that is near pandemic lows.  The first estimate of Q1 GDP is +6.4%, a strong number.  Consumer spending in March was up a strong 4.3%.  The U. of Michigan consumer sentiment index for March was 88.3, up from 86.5 the prior month, and it is recovering with the economy.

All of the economic statistics are improving, that’s good.  Any problem out there?  Yes, the total government debt is exploding, and it has been rising rapidly since the last balanced budget in 2000.  Nobody wants to talk about the debt at over $28 trillion. 

Geo-Political:

The Fed left the Fed Funds rate unchanged at zero and gave a very dovish outlook on policy.  There are signs of inflation all over, which the Fed says are temporary, so there is no change in fed policy.  Is that right?  It might be.  Oil prices have risen from pandemic lows, but will they rise higher than they were pre-pandemic, when the problem was more of a glut of production capacity?  The case can be made that oil will stop rising when demand and supply are in balance, around $65 a barrel, where we were pre-pandemic.  Corn and lumber have shot up, but the dynamics of those markets are different from oil.

Covid numbers in the US are relatively low except in the upper Midwest.  India has a severe problem.

Technical Analysis:

For the week the S&P 500 was flat.

Technically (see chart below) the market looks fair, a slight downgrade from last weeks “good” rating.  RSI at the top of the chart neutral at 61, but is has dropped lately.  Momentum shown by MACD at the bottom of the chart is neutral, but with a new slight downward bias.  The price action is neutral, just going sideways recently.

Here is the markets’ problem.  Earnings are very good, and all of the tech giants that reported last week were great (AAPL, GOOG, FB, AMZN).  That was not enough to lead the market higher.  It seems the good news of earnings for Q1 was priced into the market from Jan. to March.  We have two more weeks of big earnings for the S&P 500, and if we have failed to rally in April on good earnings, what is going to happen when the drumbeat of good earnings ends?  I’m cautious in the short run.  The infrastructure bill will provide some fiscal stimulus, but I doubt anything gets passed before July.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I sold the IVV I had been buying recently and took a small profit.  I bought a little BA on its recent pullback.  I made a nice profit over a few months on MSFT, which got called on 4/16 at 250.  It went up to 255, now it is back down to 250 and I will try to buy it back for less than 250.

I’m going to stop for the week.  I haven’t said too much, so think about what I have said.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year. 

Rich Comeau, Rich Investing

Flat Week During Good Earnings

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

Initial jobless claims showed continued improvement at 547K, a new pandemic low.  March existing home sales were at 6 million units annualized, continuing a stead pace.  March new home sales were 1 million units, annualized.  The leading economic indicators rose 1.3% in March, indicating improving conditions ahead. 

All indicators show solid growth in the economy.

Geo-Political:

Virus activity nationally is uneven with declines in the southern states where the weather is warmer, while in much of the north it is picking up again.  Vaccine rollout continues at a good pace, around 3 million shots per day.

The market fell one day last week, on news that Biden will propose an increase in the long term capital gains (LTCG) tax rate for the richest Americans,  from 20% to 40%.

Here is part of one report:

Wall Street is skeptical President Joe Biden’s expected proposal to hike capital gains taxes could pass the Senate, but investors see risks that tax-motivated selling could still weigh on technology and other sectors that skyrocketed during the pandemic.

Biden’s proposal calls for increasing the top marginal income tax rate to 39.6% from 37%, and nearly doubling taxes on capital gains to 39.6% for people earning more than $1 million, according to sources familiar with the plan.

While any tax increase will likely be lower than Biden’s initial proposal given the Democrat’s small advantage in the Senate, individual investors who are concerned about rising rates may start to unload shares in order to lock in current rates.

https://www.reuters.com/business/technology-high-growth-stocks-could-lose-out-bidens-capital-gains-tax-plan-2021-04-22/

I have a few problems with the article.  Now I guess you have to hedge and put in weasel words if you are a major publication, but folks, I don’t see a RISK that stocks may fall as investors try to lock in today’s lower LTCG, that is a GUARANTEE.  People will sell their stocks to capture a lower LTCG tax rate.  But, if you don’t read the article until the end, you would just think it is all bad, and it is not.  What will an investor do with their money after they have sold their GOOG, or AMZN or APPL?  Are they going to put it in a CD .5% a year?  No, they are not.  They are going to wait over 60 days to avoid the wash sale rule, and they are going to buy back into GOOG, AMZN and APPL, because they are great companies to hold for the long term.  Any pullback would be temporary.

And the last two lines in the article say it, although many people will not read that far:

Investors who do realize their capital gains now may find a hard time finding other attractive places to put it besides the equity market, said Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago.

Thursday’s sell-off is “not anything that is going to be a long-term disincentive to buy stocks,” he said.

So, there you have it, short term there is an impact, long term there is no impact.

Technical Analysis:

For the week the S&P 500 was flat, no gain, no loss.

Technically (see chart below) the market looks positive.  RSI at the top of the chart is in high-neutral at 64; it slipped a little from last week.  Momentum shown by MACD at the bottom of the chart is neutral moving sideways.  The price action is neutral, moving sideways.

The most important event next week will be all of the earnings reports from the largest tech stocks, FB, MSFT, GOOG, AMZN, and AAPL.  Earnings are expected to be good, and hopefully that will propel the market upward.

With earnings last week, we saw most companies report big beats, but the stocks did not jump up.  It appears the market anticipated great earnings, at least vs. poor old 2020, and the moves were priced into the stock in the Jan. – March period.  We have about three more weeks of heavy earnings reporting and it’s hard to see a big pullback in that timeframe.  After earnings season, all bets are off.  That “rising wedge” pattern is still there, we are just hovering at the top line of the wedge currently.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I sold covered calls on stocks I hold, replacing the ones that expired a week ago.  I also sold puts on stocks I would like to buy at lower prices.  I bought some TSM which is a chip maker, because the stock went down on Biden’s meeting with the chip makers in the US about subsidizing production here.  It would take two years to get a factory running in the US.  I added a little BA on its pullback. Their problem with the 737 MAX has been fixed and surveys show people will fly on the MAX, and with the pandemic coming under control, airlines have already given Boeing orders for new planes because they are so much more fuel efficient, and in some cases fleets are just getting old.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year. 

Rich Comeau, Rich Investing