All American In...'s  Instablog

The Market

Technical

The indices (DJIA 15233, S&P 1650) took another rest yesterday but still closed within all major uptrends: short term (14410-15131, 1584-1661 [the Dow is above its upper boundary]), intermediate term (13942-18942, 1479-2067) and long term (4783-17500, 688-1750).

Volume rose; breadth declined. The VIX was up a bit, closing within its short term and intermediate term downtrends. I check our internal indicator: in a 139 stock universe, 68 have been making new highs regularly, 58 have not and 13 are too close to call. That is not a robust reading given performance of the Averages. Indeed, it reflects the lack of breadth.

http://chartsetcetera.blogspot.com/2013/05/divergences-stock-market-advance-not.html

GLD fell again and is nearing a challenge of its April low and the lower boundary of its long term uptrend.

http://money.msn.com/investing/why-gold-wont-stay-down

Bottom line: I was really surprised by the lack of strength in our internal indicator. Needless to say, it reinforces my caution on the Market. That doesn't mean that the Averages still can't reach the 17500, 1750 level. But if the participation rate either remains as weak as or gets weaker, then that nimble trader I have referred may need to be even more nimble than I originally thought.

Meanwhile, (m)y strategy continues to be to take advantage of what I consider unwarranted optimism by lightening up on positions when the stock price trades into its Sell Half Range. I believe that we will have a chance to buy these shares back at much lower price.'

Morgan Stanley on recent short covering activity (short):

http://www.zerohedge.com/news/2013-05-16/morgan-stanley-most-buying-has-come-shorts-covered-rather-longs-bought

The elusive corrections (short):

http://blog.stocktradersalmanac.com/post/Elusive-SPY-Correction-and-the-Monte-Carlo-Fallacy

Update on sentiment (short):

http://www.bespokeinvest.com/thinkbig/2013/5/16/bullish-sentiment-drops-for-first-time-in-five-weeks.html

Fundamental

Headlines

Yesterday was another negative day for US economic data: April housing, weekly jobless claims and the Philly Fed manufacturing index were all very disappointing. On the other hand, both the headline and core CPI were slightly better than estimates; plus April building permits were strong.

So cumulatively this week, the numbers have not painted a particularly encouraging picture of our economy; though last week had a more positive tilt to it. I am continuing to assume that the current herky jerky, good news/bad news data flow is similar to previous episodes in this recovery---so a change in forecast is not warranted. Nonetheless, the amber light is flashing.

http://www.capitalspectator.com/archives/2013/05/the_ouch_factor.html#more

The latest from Charles Biderman (6 minute video):

http://www.zerohedge.com/news/2013-05-16/biderman-busts-sustainable-deficit-reduction-meme

Meanwhile, overseas, first quarter Japanese GDP came in stronger than expected. Could it be that Japanese economic growth will end up replacing Chinese activity as an offset to the European malaise? Too soon to tell.

But importantly, the volatility in the stats being reported in Europe, China, the US and now Japan, have created a number of economic question marks that when clarified could lead to alterations in our outlook. Clearly, we need to be watching closely.

Bottom line: yesterday was another rough day for US economic data. I hesitate to attribute the weak Market to these stats because, usually, investor response to poor numbers has been to assume that the Fed will just stay easy, longer. So it is probably safer to assume that random noise was the culprit.

The other possibility is that the discussion about 'Fed tapering' is slowly gaining some momentum. Yesterday, an FOMC member gave a very confusing speech that covered potential Fed tightening. Forgetting whether or not it was confusing, it kept the discussion going; and at some point, the perception that 'Fed tapering' is close by may gain critical mass and start impacting stock prices.

Forced buyers of risk (short):

http://pragcap.com/forced-buyers-of-risk

How does this make sense (short):

http://www.zerohedge.com/news/2013-05-16/just-plain-silly

The latest from Bill Gross (medium):

http://www.zerohedge.com/news/2013-05-16/bill-gross-we-see-bubbles-everywhere

The latest from Lance Roberts (medium):

http://www.zerohedge.com/news/2013-05-16/sp-500-now-extremes

I add this for the bulls (medium):

http://advisorperspectives.com/commentaries/schwab_051613.php

Thoughts on Investing-from Barry Ridholtz

Error checklist for investors:

1. High Fees Are A Drag on Returns
2. Mutual Fund Are Inferior to ETFs
3. Reaching for Yield is Extremely Dangerous
4. Asset Allocation Decisions matter more than stock selection
5. Passive is usually better than Active Management
6. You must understand "The Long Cycle"
7. Behavioral Issues Are Costly
8. Cognitive Errors as well
9. Understand your own risk tolerance
10. Pay Guys Like Me For the Right Reason

Economics

This Week's Data

The May Philadelphia Fed manufacturing index came in at -5.2 versus expectations of up 2.0.

Other

Growing interest in bitcoin (medium):

http://www.zerohedge.com/news/2013-05-16/peter-thiel-gets-bitcoin-bug

Politics

Domestic

International War Against Radical Islam

Benghazi emails (medium):

http://www.weeklystandard.com/author/stephen-f.-hayes

The Market

Technical

The indices (DJIA 15275, S&P 1658) were a bit more volatile yesterday than they have been recently but still closed within all major uptrends: short term (14401-15112, 1580-1654 [both are now above their upper boundaries]), intermediate term (13922-18922, 1476-2064) and long term (4783-17500, 688-1750).

Volume declined, breadth deteriorated. The VIX was once again up on an up price day; so I repeat the observation that the VIX may be at a bottom and, hence, a good candidate for hedging (for traders).

http://www.bespokeinvest.com/thinkbig/2013/5/15/sp-500-sector-trading-range-charts.html

GLD (134.83) had another big down day. It finished below the lower boundary of its intermediate term downtrend and is approaching its prior low (130.23) and the lower boundary of its long term uptrend (128.67). I am watching those support levels for a bounce. If that occurs, our Portfolios will likely start to re-build this position.

Bottom line: I continue to believe that the upper boundaries of the Averages long term uptrends will likely prove an insurmountable barrier. In the meantime, there is no other resistance around to stop the current moon shot. Nevertheless, the risk/reward equation at this point offers only the nimblest of traders much opportunity.

Meanwhile, (m)y strategy continues to be to take advantage of what I consider unwarranted optimism by lightening up on positions when the stock price trades into its Sell Half Range. I believe that we will have a chance to buy these shares back at much lower price.'

Fundamental

Almost all the US economic data yesterday was sub par: weekly mortgage and purchase applications were both down, April industrial production was very disappointing and the May NY Fed manufacturing index was well below estimates. However, April PPI was down as anticipated while PPI ex food and energy rose slightly less than forecast. Clearly, these numbers stop the seven day trend of improving stats. That said, it still leaves the data mixed for the last two to three weeks. So our forecast remains unchanged but with the amber light flashing.

Europe matched the quality of our stats though not the quantity as the entire EU first quarter GDP came in down 0.2%.

Bur no one cared because a decent percent of the media air time yesterday was taken by AG Holder's congressional testimony on IRS-gate and it got a little testy at times.

So in the face of lousy economic numbers and increasing government dysfunction there was only one thing for stocks to do---go up.

Bottom line: yesterday was a bit disappointing as measured by US and EU economic data. Watching the ruling class argue amongst itself is tiring but there is a bright side---gridlock means that they can't do more damage to us.

But the 800 pound gorilla in the room right now is global monetary policy. In the end, nobody really knows how this story is going to end because the magnitude of the current money printing regime is so completely unprecedented. My only point is that is dangerous to make too heavy a bet that all will end well,

Tepper's Appaloosa Fund's latest 13F (short):

http://www.zerohedge.com/news/2013-05-15/tepper-files-march-31-13f-cuts-core-holdings

Uncharted waters (short):

http://www.zerohedge.com/news/2013-05-15/unchartered-territory-cannot-go-forever

Reversion to the mean---for the bulls (short):

http://blog.yardeni.com/2013/05/reversion-to-mean-excerpt.html

Investing for Survival

Offshore tax havens (short):

http://www.zerohedge.com/news/2013-05-15/these-offshore-tax-havens-may-be-hazardous-your-deposit-confiscation-health

Company Highlight

Sherwin Williams Co. is one of the largest producers of paints, varnishes and application equipment, much of its sold through 3500+ retail paint and wall covering stores; in addition, it produces auto coatings which are sold through auto coatings outlets. The company has grown profits and dividends at a 10% pace over the last 10 years earning a 20%+ return on equity. The company's revenues and profits are negatively impacted by weakness in the construction and housing markets. However, it should still grow at an above average pace as a result of:

(1) improving US and international sales in autos, OEM product finishes and protective and marine coatings,

(2) aggressive expansion overseas,

(3) a major re-organization that will reduce costs, improve productivity and generate cash flow that will be used to reduce debt and buy back stock.

(4) acquisitions.

Negatives

(1) its retail paint stores are being impacted by US economic weakness,

(2) a poor pricing environment in the consumer segment,

(3) rising material costs.

SHW is rated A+ by Value Line, has a 48% debt to equity ratio and its stock yields 1.2%.

Statistical Summary

Stock Dividend Payout # Increases

Yield Growth Rate Ratio Since 2003

SHW 1.2% 14% 25% 10

Ind Ave 1.4 13 37 NA

Debt/ EPS Down Net Value Line

Equity ROE Since 2003 Margin Rating

SHW 48% 31% 3 9% A+

Ind Ave 34 26 NA 7 NA.

Chart

Note: SHW stock made great progress off its March 2009 low, quickly surpassing the downtrend off the July 2007 high (straight red line) and the November 2008 trading high (green line). Long term , it is in an uptrend (blue lines). Intermediate term, it is in an uptrend (purple lines. Short term, it is in an uptrend (brown line). The wiggly red line is the 50 moving average. The dividend Growth Portfolio owns a 50% position in SHW, having Sold Half when the stock entered that Range. The upper boundary of its Buy Value Range is $81; the lower boundary of its Sell Half Range is $157.

(click to enlarge)

http://finance.yahoo.com/q?s=SHW

5/13

Economics

This Week's Data

April industrial production fell 0.5% versus expectations of a 0.2% decline; capacity utilization came in at 77.8 versus estimates of 78.3.

http://www.capitalspectator.com/archives/2013/05/april_industria.html#more

April CPI fell -0.4% versus forecasts of -0.3%; ex food and energy, it was up 0.1% versus an anticipated rise of 0.2%.

April housing starts fell 16.4% versus expectations of a 6.4% decline.

http://www.calculatedriskblog.com/2013/05/housing-starts-decline-sharply-in-april.html

Weekly jobless claims rose 32,000 versus estimates of an increase of 7,000.

http://www.calculatedriskblog.com/2013/05/weekly-initial-unemployment-claims_16.html

Other

The feds try to shut down bitcoin (medium):

http://www.zerohedge.com/news/2013-05-15/us-government-begins-bitcoin-crackdown

Update on auto loan bubble (short):

http://www.zerohedge.com/news/2013-05-15/subprime-20-auto-loan-deliquency-balances-rise-24-yoy

David Stockman on the end of sound money (short):

http://www.zerohedge.com/news/2013-05-15/david-stockman-american-empire-and-end-sound-money

Fed policy risks (long but a must read):

http://www.zerohedge.com/news/2013-05-15/guest-post-fed-policy-risks-hedge-funds-and-brad-delong%E2%80%99s-whale-tale

Politics

Domestic

More on IRS-gate (medium):

http://www.politico.com/story/2013/05/the-irs-wants-you-to-share-everything-91378.html

Benghazi smoking guns (medium):

http://www.nationalreview.com/article/348269/benghazi%E2%80%99s-smoking-guns

How Dodd Frank institutionalizes too big to fail (medium):

http://www.nakedcapitalism.com/2013/05/josh-rosner-on-how-dodd-frank-institutionalizes-too-big-to-fail.html

Façade capitalism (medium):

http://cafehayek.com/2013/05/facade-capitalism-means-facade-freedom.html

Elizabeth Warren keeps asking the right questions (medium):

http://www.zerohedge.com/news/2013-05-15/elizabeth-warren-confronts-eric-holder-ben-bernanke-and-mary-jo-white-too-big-jail

Disclosure: I am long SHW.

The Market

Technical

The indices (DJIA 15215, S&P 1650) were up (again) yesterday, closing within all major uptrends: short term (14389-15112 [the Dow is back above this level], 1578-1652), intermediate term (13922-18922, 1476-2065) and long term (4783-17500, 688-1750).

Volume rose; breadth improved. The VIX actually rose which is unusual for a strong up price day. I wonder out loud if that is not a good sign that the VIX is about as low as it can go and, therefore, for traders whether it is at a good entry point as a hedge.

GLD fell, finishing below the lower boundary of its intermediate term downtrend. As I noted yesterday, it appears to be in the process of challenging its April low and/or the lower boundary of its long term uptrend. If it bounces off those levels, then our Portfolios will likely start to re-build this holding.

Bottom line: optimism prevails. Enjoy the ride. But remember that discretion is the better part of valor. Don't try to be a hero.

Meanwhile, (m)y strategy continues to be to take advantage of what I consider unwarranted optimism by lightening up on positions when the stock price trades into its Sell Half Range. I believe that we will have a chance to buy these shares back at much lower price.'

Stats on the current bull market (short):

http://blog.stocktradersalmanac.com/post/DIA-SPY-Bull-Markets-1527-Days-and-Counting

Fundamental

Headlines

US economic data yesterday consisted of two secondary indicators: weekly retail sales which were mixed and the NFIB Business Optimism Index which came in much better than expected. Nothing Market moving here.

Overseas, EU industrial production was ahead of estimates though German consumer confidence was disappointing. The EU industrial production was a pleasant surprise in what is developing into a string of pleasant surprises. Still too soon to be getting jiggy over Europe; but we are getting there.

***over night EU first quarter GDP came in -0.2%---ooops

The real Market movers yesterday were:

(1) it was Tuesday---the eighteenth up Tuesday in a row. Why? Well, Tuesday's are usually the day when the Fed does most of its weekly purchases in QEInfinity. More money, higher prices,

(2) David Tepper, an extremely well regarded hedge fund manager, was on CNBC and gave a very upbeat outlook on the Market. I linked to the video segment mid day yesterday. So if you didn't see it, go back and take look. The interview was a Market mover.

Given Tepper's track record, one contradicts him with some humility. So before putting my two cents in, I will let the Pragmatic Capitalists lead the way.

http://pragcap.com/david-tepper-and-the-coming-cash-on-the-sidelines

My point this that Tepper seems to assume that when Fed 'has to taper back' it will do so in a way that won't disrupt markets. My principal point with respect to Fed tightening [tapering] is that it has never, ever done so without causing a recession or inflation. Will it get it right this time? Maybe. But how much money do you bet on that outcome?

Another great piece from Lance Roberts (medium):

http://advisorperspectives.com/dshort/guest/Lance-Roberts-130514-Bull-Market-Questions.php

(3) the government cash flow keeps getting better---shrinking the deficit faster than many expected. If I am going to get excited about an improving investment environment, this is my number one candidate. To be sure, the smaller the share of GDP usurped by the government, the more money you, I and businesses have to spend and invest as we see fit.

Plus, not only is the combination of lower spending and higher taxes cutting the deficit faster than expected, Obama's current political problems could very well derail His second term agenda. While there may be much that needs to be undone from the first term, if confidence develops that the worst is over, then the combo of lower deficits and lower potential government growth has to be viewed positively

But before sounding the 'all clear', we can't forget that [a] the math of built in entitlements increases hangs around our children's necks like a ten ton anchor, [b] our tax system is too complex and too expensive to administer to encourage business optimism, [c] government regulation is far too intrusive into our economic, social and political lives and [d] the current government cash flow can't be extrapolated into the future because so much income {and hence, taxes} were moved into calendar year 2012 {FY 2013} that the rate of tax revenues will likely slow considerably as we move forward.

So, the shrinking budget deficit is a positive; but there are caveats. I would like to see FY 2013 fourth quarter tax receipts before declaring a tactical victory.

http://www.zerohedge.com/news/2013-05-14/cbo-forecasts-then-and-now

Bottom line: the economy is a positive for Your Money. Fiscal policy appears to be making more progress than I have assumed in our Models and could get even better if our ruling class can come up with a 'grand bargain'. Europe, also, seems to be healing. It is a bit too soon on all counts to be changing our Model; but even assuming a more positive outlook, stocks still are overvalued; and the risks from the unprecedented global race of central banks to devalue simply can't be dismissed as causally as so many pundits are now doing.

Another bear cries 'uncle' (medium):

http://business.financialpost.com/2013/02/27/david-rosenberg-why-cash-is-your-least-safe-bet/

The latest from Mohamed El Erian (today's must read):

http://advisorperspectives.com/commentaries/pimco_051413.php

Don't dismiss what is occurring in Japan; it will be our turn soon enough (medium):

http://www.zerohedge.com/news/2013-05-14/bonds-suffer-worst-4-days-10-years-nikkei-tops-15000-first-time-jan-2008

Investing for Survival

World's Highest Tax Rates

By International Living

Spare a thought for the citizens of Belgium. Their beer is great and their waffles tasty but they also suffer from the highest effective personal tax rate in the world. That's according to a survey by KPMG.

The auditing firm looked at income tax rates and other deductions like social security to calculate their results. "Whether social security is a true tax is a topic of continued debate, but in terms of cost, it can be material and should not be ignored," says the company.

For someone on a gross income of $100,000 a year these are the 10 countries in which they would have to shell out the most for tax and social security combined. Other European countries came close to the top 10. Luxembourg was 11th, the Netherlands 12th, Portugal 13th and Austria 17th place. Brazil was the only South American country in the top 20 coming in at 16th place.

Only three Asian countries made KPMG's full list, India at 14th, Malaysia at 34th place and the Philippines at 39th. Canada is in 40th position and the U.S. is further down the list at 55th position.

Economics

This Week's Data

The April NFIB Business Optimism Index came in at 92.1 versus expectations of 90.5.

The International Council of Chopping Centers reported weekly sales of major retailers fell 2.0% versus the prior week but rose 1.2% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales up 0.7% versus the similar timeframe last month and up 2.8% on a year over year basis.

Weekly mortgage applications fell 7.3% while purchase applications declined 4.0%.

April PPI was down 0.7%, in line with forecasts; ex food and energy, it was up 0.1% versus estimates of up 0.2%.

The May New York Fed manufacturing index came in at -1.43 versus expectations of +3.75.

Other

Credit rating agencies once again getting gamed (medium):

http://www.zerohedge.com/news/2013-05-14/2007-deja-vu-bond-issuers-game-rating-agencies-once-again

Update on the student loan bubble (short):

http://www.zerohedge.com/news/2013-05-14/us-student-loan-bubble-broken-down-state-and-why-washington-dc-stands-out-sore-thumb

If housing is doing so great, why are lumber prices plummeting (short):

http://www.zerohedge.com/news/2013-05-14/lumber-new-baltic-dry

More Chinese data (short):

http://blog.yardeni.com/2013/05/china-excerpt.html

Politics

Domestic

Double standard (short):

http://www.aei-ideas.org/2013/05/legal-double-standard-obama-administration-gives-wind-energy-industry-a-pass-on-killing-birds-but-not-oil-and-gas/

Some thoughts on the IRS scandal from my favorite liberal (short):

http://dailycaller.com/2013/05/12/what-about-clintons-irs/

Here is a questionnaire sent out by the IRS to a targeted group (medium):

http://www.zerohedge.com/news/2013-05-14/irs-conservatives-provide-details-regarding-all-your-facebook-or-twitter-activity

And here is the Inspector General's report on the IRS action (long):

http://www.zerohedge.com/news/2013-05-14/full-irs-inspector-general-report-inappropriate-targeting-conservative-groups

The nexus of the Administration and the MSM (short):

http://michellemalkin.com/2013/05/13/obama-administration-media-relative/

International

Germany pushing France to the periphery (medium):

http://www.nakedcapitalism.com/2013/05/germany-pushes-france-toward-periphery.html