On June 3, 2015, we said the following of Hospitality Properties Trust (renamed to Service Properties Trust):
“If worse comes to worse, HPT could decline to point A or $13.00. If a repeat of the housing crisis were to take place then HPT could decline as low as point B or $4.67.”
The chart below highlights the date the article was published and the price action that has transpired since June 2015.
The worst case target was achieved by an exceptionally wide margin.
Posted in HPT, Speed Resistance Lines, SVC
On February 3, 2018, we said the following:
“In the past, we would normally apply the more passive Dow Theory downside targets instead of Edson Gould’s Speed Resistance Line. However, with the late stage parabolic move in the Dow Jones Industrial Average, the more aggressive downside targets are necessary in this instance.”
Our decision to utilize the “more aggressive downside targets” has proven to be well founded. However, since the February 3, 2018, a new peak has been achieved which provides different downside targets. This leads to an update of the downside and upside targets.
Below are the updates with extensive review of what to watch for (skip to the bottom for the Summary). Continue reading
If you have to prove it then it probably isn’t true.
"As Walter Bagehot, the British financial journalist and historian, wrote in 1873, 'Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.' (Norris, Floyd. Big Fall Evoking Nasty Old Memories Of a Run on a Bank. New York Times.pg. A1)."
In this case, if you have to say it, then it probably isn’t true.
Today, Treasury Secretary Mnuchin was quoted as saying:
“Boeing has said that they have no intention of using a program that may change in the future,’ Mnuchin said. ‘These are things that the companies need to come and ask us for. ... Right now Boeing’s saying they don’t need it.’ (Andrea Shalal and Doina Chiacu; Writing by Lisa Lambert; Editing by Nick Zieminski. U.S. not bailing out airlines, Boeing not using federal money: Treasury Secretary. Reuters. March 27, 2020.).”
Let’s examine the history of some famous quotes, sometimes just days before the company in question collapsed or got bailed out. Continue reading
Posted in Quote of the Day
For the last 40 years, interest rates have been in decline. So people can be forgiven when they have the view that the trend is down, it should be down, and if it ever goes up and something goes wrong then the solution must be to cut interest rates.
Unfortunately, during a secular rising trend, cutting interest rates aren’t the solution. Worse still, falling rates ARE THE PROBLEM. Adding QE and stimulus to rate cuts compounds an already bad situation.
Review
We have been unanimous in our view that the secular trend in interest rates is up rather than down and that increasing interest rates are good for the market. Our view preceded the Federal Reserve’s policy of rate increases starting December 15, 2015.
Current Rate Environment
As we have stated well before rates started to increase, in a secular rising trend in interest rates, going up will be good for stocks and the economy. What this also means is that in a secular rising trend in interest rates, going down will be bad for stocks and the economy. We have depicted the change below.
Rates Going Up
Rates Going Down
We have used the Daily 3-Month Treasury for one simple reason, when it goes up or down, the Federal Reserve ALWAYS follows.
Conclusion
The door has been closed on the rate cutting tool that the Federal Reserve has wielded like a force field against any perceived threat to the economy. However, the reality is that we’re in a secular rising trend in interest rates. ANY additional stimulus (fiscal or monetary) should be looked upon as prolonging the problem rather than improving or fixing the problem.
Posted in Interest Rate Monitor, interest rates
On August 23, 2009, in our call that the recession was over, we said the following:
“I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past.”
From the low in 2009 to 2014, many questioned the rising stock market and economy because job growth was not as strong as hoped. However, it should have been understood that to achieve such accelerated job growth comes at a very expensive price.
On July 2013, we said the following of the unemployment rate:
“It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios. The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextended economic boom.”
On August 24, 2018, we said the following of the unemployment rate:
“Presently, we anticipate the unemployment rate rising to the 6.30% level as a natural reaction to the current low levels. While the unemployment rate can go lower, there is a tremendous tradeoff to achieving lower levels. It is quite possible we have seen the best of times with a declining unemployment. Anything below the current levels will come at a tremendous cost in the next recession.”
The current environment bears out the concerns that we’ve had about the unemployment rate decreasing below 3.80%. Once we get beyond a certain tipping point the reaction is swift and unnecessarily painful.
The Outlook
According to the Washington Post dated March 23, 2020, the projected unemployment rate is likely to range from 9% to 30% based on the fallout from the coronavirus (COVID-19). Our August 2018 projection of 6.30% remains, as it is the first stopping point to any higher level beyond Goldman Sach’s 9% or St. Louis Federal Reserve President James Bullard’s 30%.
These estimates, in our view, are knee jerk reactions in a vacuum. As we were concerned about going below 3.80% in the unemployment rate back in 2013, we’re going to wait until we reach 6.30% before we can offer up a measure perspective on the situation.
Please keep in mind that none of what has occurred, at least from a data standpoint, is unusual or unexpected. Of course we couldn’t predict that a pandemic was coming. Yet, the data, from a historical standpoint, suggested that the low range was at an extreme and was bound to react to the upside.
On August 4, 2019, we said the following:
“A trend doesn’t define the future prospects. However, we believe that the declining trend has not completely played out. This means that we expect that the economy and stock market will languish, in the best case scenario.”
When you combine Charles H. Dow’s consumer sentiment indicator, the Dow Jones Industrial Average on a year-over-year basis, with Dow Theory we see that all indicators have been in place for the decline that we’ve seen so far.
The only question that remains is how far will the decline extend? We’re working to generate a measured response to this question.
As we register daily percentage increases beyond all historical norms for Boeing, we worry the message in the price is being misinterpreted. So to help put this matter into the proper context, we have outlined the top 5 daily percentage increases in Boeing’s share price below.
Number 5: July 28, 1987
Number 4: October 28, 2008
Number 3: March 24, 2020
Number 2: July 8, 1970
Number 1: March 25, 2020
Our Take
In each of the top 2, top 4, top 5 & top 6 single day percentage gains, Boeing was far from a reversal of the stock price to the upside. The lone exception, that could be argued, was the 1970 increase of +23.71%, which took Boeing to a new low by 1974.
We have intentionally included the prior low before the crash in the stock price. Also, we included the following peak price to put into perspective the amount of time and money that may have been lost before getting back to a “break-even” point (excluding dividends).
The fact that Boeing is having these significant increases in the price in a single day is a warning sign that investors must take heed of. This isn’t a recovery, instead, it is manic panic that will bring lower lows.
See Also: The Most Dreaded Chart of Boeing
There is a reason it is called the Dow Jones Utility Average, it reflects what the average “should” be. However, some members of the average have gone far above what is considered to be reasonable This leads to only one outcome, reversion to the mean (in the best case scenario).
On the way to reverting to the mean, many stocks will overshoot the mean as a normal reaction to the extreme that was attained in the prior up or down period. As we’ve demonstrated with the chart of Boeing (BA) versus the Dow Jones Industrial Average on March 22, 2020, any stocks that has exceeded the average will likely revert to the mean in dramatic fashion. As seen in the chart provided, NextEra Energy (NEE) will be no exception.
Below is a chart of NextEra Energy versus the Dow Jones Industrial Average from the March 9, 2009 low to March 23, 2020.
Our review of NextEra Energy isn’t as wish for the decline in the stock price. Instead, our work is an observation that has stood the test of time.
As markets are currently experiencing an exceptional increase of +5% to +7% (abnormal and unhealthy), we’d like to save investors a lot of money so that they can subscribe to our service which will outline the best times to buy NextEra Energy (we already have that price). At the current price, NextEra Energy (NEE) is in our AVOID range.
Posted in Dow Jones Utility Average, NEE, relative, utilities
Since I’m on the hook for the pending bailout of Boeing, it is worth knowing why the company soared so much in the first place.
Below is a chart of Boeing versus the Dow Jones Industrial Average from the March 9, 2009 low to March 20, 2020.
Look how majestically Boeing soars above the Dow Jones Industrial Average in the period from 2012 to 2019. As usual, the rise of Boeing wasn’t due to some kind of fluke. It was primarily an outgrowth of a accounting method that, while very legal, was questionable.
The accounting method is known as “program accounting” which allows the company to defer the costs of building planes and book the expect profits from those planes in the future, in the current period. It’s the usual time travelers dream except it is done with accounting.
Thankfully, there were well informed critic of this blatant fantasy world that Boeing was living in as noted in the excerpts below.
“Rather than booking the huge costs of building the advanced 787 or other aircraft as it pays the bills, Boeing -- with the blessing of its auditors [Deloitte & Touche LLP] and regulators and in line with accounting rules -- defers those costs, spreading them out over the number of planes it expects to sell years into the future. That allows the company to include anticipated future profits in its current earnings (Ostrower, Jon. Boeing's Unique Accounting Helped Lift Profit. Wall Street Journal. 04 Oct 2016: B1.).”
“The problem, analysts and other critics say, is that Boeing's approach stretches its profit per plane into such a distant and uncertain future that it isn't clear if it will ever recover the nearly $30 billion it has sunk into producing the plane and validate years of projected profits (Ostrower, Jon. Boeing's Unique Accounting Helped Lift Profit. Wall Street Journal. 04 Oct 2016: B1.).”
“Boeing, which hasn't confirmed or denied the investigation, has defended its accounting -- which complies with generally accepted accounting principles -- and says its profit expectations are realistic (Ostrower, Jon. Boeing's Unique Accounting Helped Lift Profit. Wall Street Journal. 04 Oct 2016: B1.).”
“For Boeing, the cost of producing the Dreamliner, which was delayed by 3 1/2 years because of design and manufacturing problems, is a thorny issue. The Dreamliners delivered so far continue to cost the company much more to make than what it charges for them, a fact obscured by its soaring financial results (Ostrower, Jon. Critical Mission for Boeing: Slashing Dreamliner Costs. Wall Street Journal.08 Jan 2014: B.1.).”
“If Boeing booked the difference between current sales and costs for each product it delivers, the way most companies do, its commercial-jet division's operating profit for the first nine months of 2013 would instead have been a $69 million loss, according to company figures (Ostrower, Jon. Critical Mission for Boeing: Slashing Dreamliner Costs. Wall Street Journal.08 Jan 2014: B.1.).”
Closing Thoughts
Sadly, many defenders of the bailout of Boeing will invoke claims that COVID-19 did the company in or that jobs will be lost. Few of those same people will look at how this could have been avoid by Boeing management.
On Deck: NextEra Energy: NextProblem
Posted in accounting fraud, BA, COVID-19
On March 23, 2020, the Federal Reserve announced that they are standing ready to provide unlimited quantitative easing. Among the actions included in Fed’s announcement:
This action by the Federal Reserve seems eerily familiar to us. Why? Because March 2008 was the year many of these same programs were implemented by the Federal Reserve.
Below is a chart of the Dow Jones Industrial Average covering the 2007 to 2009 period when the Fed stepped in in a similar way.
The position of where you are can change very quickly based on the type of policy action taken. The less policy action the faster the market gets closer to the “bottom.”
Posted in 2008, DJIA, Federal Reserve Bank, You Are Here
On January 6, 2015, we said the following of the Oil and Gas Stock Index (XOI):
“The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated. However, we did not include the extreme downside target of 575.41. We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low.”
On September 7, 2015, we said the following of the XOI:
“…lurking in the background is the extreme downside target of 575.41. Since our experience has been that the extreme downside target is commonly achieved, we hazard to guess what would happen globally to the oil market in order to decline to such a low point.”
Unfortunately, we made the following mistake on December 27, 2017 regarding the XOI:
“Assuming that the primary movement is still a bear market, then the expected upside target should have been from 1,210.15 (3/8) to 1,313.37 (½). With the XOI above the 1,313.37 level, Dow Theory suggests that a bull market is on the way as the balance of losses sustained by the buyers near the previous peak is giving rise to optimism that breakeven on their investment is possible.”
We incorrectly interpreted Dow Theory in the belief that a bull market was on the way. It could be argued that as the prior peak was not achieved then a bull market wasn’t signaled and therefore the analysis was somehow right. However, we’d like anyone who uses both Dow Theory and Speed Resistance Lines to know that it is the interpretation that is incorrect and generally not the tools.
XOI Index: 2008 to 2020
The descending 575.41 level on the XOI Index is the equivalent of 375 (it continues to decline over time). That will likely be the point when the XOI bounces. From the 375 level it is uncharted territory. However, that is the point when values will come into play and investment can be done with relative abandon. Keep in mind the effort for many countries to phase out oil consuming vehicles.
Posted in Dow Theory, SRL, XOI
As we enter the bailout phase of Boeing, there is one chart that should alarm all investors.
Since the low in the stock market on March 9, 2009, Boeing (BA), (as of March 20, 2020) has gained approximately +206%.
In the same period of time (March 9, 2009-March 20, 2020), the Dow Jones Industrial Average has increased +192%.
Let that sink in for a minute. We are about to bail out a company that as of March 20, 2020 has exceeded the gains of the Dow Jones Industrial Average since the March 2009 low.
Now, Let’s look at the chart that should be causing dread for all investors.
The comparison between Boeing and the Dow Jones Industrial Average, when drawn on a relative basis, shows the extent of the bubble in the price of Boeing stock.
Defenders of the Boeing bailout say that the total shutdown of the airline industry and the coronavirus are the reasons that Boeing is suffering more than usual. However, when viewed on a relative basis against the Dow Jones Industrial Average, which Boeing is a part of, we can only conclude that Boeing is only reverting to the mean.
As noted above (206% v. 192%), the mean has not been reached and as Charles H. Dow has said, the reaction will swing to the opposite direction before being resting at the mean.
Could things get any worse after a horrendous week? We certainly hope the curve for COVID-19 will flatten soon but only time can tell.
The S&P 500 has broken below the 2018 low at a record setting pace and has fallen -32% from the peak.
If you think that this situation is worse than the financial crisis then we probably have more room on the downside as the market fell more than -50% in 2008.
If you have the stomach to ride this out and want to pick the bottom, there are plenty of companies on our watch list this week. Continue reading
Posted in Dividend Achiever Watch List, Dividend Achievers, Dividend Watch List
Tagged members
On January 30, 2019, we said the following:
“The rebound has been exceptional but requires one last step in the process of confirming that the trend is actually up. In order for the trend to be CONFIRMED as up, the price of TPL needs to retest the $409 level and hold. Without holding at the $409 level, TPL would be expected to test the ascending $290.66 target, at minimum.”
Since January 30, 2019, Texas Pacific Land has had the following activity:
We’ve updated the Speed Resistance Lines because the peak in the price increased from our prior level at $871.99 to $901.04. Unsurprisingly, TPL has achieved our lowest downside target after bouncing at the $410 level.
Now our concern is how far below the $300 level that TPL might go. We seem to be in the early stages of the current market decline so we’ll have to update the downside risk as we go.
Posted in Edson Gould, SRL, TPL
Review:
Update
Before the full year of 2020 was under way, General Electric had managed to give back all ofthe 2019 gains. The era of forgiving has been quickly forgotten.
Now that General Electric sits on the cusp of the 2018 low, the questions becomes, can the stock recover and retest the 2020 peak? We don’t think so for two primary reasons.
The fact that the price could rise as expected and the falter at the very resistance target that was highlighted near the 2018 low suggests that there are powerful forces at work.
The reality is that a recession is on the way. the depth and length is the only unknown. However, we have always maintained that if General Electric couldn’t do well during a booming economy then what should be expected during a recession?
We advise caution as the market seems bound and determined to expose failings and frauds which will result in collateral damage to companies like General Electric.
Posted in GE, General Electric