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Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 46 years of investment... More
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  • The Closing Bell

    Statistical Summary

    Current Economic Forecast

    2013

    Real Growth in Gross Domestic Product: +1.0-+2.0

    Inflation (revised): 1.5-2.5

    Growth in Corporate Profits: 0-7%

    2014 estimates

    Real Growth in Gross Domestic Product +1.5-+2.5

    Inflation (revised) 1.5-2.5

    Corporate Profits 5-10%

    2015 estimates

    Real Growth in Gross Domestic Product (revised) 0-+2%

    Inflation (revised) 1.0-2.0

    Corporate Profits (revised) -5-+5%

    Current Market Forecast

    Dow Jones Industrial Average

    Current Trend (revised):

    Short Term Uptrend 16990-19767

    Intermediate Term Uptrend 17104-22230

    Long Term Uptrend 5369-18973

    2014 Year End Fair Value 11800-12000

    2015 Year End Fair Value 12200-12400

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Uptrend 1989-2970

    Intermediate Term Uptrend 1796-2567

    Long Term Uptrend 797-2129

    2014 Year End Fair Value 1470-1490

    2015 Year End Fair Value 1515-1535

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 49%

    High Yield Portfolio 54%

    Aggressive Growth Portfolio 53%

    Economics/Politics

    The economy is a neutral for Your Money. The economic data this week was mostly negative: positives---March builders' confidence, April Philly Fed manufacturing index, March PPI and April consumer sentiment; negatives---March housing starts and building permits, weekly mortgage and purchase applications, March industrial production and capacity utilization, March leading economic indicators, March small business optimism, April NY Fed manufacturing index, the March budget deficit and March CPI ex food and energy; neutral---March retail sales and sales ex food and energy combo, March CPI and the Fed Beige Book.

    Housing starts, industrial production, leading economic indicators and retail sales were the big numbers this week---the score: negatives 3 and neutral 1. So both on both a quantity and quality basis, the trend following last week's nonevent is back to solidly negative.

    An optimist on industrial production (short):

    http://scottgrannis.blogspot.com/2015/04/why-drop-in-industrial-production-is.html

    The international economic data was also downbeat. While we did get another positive datapoint from the EU (auto sales), China reported several, not just negative, but very negative stats. On the former point, this is the fifth week of good numbers from the EU; though it is still too soon to state with confidence that the EU is coming out of its slump. As I noted last week, one of the things that holds me back is the unresolved problems of Greece and Ukraine. Both of which experienced adverse developments this week and either of which could stop any potential recovery in its tracks.

    Our forecast:

    'a much below average secular rate of recovery, exacerbated by a declining cyclical pattern of growth, resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with an impaired balance sheet, and a business community hesitant to hire and invest because the aforementioned, the weakening in the global economic outlook, along with...... the historic inability of the Fed to properly time the reversal of a vastly over expansive monetary policy.'

    The pluses:

    (1) our improving energy picture. 'Oil supplies remain abundant and that is a significant geopolitical plus. Furthermore, lower prices should be constructive when viewed as either a cost of production or cost of living. However, none of pricing positives have yet shown up in the macroeconomic stats. Indeed, as I have been pointing out, that data only gets worse the further oil prices fall.'

    Unfortunately for the 'unmitigated positive' crowd, oil prices appeared to have broken out of their recent trading range to the upside. My question now is, will that same group of folks start yakking about how negative this development will be were it to continue?

    Of course, the problem that I am really worried about is the impact lower oil prices [employment, rig count, cash flow] have had on the subprime debt from the oil industry on bank balance sheets and the likelihood of a default.

    The latest numbers on rig count (short):

    http://www.zerohedge.com/news/2015-04-17/us-rig-count-drops-record-19th-week-row

    The negatives:

    (1) a vulnerable global banking system. This week, there was more fallout from the bankrupt Austrian bank as it claimed another victim.

    Another potential problem that I have mentioned before is the consequences to the EU financial system of a Greek exit---which seems to be gathering some momentum. I am not predicting that it will happen; gosh only knows that the EU ruling class has turned pulling back from the brink of disaster a major art form. Still it is a risk about which I believe that the pundits are bit too smug.

    Even the banksters' bankers are having problems (short):

    http://www.zerohedge.com/news/2015-04-16/another-former-imf-head-arrested-rodrigo-rato-perp-walked-madrid

    'My concern here.....that: [a] investors ultimately lose confidence in our financial institutions and refuse to invest in America and [b] the recent scandals are simply signs that our banks are not as sound and well managed as we have been led to believe and, hence, are highly vulnerable to future shocks, particularly a collapse of the EU financial system.'

    (2) fiscal policy. The only news this week was the now growing federal deficit---which has been part of major long term negative---too much spending, too high taxes, too much regulation

    http://scottgrannis.blogspot.com/2015/04/federal-budget-deficit-3-of-gdp.html

    In the interest of being fair and balanced, several GOP presidential candidates offered plans this week to address the spending/tax problems: tax reform [Rubio] and entitlements reform [Christie]. We might take some hope from this; but it is a long way until the elections and an even longer way from the actual execution of any reform.

    Rubio's plan (medium):

    http://theweek.com/articles/549657/rightwing-hostility-marco-rubios-tax-plan-shows-gop-stuck-past

    Christie's plan (medium):

    http://www.realclearmarkets.com/articles/2015/04/16/chris_christie_addresses_the_pension_elephant_101626.html

    (3) the potential negative impact of central bank money printing: The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn't been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.

    Moody puts student loan bonds on watch for downgrade (medium):

    http://www.zerohedge.com/news/2015-04-17/student-debt-bubble-about-witness-its-2007-moment

    This week,

    [a] ECB kept interest rates unchanged {ZZZZZZZZZZ}. While that maybe a snoozer, its bond buying program {QE} is causing all kinds of problems, to wit, negative interest rates and an acute the scarcity of government bonds---which has the ECB now looking at buying corporate debt; and nothing says mispricing of assets like buying non-risk free bonds when you are supposed to be buying risk free bonds,

    http://www.zerohedge.com/news/2015-04-16/mario-draghi-collateral-scarcity-and-why-ecb-will-soon-buy-corporate-bonds

    [b] a Japanese government official suggested that the current exchange rate for the yen was too high, i.e. it needs to be devalued more,

    [c] our own Fed gave us a snoot full of dovish comments on Thursday after it dawned on them that the US economy wasn't doing too well.

    At the risk of being repetitious, I have suggested that the Fed would once again mishandle the transition to normal monetary policy. The evidence gathers daily that this economy has seen its highs in growth; and after twelve weeks of nonstop bombardment, the Fed is getting a clue that whatever transition it might have thought it could execute, whenever it thought that the economy might be strong enough for higher rates, has all been a giant wet dream. In short, the Fed is still batting 0.000.

    The important point here is that if I am correct on the direction of the economy, the world is going to have to alter its current 'goldilocks' scenario; and whatever the new improved version is, it may not be quite as palatable as the one they dream about at the moment.

    (4) geopolitical risks: tensions in the Middle East remain. Iraq regained the spotlight this week as ISIS and Iraqi army units are in a pitched battle. Unfortunately, ISIS appears to be winning. Equally regrettable, US friendlies appear to be losing everywhere in the Middle East while the administration pursues a self-destructive 'legacy' policy with Iran which will in effect make it the hegemon of the area---which got a boost this week when Putin agreed to sell it a state of the art missile defense system.

    James Baker on the Iran deal (medium):

    http://www.wsj.com/articles/the-nuclear-deal-with-iran-needs-worklots-of-it-1429225765

    In addition, …I am…concerned about the lack of appreciation by our leadership of radical Islam's intent to bring the war to our home. My fear is that it will take a major catastrophe [like burning people alive and mass beheadings aren't enough] to make Our Glorious Leader realize how irresponsible, unsound, dangerous and intellectually vacuous our current 'local law enforcement',' jobs for jihadists' strategy [?] is.

    Meanwhile, violence in Ukraine is on the rise as Putin turns up the heat while Ukraine tries to get funding from the IMF.

    And the US now officially has boots on the ground in Ukraine (medium):

    http://www.zerohedge.com/news/2015-04-17/300-us-paratroopers-arrive-ukraine-after-russia-says-its-missiles-will-target-nato-m

    (5) economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. We got a single upbeat datapoint out of the EU this week, keeping alive the prospect that the European economy may be starting to turn.

    However, the rest of the news was pretty bleak: [a] China reported multiple negative stats, [b] the Japanese reinforced their commitment to QE, [c] the latest WTO 2015 and 2016 world trade estimates were downgraded, [d] while the problems in Ukraine and Greece just got worse.

    With respect to Greece, it continues to inch toward an exit from the EU. Perhaps not deliberately; more likely it is either naiveté or recklessness. Specifically, the Greek government [a] once again failed to deliver enough details on troika mandated reform measures to earn it the financial assistance it so desperately needs [b] began discussions with a well-known sovereign debt restructuring/bankruptcy attorney and [c] last but certainly not least, began discussion with Paul Krugman---the same genius that has been advising the Japanese government. What could possibly go wrong?

    http://www.zerohedge.com/news/2015-04-17/greece-about-be-fixed-good

    In the meantime, those optimistic pundits pronouncing that Greece offers no risk to the EU or its financial system are getting a lesson in humility. Adding insult to injury, S&P lowered Greece's credit rating to CCC+.

    http://www.thefiscaltimes.com/Columns/2015/04/16/Greek-Default-Threat-Bluster-or-Bombshell

    More (medium):

    http://www.nakedcapitalism.com/2015/04/greece-default-grexit.html

    And the latest on the subject from the ECB (medium):

    http://www.zerohedge.com/news/2015-04-17/ecb-considering-parallel-greek-currency

    'Muddling through' remains the assumption in our Economic Model. Hopefully, the recent EU data will continue to improve; which should improve the odds of this scenario. On the other hand, [a] a Grexit remains a decent probability and no one knows the unintended consequences of such an event and [b] the Chinese and Japanese economies continue to falter and they collectively are bigger than the combined EU economies. This remains the biggest risk to forecast.

    Bottom line: the US economic news resumed its downward path.

    Overseas, the EU economy is still showing improvement, though we got some very rough data out of China.

    Meanwhile, QE remains the principal theme among the central bankers as (1) the Japanese central bank reiterated its devotion to currency devaluation, and (2) the Fed officials offered up more crawfishing comments on rate hikes.

    My immediate concern is that these actions add fuel to the currency devaluation race---the history of trade wars generally suggest that they don't end well. Further, I believe that the ultimate price for the largest expansion in global monetary supply in history will be paid by those assets whose prices have been grossly distorted, not the least of which are US equity prices.

    Hoisington's first quarter review (a bit long but worth the read):

    http://www.advisorperspectives.com/commentaries/20150417-hoisington-investment-management-hoisington-quarterly-review-and-outlook-first-quarter-2015

    The geopolitical hotspots remain unresolved (1) the Greeks and the Troika appeared to make no progress this week, as the Greeks continued to look for ways to weasel out of repaying their debts, (2) the Ukraine/NATO/Russia standoff heated up and (3) the Middle East violence has escalated raising the odds of a Sunni/Shi'a civil war---which almost certainly won't leave oil supplies unscathed.

    This week's data:

    (1) housing: March housing starts and building permits were well below consensus; weekly mortgage and purchase applications were down; the March NAHB builders' index was better than estimates,

    (2) consumer: March retail sales rose less than expected though ex food and gas they were slightly better than anticipated; month to date retail chain store sales slowed markedly; March consumer credit declined; weekly jobless claims were well ahead of forecasts; April consumer sentiment rose fractionally,

    (3) industry: March industrial production fell twice the consensus, while capacity utilization dropped; the March small business optimism index was well below estimates; the April NY Fed manufacturing index was negative while the Philadelphia Fed index was up from February,

    (4) macroeconomic: the March US budget deficit was larger than anticipated; March PPI was up but less than in February; March CPI came in on target, though ex food and energy, it was a hotter than expected; March leading economic indicators were short of forecast and the February reading was revised down; the latest Fed Beige Book was useless, except to blame any shortfall on the weather.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 17826, S&P 2081) finished the week on a major down note. The S&P has now made a second lower high and kept that very short term downtrend intact. As you know, on Thursday the Dow negated the existing upper boundary of its very short term downtrend; however, it still didn't get even with or above the prior high, meaning that it too has marked a second lower high.

    On the other hand, the Dow closed right on its 100 day moving average, while the S&P remains slightly above its comparable trend. Remember that the 100 day moving average has proven a very resilient support level for the past two years. So the next couple of days pin action around this boundary could give us a hint on future short term price movement.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (16990-19767, 1989-2970), intermediate term (17104-22230, 1796-2567 and long term (5369-18873, 797-2129).

    Volume rose; but it was options expiration, so that was to be expected. Breadth was terrible. The VIX bounced 10%, finishing back above the lower boundary of a pennant formation---which was negated by Thursday's pin action. I am reversing/putting on hold that call until we see how the Markets trade next week. Meanwhile, it remained within its short term trading range, its intermediate term downtrend, its long term trading range and below its 100 day moving average. I continue to think that the VIX remains a reasonably priced hedge.

    The long Treasury was up strong on Friday; not surprising given the equity market performance. It finished within its very short term and short term trading ranges, its intermediate and long term uptrends and above its 100 day moving average.

    GLD's price rose, closing within its short and intermediate term trading ranges, its long term downtrend and below its 100 day moving average. In addition to the really crappy overall performance of GLD, it is starting to develop a head and shoulders pattern which, if completed, has negative implications.

    Bottom line: Friday's pin action (1) created a second lower high for both of the indices, (2) but left them right on their 100 day moving averages which has offered considerable strength recently. So short term, the technical picture is a bit cloudy. How the Averages handle their 100 day moving averages next week should provide some insights on direction.

    That said, longer term, the trends are solidly up and will be so until the short term uptrends, at the very least, are negated.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (17826) finished this week about 48.1% above Fair Value (12036) while the S&P (2081) closed 39.2% overvalued (1495). Incorporated in that 'Fair Value' judgment is some sort of half assed attempt at getting fiscal policy under control, a botched Fed transition from easy to tight money, a historically low long term secular growth rate of the economy and a 'muddle through' scenario in Europe, Japan and China.

    This week's poor US and Chinese economic news only confirms the assumptions in our Valuation Model.

    The Japanese enthusiastic embrace of QE notwithstanding, problems with this ineffective, overused tactic continue to appear (1) in the EU, zero interest rates and the scarcity of available bonds for purchase under their version of QE are severely impacting the pricing of risk and the misallocation of assets, (2) in China, rampant speculation in the securities markets have forced it to institute measures [raising margin requirements] to reduce it, (3) while in the US, the Fed appears to have overstayed its commitment to money forever and is now stuck with a decline in economic activity and no policy levers to combat it save the same ones that helped cause the problem in the first place. All these signs of the problems (misallocation of investment, asset mispricing, encouraging speculation, beggar thy neighbor currency devaluations, negligible economic improvement) of a failed QE; and all signs that the correction process in the securities markets may be more painful when it occurs.

    Geopolitical risks have not declined. The Greek bailout talks have progressed very little, the outcome of the current Ukraine/NATO/Russia standoff is heating up again and the military developments (ISIS progress in Yemen and Iraq; sale of a Russian missile defense system to Iran) in the Middle East are increasing the explosive potential there.

    'As I noted last week, I have no clue how to quantify the aforementioned geopolitical risks' impact on our Models even if I could place decent odds of their outcome because: (1) the outcomes are mostly binary, i.e. Greece either exists the EU or doesn't and (2) they all most likely incorporate potential unintended consequences, which by definition are unknowable. Better to just say these are potential risks with conceivably significant costs and then wait to see if we 'muddle through' or have to deal with those costs. The important investment takeaway, I believe, is to be sure that your portfolio had at least some protection in the downside.'

    Bottom line: the assumptions in our Economic Model have recently changed. While they will have no effect on our Valuation Model, if I am correct they will almost assuredly result in changes in Street models which will have to bring their consensus Fair Value down.

    The assumptions in our Valuation Model have not changed either; though there are scenarios listed above that could lower Fair Value. That said, our Model's current calculated Fair Values are so far below current valuation that any downward revisions by the Street will only bring their estimates more in line with our own.

    Our Portfolios maintain their above average cash position. Any move to higher levels would encourage more trimming of their equity positions.

    I can't emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

    http://alephblog.com/2015/04/17/on-being-a-forced-seller-in-a-panic/

    Bear in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

    DJIA S&P

    Current 2015 Year End Fair Value* 12300 1525

    Fair Value as of 4/30/15 12036 1495

    Close this week 17828 2081

    Over Valuation vs. 4/30 Close

    5% overvalued 12637 1569

    10% overvalued 13239 1644

    15% overvalued 13841 1719

    20% overvalued 14443 1794

    25% overvalued 15045 1868

    30% overvalued 15647 1943

    35% overvalued 16248 2018

    40% overvalued 16850 2093

    45%overvalued 17452 2167

    50%overvalued 18054 2242

    55% overvalued 18655 2317

    Under Valuation vs. 4/30 Close

    5% undervalued 11434 1420

    10%undervalued 10832 1345 15%undervalued 10230 1270

    * Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term cyclical influences. The model is now accounting for somewhat below average secular growth for the next 3 to 5 years.

    The Portfolios and Buy Lists are up to date.

    Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.

    Apr 18 10:32 AM | Link | Comment!
  • The Morning Call--The Fountain Of Perpetual QE

    The Morning Call

    4/17/15

    The Market

    Technical

    The indices (DJIA 18105, S&P 2104) declined slightly yesterday. They both closed above their 100 day moving averages. The Dow ended above the upper boundary of a very short term downtrend for a second day, negating that trend; however, the S&P remained below its comparable trend line.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (16984-19761, 1987-2968), intermediate term (17091-22217, 1796-2567 and long term (5369-18873, 797-2129).

    Volume fell; breadth was really poor. The VIX dropped again, closing back below the lower boundary of the pennant formation for a second day, negating that formation to the downside and implying more upside for equities. It also ended within its short term trading range, its intermediate term downtrend, its long term trading range and below its 100 day moving average. The cheaper this gets, the better its value as a hedge.

    The long Treasury declined again, but remained within very short term and short term trading ranges, intermediate and long term uptrends and above its 100 day moving average. The longer it holds those short term trading ranges, the better the odds that it has stabilized.

    GLD's price decreased, closing within its short and intermediate term trading ranges, its long term downtrend and below its 100 day moving average. GLD continues to struggle just to stay flat.

    Bottom line: the indices are now out of sync on a very short term basis. However, the performance of the VIX suggests that this draw will be settled to the upside. That said, both to the Averages are near the upper boundaries of their long term uptrends which I believe will provide formidable resistance. Looking at the risk/reward offered by the upper boundaries of the long term uptrends (reward) and the lower boundaries of the short term uptrend (risk), risk wins.

    Fundamental

    Headlines

    The US economic data maintained it downward sloping trend yesterday: March housing starts and building permits were awful and weekly jobless claims rose versus an anticipated decline. The good news was the April Philadelphia Fed manufacturing survey which rose modestly from its March reading. The most important stat was housing starts; so our revised forecast appears right on.

    Ignoring the data (medium):

    http://www.zerohedge.com/news/2015-04-16/3-things-retail-sales-real-unemployment-optimism

    There were also four Fed speakers yesterday, all but one of whom made dovish mewings---most of which included references to the lousy economic numbers that we have been getting for lo these many weeks. Translated, I think that means that the odds of a rate increase just took another step down. Which also provides further confirmation that the Fed has whiffed again on the timing of the transition from easy to normal monetary policy. Perhaps more important, if the Fed is now figuring out that the economy is for s**t, how long do we have to wait before the 'goldilocks' true believers suddenly recognize that the emperor has no clothes? I don't have the answer; but when, as and if they do and all their economic and valuation models have to be revised, cash is probably not a bad thing to own.

    http://www.reuters.com/article/2015/04/16/us-usa-fed-lockhart-idUSKBN0N723820150416

    Overseas, EU March auto sales were strong, providing additional evidence that economic conditions are starting to improve in Europe. Unfortunately, the EU is facing a couple of geopolitical hot potatoes that could derail any recovery, assuming that there even is one. I speak of (1) Ukraine where Putin is beginning to turn up the heat [violence] again as the country struggles to gain financing from the IMF and (2) Greece whose population from all appearances have a death wish. The government, whether because it is too inexperienced or too reckless, still hasn't met the terms of the troika to gain ECB financing while at the same time pursuing Russian aid and the help of a well-known sovereign debt restructuring/bankruptcy attorney.

    Meanwhile back at the ranch, things are going from bad to worse (medium):

    http://www.zerohedge.com/news/2015-04-16/meanwhile-greece-%E2%80%94-live-feed

    And (medium):

    http://www.zerohedge.com/news/2015-04-16/greece-may-pay-wages-and-pensions-ious

    So it is looking like the pundit consensus that the fallout from a Grexit will be contained may have to be re-thought (medium):

    http://www.zerohedge.com/news/2015-04-16/contagion-arrives-european-peripheral-bond-risk-soars

    And:

    http://www.zerohedge.com/news/2015-04-17/greek-bank-quarantine-abroad-sparks-european-selloff

    Bottom line: yesterday's events were a rough repeat of Wednesday's: lousy economic news, more weak Fed gruel and a Greek government apparently hell bent on self-destruction. The only thing missing was some lousy international economic stats. Oh well, I guess we are stuck with only a hat trick. Nevertheless, investors seemed willing to take it all in stride as long as the fountain of perpetual QE continues to flow.

    And that is the essence of the Market---ignore everything but global central bank policy. Not that global monetary policy isn't important; but global monetary policy has been pursuing QE with almost no tangible results except in its very early stages; and we are long passed that point for virtually everyone except the EU. So the question is, when will the Markets contemplate some factor aside from QE and/or recognize that QE is a fraud on the global financial system?

    I can't emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

    Bear in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

    Thoughts on Investing from Barry Ridholtz

    The Fine Art of Doing Nothing

    Don't just do something, sit there!

    I love that purposefully juxtaposed Yogi Berra-ism.

    I have been thinking about nothing on this lovely Friday morning. More precisely, why doing nothing - or at least much less - is better for your long term investing outcomes than doing something, also known as more.

    Don't.

    Don't do something, anything, just for the sake of it. If you are going to do something, you better have a damned good reason for it.

    Doing something feels good. Doing something creates the illusion of control. Doing something responds to the angst we feel when we are unhappy with current circumstances.

    Doing something is why people dump all of their stock at market bottoms; please-just-make-the-pain-stop-sell it-I-don't-care-if-this-is-the-low was heard quite often in February and March 2009.

    I have been thinking about nothing recently, mostly in the context of time frames (a post I did a few weeks ago, expanded into a full column for Sunday).

    Humans exist in the here and now, at the intersection of past and future. The present is all they really know from experience. Contextualizing the long game is not their forte. What 24/7 media fills their minds with is so much meaningless detritus, so many useless options - it's why they often forget that nothing itself is a viable choice. Indeed, nothing is often the best choice available.

    Nothing is the enemy of the financial industry. Doing nothing does not generate any business. You cannot sell a front load mutual fund, an annuity, or any sort of private placement when people do nothing.

    Nothing generates no fees, commissions, costs or taxes.

    Nothing doesn't pay the rent. Nothing is the costly opponent of salespeople everywhere. They have come up with all manner of clever phrases to taint the art of doing nothing. "Paralysis by Analysis" is my favorite example.

    The investment industry hates nothing. Just about everything the financial sector does or says or markets or advertises is designed to get you to do something - anything! And right now, too: Track your portfolio tick by tick! Get instant updates the second news breaks! Free trading for ETFs! Real time alerts!

    E) None of the above.

    When confronted with a problem, many people feel obligated to do something, anything - even the wrong thing.

    "Well, at least you tried" they say, when what they really meant was "You did not think this through or fully consider the options and outcomes to your decision making. You failed."

    Even Pop culture references this, obliquely. Yoda was philosophical about nothing as an option: "Do. Or do not. There is no try." Hence, Star Wars recognized that nothing was a viable option.

    No, not Seinfeld - it was never a show, as so many people have mischaracterized it, about nothing. It was actually a show about the minutia of life.

    Nothing is underrated.

    Sometimes, nothing is better than something.

    What are you doing when you should be doing nothing?

    News on Stocks in Our Portfolios

    Schlumberger beats by $0.15, misses on revenue

    o Schlumberger (NYSE:SLB): Q1 EPS of $1.06 beats by $0.15.

    o Revenue of $10.25B (-8.8% Y/Y) misses by $210M.

    Economics

    This Week's Data

    The March Philadelphia Fed manufacturing index rose to 7.5 versus February's reading of 5.0.

    http://www.calculatedriskblog.com/2015/04/philly-fed-manufacturing-survey.html

    The March CPI headline number came as expected (+0.2%); however, ex food and energy, it was up 0.2% versus expectations of up 0.1%.

    Other

    Bloomberg's economic surprise index (short):

    https://twitter.com/MktOutperform/status/588704109349343233/photo/1

    Politics

    Domestic

    International War Against Radical Islam

    Apr 17 9:06 AM | Link | Comment!
  • The Morning Call & Subscriber Alert

    The Market

    Technical

    The indices (DJIA 18112, S&P 2106) continued to rise yesterday. They both closed above their 100 day moving averages. The Dow ended above the upper boundary of a very short term downtrend (a finish above that boundary today will negate the trend); however, the S&P remained below its comparable trend line.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (16973-19750, 1984-2965), intermediate term (17086-22212, 1796-2567 and long term (5369-18873, 797-2129).

    Volume rose; but breadth was mixed. The VIX fell 6%, closing back below the lower boundary of the pennant formation; a finish below that boundary today will negate that formation. It also ended within its short term trading range, its intermediate term downtrend, its long term trading range and below its 100 day moving average. The cheaper this gets, the better its value as a hedge.

    http://www.zerohedge.com/news/2015-04-15/vixterminated-below-13-sparks-another-surge-stocks

    The long Treasury declined, but remained within a very short term and short term trading range, intermediate and long term uptrends and above its 100 day moving average.

    Why interest rates won't rise soon (medium):

    http://www.researchaffiliates.com/Our%20Ideas/Insights/Fundamentals/Pages/377_Not-So-Great_Expectations_Why_Real_Interest_Rates_Wont_Soar.aspx

    GLD's price increased, closing within its short and intermediate term trading ranges, its long term downtrend and below its 100 day moving average. GLD continues to struggle just to stay flat.

    Oil appears to have made a bottom and then broken a resistance level on the upside.

    https://www.bespokepremium.com/think-big-blog/crude-inventories-increase-less-than-expected/

    (click to enlarge)

    Bottom line: despite yesterday's rally, the indices closed mixed with respect to the upper boundaries of their very short term downtrends. We will likely know today which is the outlier. As I have opined, both need to get through this trend line as well as their February highs before assaulting the upper boundaries of their long term uptrends which I believe will prove impossible to challenge in any meaningful way.

    More on sentiment (short):

    http://thereformedbroker.com/2015/04/15/effervescence-extrapolated/

    Stock market performance around April options expiration (short):

    http://jeffhirsch.tumblr.com/post/116489184223/bulls-stampede-april-option-expiration

    Fundamental

    Headlines

    Yesterday's US economic stats were again largely disappointing: negatives: mortgage and purchase applications, industrial production, capacity utilization and the NY Fed manufacturing index; positive: homebuilder confidence; Casper Milquetoast: Fed Beige Book. After last week's dearth of data, clearly the numbers are backing our recent call of a slowdown in the rate of US economic growth.

    Overseas, multiple datapoints from China showed a significant slowdown in its growth rate. These numbers don't assuage my concerns about a global economic slowdown.

    http://www.zerohedge.com/news/2015-04-15/chinas-true-economic-growth-rate-16

    ***overnight, EU March auto sales rose 11%.

    Not surprisingly, the ECB kept interest rates unchanged.

    And last but not least, S&P lowered Greece's bond rating to CCC+ and the Greek PM met with a sovereign debt ('restructuring') lawyer. As the probabilities of a Grexit mount, a large portion of the investment and economic worlds spent yesterday professing little to no concern. They may be correct but I would be unwilling to bid stock prices up until I knew.

    http://www.zerohedge.com/news/2015-04-15/sp-downgrades-greece-ccc-ahead-varoufakis-meeting-famous-sovereign-bankruptcy-lawyer

    Bottom line: at the risk of sounding like a broken record, the economic outlook continues to deteriorate both here and abroad. True we haven't seen any economic data this week from Europe---which has been the only bright spot in the global economy of late. That said, the Chinese growth numbers were at seven year lows and that won't help global trends---as can be seen in Tuesday's WTO trade forecasts and declining US GDP figures.

    Further, actions by the Greek government suggest the rising odds of an exit from the EU. Not that such an event hasn't been well publicized or that all the experts aren't correct in poo pooing any negative impact of such an occurrence. But given past history, it seems to me that in this case, discretion is the better part of valor. (must read):

    http://www.zerohedge.com/news/2015-04-15/bonds-dont-bring-breakups-banks-do-ubs-says-europe-risks-bank-runs-grexit

    I can't emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

    Bear in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

    Subscriber Alert

    The stock price of Lorillard (NYSE:LO) has risen above the upper boundary of its Buy Value Range. Therefore, it is being Removed from the High Yield Buy List. The High Yield Portfolio will continue to Hold this stock.

    Company Highlights

    Caterpillar is the world's largest producer of earth moving equipment serving the road building, mining, logging, agriculture, petroleum and general construction industries. The company has earned a 12-20% return on equity over the past ten years growing earnings and dividends at a 10-19% annual rate. While the CAT's profitability is economically sensitive, longer term the company should prosper as a result of:

    (1) strict cost controls.

    (2) strength in real estate and transportation markets,

    Negatives

    (1) declining backlog,

    (2) weak mining market,

    (3) rising R&D expenses,

    (4) restructuring costs.

    CAT is rated A+ by Value Line, has larger than desirable debt to equity ratio of 56% and its stock yields 3.3%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    CAT 3.3% 7% 54% 10

    Ind Ave 1.6 4 22 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    CAT 56% 22% 3 7% A+

    Ind Ave 37 15 NA 7 NA

    Chart

    Note: CAT stock made initial good progress off its March 2009 low, surpassing the downtrend off its May 2008 high (straight red line) and the November 2008 trading high (green line). Long term the stock is in an uptrend (blue lines). Intermediate term it is in a trading range (purple lines). Short term it is a downtrend (brown lines). The wiggly red line is the 100 day moving average. The High Yield Portfolio owns a 50% position in CAT, having Sold Half in early 2011. The upper boundary of its Buy Value Range is $39; the lower boundary of its Sell Half Range is $123.

    (click to enlarge)

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

    4/15

    Investing for Survival

    Learning how to be wrong (medium):

    http://seekingalpha.com/article/3067756-managing-risk?ifp=1

    News on Stocks in Our Portfolios

    Blackrock (NYSE:BKN)

    · Q1 adjusted net income of $830M or $4.89 per share vs. $762M and $4.43 one year ago. Adjusted operating margin of 41.2% down 20 basis points.

    · AUM of $4.77T up 8% year-over-year.

    · Retail net inflows of $14.17B brings AUM to $551B. iShares inflows of $35.5B brings AUM to $1.07T. Institutional inflows $20.8B brings AUM to $2.8T.

    W.W. Grainger misses by $0.04, misses on revenue (NYSE:GWW):

    Q1 EPS of $3.07 misses by $0.04.

    • Revenue of $2.44B (+2.1% Y/Y) misses by $20M.

    Improved Q1 results from Sherwin-Williams

    Sherwin-Williams (NYSE:SHW) reports sales in its paints business rose 7.5% to $1.46B in Q1.

    • Paint segment profit rate increased 130 bps to 12.1%.
    • Sales in the consumer segment were up 8.1% to $352M.
    • Consumer segment profit rate +10 bps to 15.8%.
    • The company missed on EPS due in part to foreign exchange swings which negatively impacted EPS by $0.04 during the quarter and weak end market demand in some markets.
    • Guidance; Sherwin-Williams expects sales to increase 6% to 8% in Q2 and EPS to fall in a range of $3.70 to $3.90 vs. $3.70 consensus. For the full-year, a high single-digit sales growth rate is seen and EPS of $10.90 to $11.10 vs. $11.22 consensus.

    Philip Morris beats by $0.15, beats on revenue

    Philip Morris (NYSE:PM): Q1 EPS of $1.16 beats by $0.15.

    • Revenue of $6.62B (-4.3% Y/Y) beats by $490M.

    Economics

    This Week's Data

    March industrial production fell 0.6% versus expectations of a decline of 0.3%; capacity utilization came in at 78.4 versus estimates of 78.7.

    http://www.capitalspectator.com/us-industrial-production-tumbled-in-march/

    The NAHB builders' confidence index came in at 56.0 versus forecasts of 55.0.

    http://www.calculatedriskblog.com/2015/04/nahb-builder-confidence-increased-to-56.html

    The latest Fed Beige Book was released and it contained the usual thin gruel of 'on the one hand/on the other hand' comments designed to make everyone comfy. For those counting, weather was mentioned 71 times.

    http://www.zerohedge.com/news/2015-04-15/71-mentions-weather-latest-fed-beige-book

    March housing starts rose 2% versus consensus of up 16%; building permits fell 6% versus expectations of 1% decline.

    Weekly jobless claims climbed 12,000 versus estimates down 1,000.

    Other

    Update on big four economic indicators (short):

    http://www.advisorperspectives.com/dshort/updates/Big-Four-Economic-Indicators.php

    Update on US macro surprise index (short):

    http://www.zerohedge.com/news/2015-04-15/four-chartsmen-recession

    The collapse of the petrodollar (medium and a must read):

    http://www.zerohedge.com/news/2015-04-15/collapse-petrodollar-oil-exporters-are-dumping-us-assets-record-pace

    Politics

    Domestic

    International War Against Radical Islam

    Another red line crossed (medium):

    http://www.powerlineblog.com/archives/2015/04/another-red-line-done-gone.php

    Apr 16 9:21 AM | Link | Comment!
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