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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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Investing for Survival
  • The Morning Call--Is EU QE Working?

    The Market

    Technical

    After a fairly volatile day, the indices (DJIA 18011, S&P 2109) closed down slightly. Both finished above their 100 day moving average, but below their former all-time highs. On a very short term basis, they both are in narrowing pennant patterns formed by their 100 day moving and the lower boundary of a very short term uptrend on the downside and the upper boundary of a very short term downtrend on the upside. I mention these as signs of the narrow trading range that the Averages have been in for some time, which I noted yesterday as illustrating the lack of conviction of both bulls and bears.

    Longer term, the Averages remained well within their uptrends across all timeframes: short term (17299-20104, 2030-3009), intermediate term (17445-22593, 1832-2600) and long term (5369-19175, 797-2138).

    Volume fell and breadth was mixed. The VIX was up slightly. It is still below its 100 day moving average and the upper boundary of its very short term downtrend, but getting ever closer---a potential negative for stocks if it breaks above those trends.

    http://www.marketwatch.com/story/there-are-as-many-stocks-rising-to-highs-as-falling-to-lows-2015-06-02?siteid=rss&rss=1&curator=thereformedbroker&utm_source=thereformedbroker

    The long Treasury had another bad day, finishing below its 100 day moving average and within a short term downtrend and also below that minor resistance level I pointed to earlier and back below the upper boundary of that recently negated very short term downtrend.

    http://www.capitalspectator.com/is-a-us-recession-lurking-the-treasury-market-is-skeptical/

    GLD was up fractionally---continuing to do nothing and ending below its 100 day moving average and the neck line of the head and shoulders pattern. Oil rose again, closing above the upper boundary of its short term trading range. This is the second assault on this boundary. If it remains above that level through the close on Thursday, the short term trend will re-set to an uptrend.

    The dollar fell, closing below its 100 day moving average and within the developing pennant formation that I noted yesterday.

    Bottom line: the Market remains directionless both on a very short term basis (trapped between their 100 day moving averages and their former all-time highs) and within a trading range dating back to mid-February. While I think that the up/down volume and other divergences suggest that this stalemate will be resolved to the downside, I have to recognize that I am influenced by my own fundamental view of the equity valuation.

    I still believe that the Averages have come too far not to challenge the upper boundaries of their long term uptrends but I also think that any further advance will be limited to the rate of ascent of those boundaries. That aside, if I define the upside as the upper boundaries of the indices' long term uptrends and the downside as the lower boundaries of the indices' short term uptrend, the risk/reward is not positive.

    Full year Market performance in past pre-election years in which the January to May performance was flat (short):

    http://jeffhirsch.tumblr.com/post/120555563948/glass-is-not-half-full-past-lagging-pre-election

    Fundamental

    Headlines

    Yesterday's US economic data was mixed, with major misses in both directions: April factory orders were very weak while May light vehicle sales was a blowout number. Bringing up the rear, was month to date retail chain store sales which were slightly ahead of last week's reading. Mixed, of course, is still mixed. But I would observe that (1) on the one hand, the factory orders number is less current than May car sales, (2) on the other hand, I have dwelled repeatedly on the parallel today of auto sales/financing to home sales/financing in 2007.

    On the global front,

    (1) the Reserve Bank of India lowered rates for the third time this year even though the country's first quarter output production was up. So QE remains alive and well and every central bank's favorite policy,

    (2) speaking of which, China doubled down on its latest QE strategy, sending Chinese stocks into the stratosphere,

    (3) EU inflation rose 0.3%---doesn't sound like much, but it is the first positive inflation reading in some time. That news along with the uneven improvement in the EU economic stats of late is suggesting that Draghi's QE is working. And that is likely correct. Which may have you wondering, how do I reconcile QE working in the EU with all that hot tongue I have been laying QE in general? First remember, the ECB had been following a policy of monetary austerity until last year. So the current EU QE is the equivalent of our own Fed's QEI which I have noted numerous time had a positive impact on the economy. It was QEII, III and IV that misallocated capital, encouraged rampant speculation and grew the carry trade. Much like the Japanese version of QE though admittedly not as extreme. The point here being that the current EU QE is likely having an effect on the European economy and once improvement is substantiated, the ECB needs to unwind its QE rather than following in the misguided footsteps of the US and Japanese central banks.

    Is ECB QE starting to appear in the data? (short):

    (4) the Greek bailout dilemma continued to hold investor attention. Monday night the Troika met, blew off the latest Greek bail out proposals and decided to write the plan itself. It has heretofore shunned that approach because it didn't want to appear to be forcing terms upon the Greeks from on-high. But given the Greek unwillingness to recognize reality, it took that step and it appears that it will be presented as 'take it or leave it'. Now what? I am laughing to myself as I write this because I have no idea how to assess an endgame to this clusterf**k. That said, risks remain, so caution is in order.

    Greece appears ready to sign pipeline deal with Gazprom (medium):

    http://www.zerohedge.com/news/2015-06-02/greece-breaks-americas-heart-will-sign-mou-russia-gas-pipeline

    And surprise, surprise, Greece says that it won't make Friday's repayment of an IMF loan (short):

    http://www.zerohedge.com/news/2015-06-03/greece-admits-it-will-not-make-imf-payment-friday-no-deal-expected-wednesday

    ***overnight, the ECB left interest rates unchanged, the OECD lowered its global growth outlook, first quarter Australian GDP came in better than expected and another large Chinese company defaulted.

    http://www.zerohedge.com/news/2015-06-02/defaults-continue-china-duck-producer-sinks

    Bottom line: the economic data continues mixed this week which is an upgrade from the last nineteen; and as I have noted, we need it. That said, I would caution against getting too jiggy over the May new car sales because there is a lot on subprime lending incorporated in that number. On the other hand, the bond market has had a couple of rough days (bond prices down, yields up) which suggests that the bond guys are looking for economic improvement.

    While somewhat erratic, the economic stats out of the EU seem to be on an upward trend. That is a plus. However, the trend in liquidity infusions from central banks (India, China) are growing. While that may help our 'muddling through' scenario in the short run, it raises the risk of more beggar thy neighbor devaluations and the overleveraging of sovereign financial systems longer term.

    That said, even if the US economy is well on its way to regaining 2-3% real growth, even if the historically unprecedented global QE does not lead to disaster and even if the euros manage to prevent Greece from defaulting, stocks are still overvalued.

    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.

    Where the power sits within the Fed (medium):

    http://blogs.cfr.org/geographics/2015/06/01/fedwatchers/

    A bubble on thin ice (medium):

    http://www.acting-man.com/?p=37760

    Today's stock buybacks are a distortion (medium):

    http://www.blackrockblog.com/2015/06/01/pay-attention-todays-buyback-boom/?utm_source=blog&utm_medium=hero&utm_campaign=herobr%20/br%20/br%20/&curator=thereformedbroker&utm_source=thereformedbroker

    And a brief history of what happens in the aftermath (medium):

    http://www.nakedcapitalism.com/2015/06/wolf-richter-last-two-times-this-happened-stocks-crashed.html

    Update on valuation:

    http://www.advisorperspectives.com/dshort/updates/Regression-to-Trend.php

    http://www.advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

    Investing for Survival

    Five myths debunked (medium):

    http://www.zerohedge.com/news/2015-06-02/5-investing-myths-debunked

    News on Stocks in Our Portfolios

    Brown-Forman EPS in-line, beats on revenue

    · Brown-Forman (NYSE:BF.A): FQ4 EPS of $0.66 in-line.

    · Revenue of $947M (+6.0% Y/Y) beats by $28.51M.

    Economics

    This Week's Data

    Month to date retail chain store sales rose fractionally from last week.

    April factory orders fell 0.4% versus expectations of -0.1%.

    May light vehicle sales came in around 17.7 million units, an outstanding reading.

    http://www.calculatedriskblog.com/2015/06/preliminary-may-vehicle-sales-at-177.html

    http://www.advisorperspectives.com/dshort/updates/Vehicle-Sales-Per-Capita.php

    Weekly mortgage applications fell 7.6%, while purchase applications declined 3.0%.

    The May ADP private payrolls report showed job growth of 32,000, in line.

    The second quarter US trade deficit was $40.9 billion versus expectations of $44 billion.

    Other

    Politics

    Domestic

    Must watch video by George Will on today's college education (5 minutes):

    http://cafehayek.com/2015/06/george-wills-short-witty-and-powerful-commencement-address.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

    And the Arthur Ashe Courage Award goes to, drumroll…………

    http://www.zerohedge.com/news/2015-06-02/america-which-one-these-most-courageous

    International War Against Radical Islam

    Obama's options on Iran (short):

    http://www.powerlineblog.com/archives/2015/06/obamas-table-of-options-shrinks.php

    Jun 03 9:05 AM | Link | Comment!
  • The Morning Call--A Deal In The Making?

    The Market

    Technical

    The indices (DJIA 18040, S&P 2111) lifted modestly yesterday. Both closed above their 100 day moving average, but below their former all-time highs.

    Longer term, the Averages remained well within their uptrends across all timeframes: short term (17293-20098, 2030-3009), intermediate term (17438-22566, 1830-2597 and long term (5369-19175, 797-2138).

    Volume fell but breadth improved. The VIX was up slightly---a little unusual on an up Market day. It ended below its 100 day moving average and the upper boundary of its very short term downtrend, but is nearing both---a potential negative for stocks if it breaks above those trends.

    Another divergence (short):

    http://www.zerohedge.com/news/2015-06-01/another-break-adds-equity-bear-case

    Counterpoint:

    http://thereformedbroker.com/2015/06/01/savita-wall-streets-still-too-bearish-on-us-stocks/

    The long Treasury had bad day on heavy volume, finishing below its 100 day moving average and within a short term downtrend.

    GLD was down slightly, ending below its 100 day moving average and the neck line of the head and shoulders pattern. Oil rose closing very near the upper boundary of its short term trading range. The dollar was up but appears to be developing a pennant formation (a series of lower highs accompanied by a series of higher lows). The penetration of one of these boundaries typically leads to a move in the direction of the break.

    Bottom line: there remains a lack of conviction among Market participants with neither side willing to press its case. Yesterday, the temerity was demonstrated by the bulls as the US economic data seemed paint the kind of goldilocks scenario that has had them wee weeing in their pants of late. Also weighing on the downside: (1) volume has tended to expand on the down days and shrink on the up days and (2) the number of divergences continues to grow. I still believe that the Averages have come too far not to challenge the upper boundaries of their long term uptrends but I also think that any further advance will be limited to the rate of ascent of those boundaries.

    Ten bearish and one bullish chart (short):

    http://mebfaber.com/2015/05/31/10-bearish-charts-1-bullish-chart/

    A counterpoint on current risk of high margin debt (short):

    http://www.pragcap.com/how-scary-is-the-current-margin-debt-situation

    Fundamental

    Headlines

    Yesterday was a big data day: April personal income was above expectations while personal spending was below; the May Markit PMI, May ISM manufacturing index and April construction spending were all above estimates. So we have for the second week in row started off with a very upbeat day of stats. I will note that the positive reports beat forecasts narrowly while the negative releases were big misses. Nonetheless, a good day is still a good day; and yesterday's numbers help give me comfort that I won't have to lower our forecast for a second time.

    Overseas, the May EU and Chinese PMI's came in slightly above consensus. Following poor data from both last week, this gives support to our international 'muddling through' scenario.

    ***overnight, EU inflation rose 0.3%; the Reserve Bank of India lowered rates for the third time this year even though the country's first quarter output production was up; and China doubles down on its latest QE strategy (medium):

    http://www.zerohedge.com/news/2015-06-01/china-may-double-down-debt-swap-abs-issuance-stumbles

    Greece remained center stage, the Greeks having missed a self-imposed deadline for a new and improved financial plan to allow additional bailout funds, earning it some well-deserved raspberries from their negotiating counterparts. The Troika is actually meeting as this is being written to plan their next move.

    ***overnight, apparently the Troika has decided to write the terms of the bailout agreement for Greece and present it on a take it or leave it basis. It reportedly contains concessions by both sides. (medium):

    http://www.zerohedge.com/news/2015-06-02/greece-troika-submit-conflicting-eleventh-hour-deal-proposals

    Bottom line: the economic data appears to be starting to trend more positively, which it absolutely had to do to avoid raising the specter of recession. Whether this improvement can be sufficient to return the promise of economic growth to Street expectations of a 2%+ rate is something entirely different. Not that it can't/won't happen. It just seems unlikely to me.

    Likewise, yesterday's positive EU/Chinese PMI reports were welcome; especially from Europe because we had the improvement thing going for us and then it took a hit last week. If the trend to better numbers continues that helps our 'muddling through' scenario.

    That said equity valuations as measured by our Valuation Model are stretched, meaning that any disappointment in US economic/corporate profit growth or international economic growth or some event that could negatively impact either (Grexit, oil supply disruption) could potentially throw a monkey wrench in Street Models and induce heartburn in the securities markets.

    Even if nothing untoward occurs, current stock prices are incorporating so much future return, the likelihood of achieving meaningful returns over the next ten years is not very high.

    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.

    The liquidity time bomb (Nouriel Roubini) (medium):

    https://www.project-syndicate.org/commentary/liquidity-market-volatility-flash-crash-by-nouriel-roubini-2015-05

    High valuations test the bullish case (medium):

    http://www.ft.com/intl/cms/s/0/90694090-083c-11e5-95f4-00144feabdc0.html?siteedition=intl#axzz3booK3zul

    M&A deals and volume; notice the last time we saw activity at current levels (short):

    http://thereformedbroker.com/2015/06/01/ma-deal-and-dollar-volume-explodes/

    More on IPO volume (short):

    http://www.zerohedge.com/news/2015-06-01/chart-day-its-worse-2000

    The latest from John Hussman (medium):

    http://www.advisorperspectives.com/commentaries/20150531-hussman-funds-when-paper-wealth-vanishes

    Company Highlight

    Kimberly Clark develops, manufactures and markets personal care products (Huggies, Pull Ups, Little Swimmers, Goodnights, Kotex, Depends, Kleenex, Scott, Cottonelle tissue, Viva paper towels, workplace health products [soaps, sanitizers, etc.] and healthcare products). KMB has grown its profits and dividends at a 3-9% annual rate over the past 10 years earning an amazing 30%+ rate of return on equity. While KMB's results are sensitive the economy, the company should continue to grow on a secular basis as a result of:

    (1) significant cost cutting as well as better supply chain management,

    (2) expansion into emerging markets,

    (3) new product innovation,

    (4) a significant stock buyback program.

    Negatives:

    (1) volatile commodity prices,

    (2) fluctuations in currency,

    (3) increased competition in diapers.

    KMB is rated A++ by Value Line, carries a 89% debt to equity ratio and its stock yields 3.0%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    KMB 3.3% 5% 97% 10

    Ind Ave 2.5 11 46 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    KMB 89% 44% 4 8 A++

    Ind Ave 49 17 NA 9 NA

    Chart

    Note: KMB stock made great progress off its March 2009 low, quickly surpassing the downtrend of its June 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 a trading range (purple lines). The wiggly red line is the 100 day moving average. The High Yield Portfolio owns a 50% in KMB, having Sold Half of its holding at around $85 per share in early 2013. The upper boundary of its Buy Value Range is $54; the lower boundary of its Sell Half Range is $93.

    (click to enlarge)

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

    6/15

    Investing for Survival

    Beware of you emotional intelligence (medium):

    http://www.institutionalinvestor.com/blogarticle/3436914/blog/how-emotional-intelligence-can-make-you-a-better-investor.html#.VQnD2_nF-So

    News on Stocks in Our Portfolios

    Medtronic beats by $0.05, beats on revenue

    · Medtronic (NYSE:MDT): FQ4 EPS of $1.16 beats by $0.05.

    · Revenue of $7.3B (+59.7% Y/Y) beats by $110M.

    Economics

    This Week's Data

    April personal income rose 0.4% versus expectations of up 0.3%; personal spending was flat versus estimates of up 0.2%.

    http://www.capitalspectator.com/us-consumer-spending-flat-in-april-but-incomewages-perk-up/#more-5480

    The May Markit PMI came in at 54.0 versus forecasts of 53.8.

    The May ISM manufacturing index was reported at 52.8 versus consensus of 51.8.

    http://www.calculatedriskblog.com/2015/06/ism-manufacturing-index-increased-to.html

    April construction spending was up 2.2% versus an anticipated rise of 0.7%.

    http://www.calculatedriskblog.com/2015/06/construction-spending-increased-22-in.html

    Other

    Politics

    Domestic

    In case you missed this one: TSA failed to detect 95% of prohibited devices worn by investigation team (medium):

    http://www.zerohedge.com/news/2015-06-02/tsa-agents-failed-catch-95-mock-bombs-and-weapons

    International War Against Radical Islam

    Saudi Arabia is no friend of the US (medium):

    http://www.washingtonpost.com/opinions/saudi-arabia-is-no-friend-to-the-united-states/2015/05/29/64f24bac-0588-11e5-8bda-c7b4e9a8f7ac_story.html

    Jun 02 8:54 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    The S&P continues to struggle to remain above its former all-time high. This is the level to watch for an indication that it will challenge the upper boundary of its long term uptrend. The positive news is that it has established a very short term trend of higher lows.

    (click to enlarge)

    The long Treasury remains below its 100 day moving average and within a short term downtrend. Even though it closed up on Friday, notice it touched a minor resistance level (horizontal purple line) and backed off.

    (click to enlarge)

    GLD remains in its own trendless world.

    (click to enlarge)

    While the VIX rose on Friday as you might expect, it was not nearly as pronounced as I would have expected given the stock action---a plus for stocks.

    (click to enlarge)

    Fundamental

    Goldman on Greece (medium):

    http://www.zerohedge.com/news/2015-06-01/greek-default-deposit-blocks-new-government-may-be-necessary-end-impasse-goldman-say

    Investing for Survival

    Josh Brooks: Investors should always be reading.

    http://thereformedbroker.com/2015/03/17/josh-brooks-investors-should-be-reading-constantly/

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    Other

    Politics

    Domestic

    International War Against Radical Islam

    Jun 01 8:40 AM | Link | Comment!
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