Seeking Alpha

All American In...'s  Instablog

All American Investor
Send Message
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... More
My company:
Strategic Stock Investments
My blog:
Investing for Survival
  • 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%

    Current Market Forecast

    Dow Jones Industrial Average

    Current Trend (revised):

    Short Term Trading Range 15330-16601

    Intermediate Uptrend 14696-16601

    Long Term Uptrend 5055-17405

    2013 Year End Fair Value 11590-11610

    2014Year End Fair Value 11800-12000

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Uptrend 1813-1990

    Intermediate Term Uptrend 1760-2560

    Long Term Uptrend 739-1910

    2013Year End Fair Value 1430-1450

    2014 Year End Fair Value 1470-1490

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 43%

    High Yield Portfolio 47%

    Aggressive Growth Portfolio 46%

    Economics/Politics

    The economy is a modest positive for Your Money. It was another slow, holiday shortened week in which the data was mixed: positives---weekly mortgage and purchase applications, March retail sales, the April Philly Fed index and March industrial production and capacity utilization; negatives---February housing starts, the April NY Fed manufacturing index and March CPI; neutral---weekly retail sales, weekly jobless claims and February business inventories/sales.

    While the data was sparse, three of the primary economic indicators were out this week: housing starts were poor, industrial product was excellent, retail sales were up but there was some question about their internal make up. In short, they were mixed; and mixed is to be expected in our sluggish forecast. Hence, they were in line with our expectations and sufficient enough for me to kill the economic warning light.

    Update on big four economic indicators (medium):

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

    Our outlook remains:

    'a below average secular rate of recovery 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 unwilling to hire and invest because the aforementioned along with...... the historic inability of the Fed to properly time the reversal of a vastly over expansive monetary policy.'

    http://www.capitalspectator.com/the-march-economic-profile-perks-up-so-far/#more-3441

    The pluses:

    1. our improving energy picture. The US is awash in cheap, clean burning natural gas.... In addition to making home heating more affordable, low cost, abundant energy serves to draw those manufacturers back to the US who are facing rising foreign labor costs and relying on energy resources that carry negative political risks.

    http://www.aei-ideas.org/2014/04/energy-fact-of-the-day-net-petroleum-imports-are-below-30/

    The negatives:

    1. a vulnerable global banking system. No news on this score this week. That doesn't mean that this risk is any less.

    http://www.nakedcapitalism.com/2014/04/don-quijones-troika-hostile-takeover-of-europe.html

    '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.'

    1. fiscal policy. All quiet among our ruling class with the Passover/Easter holiday, except for this (short):

    http://www.clubforgrowth.org/perm/?postID=16278

    1. 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.

    This week:

    [a] Fed policy got even murkier when the most dovish member of the FOMC made a hawkish speech while Yellen gave her most dovish statement ever.

    http://www.zerohedge.com/news/2014-04-15/tuesday-humor-biggest-fed-dove-concerned-about-real-erosion-peoples-purchasing-power

    In addition, some mystery entity is gobbling up Treasuries via the Belgian central bank. While there is no way of knowing if it is our own Fed counteracting its own tapering, the bottom line is that someone is doing it,

    http://www.zerohedge.com/news/2014-04-15/shocking-buying-spree-americas-mysterious-third-largest-treasury-holder-ramps-higher

    [b] the economic news out of China continued to be very downbeat. However, on Monday the Bank of China made a very explicit statement that there would be no stimulus. To be sure, those guys lie a lot; but to date, their actions are reflecting their words,

    [c] finally, the data on the Japanese economy is equally bad. In response, the Bank of Japan is threatening a QEInfinity squared ramp in monetary growth---in the sure knowledge that its past QE and QEInfinity attempts to stimulate the Japanese economy have not been just an abject failure but have crushed the Japanese workingman {higher prices, higher taxes}. One has to wonder if the electorate will put up with more of the same.

    In response to this, investors spent the week in a state of euphoria induced denial, picking and choosing which events to focus on and ignoring anything that smacked of cognitive dissonance. I can understand this behaviour if it was clear that the central banks were going to continue pumping as hard as they can [don't fight the Fed].

    Certainly, if more monetary easing is forthcoming, the transition process to normalized monetary policy can be postponed; but I see nothing in the above developments that makes that a certainty. Further, what I do believe is that [a] at some point, electorates are going to rebel over policies that only make their life worse and [b] whether they do or not, history tells us that when, as and if a transition begins {i} the Fed will bungle it and {ii} the longer it takes, the greater the pain.

    1. a blow up in the Middle East or someplace else. Ukraine is now in the midst of a serious police [military] action as forces are being deployed to stamp out pockets of pro-Russian dissidents. Meanwhile, Putin has warned both Obama and Merkel that the country is on the verge of civil war. For the strife to continue [which seems likely] and him to do nothing [which seems unlikely] is probably not a good assumption. There was some sort of squishy agreement on Thursday attempting to de-escalate tensions. But that already seems to have gone by the wayside. I maintain my belief that whatever the outcome, Putin will be happy. Indeed what better time to invade than a long Easter weekend.

    My bottom line: 'If He [Obama] would actually do something (pledge to reinvigorate NATO, resume negotiating the treaties with Poland and the Czech Republic) to project American power and show Putin that He is dead serious about preventing further expansion from Russia, I could get behind the Guy. Sure it would likely send nervous tremors through the Markets---but it would be a long term positive. But trying to scare Putin with a lot diplomatic bullshit accomplishes nothing because Putin doesn't care and doesn't respect Obama enough to think that anything He does will materially impact Russia. Indeed as I have voiced many times, my concern is that Putin responds to these antics by kicking Obama in groin, humiliating Him publicly. I suspect that the Markets would be even less enthralled with this scenario.'

    http://www.zerohedge.com/news/2014-04-18/ukraine-de-escalation-voided-pro-russia-milita-refuse-vacate-occupied-buildings

    The showdown between the US and Russia (medium):

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10771069/US-financial-showdown-with-Russia-is-more-dangerous-than-it-looks-for-both-sides.html

    1. finally, the sovereign and bank debt crisis in Europe and around the globe. The economic data out of China and Japan this week were terrible. China has stated reasonably forcefully that it will not stimulate the economy and has shown its willingness to allow companies and investment trust to default. Of course the latter does not encompass the banks nor is it likely to; but given the level of counterparty liabilities that exist outside the banking system, damage could still extensive if defaults began to snowball and get out of control.

    Japanese economic policy enshrines the very definition of insanity. These guys are in a decade long recession, the recent gargantuan expansion of money supply has only made matters worse and now the government is considering doubling down on this losing strategy. I have no clue how this situation resolves itself but it seems likely to me that the Japanese electorate is not going to be happy and the risk that the yen carry trade gets crushed substantial.

    Of course, as I continue to note, to date the various government leaders have managed to keep their respective crises under control. Clearly, they may be able to continue to do so. However, this narrative is not a prediction of disaster; it is an analysis of risks facing the US economy and securities markets. And the risk is one or more of these situations spins out of control.

    Bottom line: the US economy continues to progress, disastrous Fed and fiscal policy notwithstanding.

    Fed policy remains uncertain as we lurch from one contradictory statement to another. I continue to believe that (1) this is a sign that the Fed has no idea about how to extract itself from a disastrous QEInfinity, (2) this means that it will once again bungle the transition to tighter money and induce more pain in the Markets than they might otherwise have had to suffer and (3) because QE has had so small an impact on the economy, then the transition process will be manageable, economically speaking---the pain being felt in the securities markets.

    Investor daydreaming aside, the Chinese government continues its new policies [the government is not the answer, re-introducing 'moral hazard' into the investment equation] in spite of a flow of disappointing economic data. If it sticks to its guns, then I believe that there is apt to be some discomfort along the way, not just for the Chinese but for the rest of the globe. To its credit, it has managed the process reasonably well to date---the operative words being 'to date'.

    The weak EU and Japanese economies are also areas of concern. This week

    1. inflation in the EU fell, raising hopes of an ECB easing. To be fair, the ECB has been reasonably firm in its monetary policy to date; so all things being equal, it has the room to be more accommodative. However, [a] it has not been clearly established that the ECB can legally pursue the easing policies it has proposed and [b] the EU's problem is more centered on its banking system in that the banks are highly leveraged and own a substantial portion of their host countries' sovereign debt. Even if we assume the ECB eases monetary policy, the question is, will it be any more effective than the US or Japanese. And with the EU economy in worse shape than the US, the issue remains the ability of the sovereigns to service their debt and the solvency of the banks that hold it.

    http://blog.yardeni.com/2014/04/eurozones-recovery-is-lackluster-excerpt.html

    1. Japan announced that GDP growth would not meet its forecasts. Its solution, more QE. Again that had investors all atwitter. But for the life of me, I can't see how this economic mess resolves itself without some real pain.

    Finally, military confrontation is now occurring in Ukraine and Putin is telling us and the Germans that he ain't happy about it. My best guess is that when all is said and done, Putin is happy, oil prices are higher and the US looks like a shadow of its former self. I just hope Putin spares us Obama's public humiliation.

    In sum, a resilient US economy is something about which to rejoice but is it facing a number potentially troublesome headwinds.

    This week's data:

    1. housing: weekly mortgage and purchase were both up; March housing starts were disappointing,
    1. consumer: weekly retail sales were mixed; March retail sales were slightly better than expected, weekly jobs claims rose less than forecast,
    1. industry: February business inventories were below estimates but sales were better; March industrial production and capacity utilization were quite strong; the April NY Fed manufacturing index was well below estimates while the Philadelphia Fed index was much better than consensus,
    1. macroeconomic: March CPI was hotter than anticipated.

    The Market-Disciplined Investing

    Technical

    `The indices (DJIA 16408, S&P 1864) had another volatile week, but finished up every day. None of their primary trends were broken, although the S&P touched the lower boundary of its short term uptrend and then bounced. Plus both of the Averages both broke above below their 50 day moving averages.

    The S&P closed within uptrends across all timeframes: short (1813-1990), intermediate (1760-2560) and long (739-1910). The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405). They continue out of sync in their short and intermediate term trends.

    Volume on Friday was up but that was largely a function of options expiration; breadth deteriorated. Not surprisingly, the VIX suffered some serious whackage as prices soared; though it continues to offer no directional help with the Market. It finished within, but close to the lower boundary of, its short term trading range, below its 50 day moving average and within an intermediate term downtrend.

    http://www.bespokeinvest.com/thinkbig/2014/4/17/investor-sentiment-turns-a-little-less-bullish.html

    The long Treasury was up neatly Monday through Wednesday, than gave much of it back on Thursday. I will be paying close attention to TLT next week to see if Thursday's action was just noise or a sign that the bond crowd is revising its outlook. Still it remained within a short term uptrend and an intermediate term downtrend and above its 50 day moving average.

    GLD's chart remains a dog. It is within both short and intermediate term downtrends and below its 50 day moving average.

    Bottom line: the indices weekly pin action was quite strong. Of course, a bounce was not all that surprising given that the prior week was one of the roughest in the Market since February. How much of it was just a rebound from a very oversold condition and how much a renewed round of euphoria, is the question before us at the moment.

    From a standpoint of the fundamentals, the fact that prices rose on both good and bad news suggests that investors seem to have a rekindled belief that the central banks will expand money supply into infinity. I have a problem with how they could have gotten to that position (like ignoring any Fed statement that doesn't fit the theme as well as the explicit statement of the Bank of China that no stimulus is forthcoming). But what I think doesn't matter. If the Market believes it, prices are headed up and will likely challenged the upper boundaries of the Averages long term uptrends.

    On a technical note, the last lower high was circa S&P 1873. If it can close above that level, a very short term downtrend will be negated. If not, then our attention returns to the lower boundary of the S&P short term uptrend.

    Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (16408) finished this week about 40.2% above Fair Value (11700) while the S&P (1864) closed 28.3% overvalued (1452). 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 and China.

    While it was another slow week for economic releases, several covered important segments of the economy which kept the quality of information factor high. In general, the stats, especially the primary indicators, mirrored our forecast. So I am turning off the economic warning light. That leaves the economy as the bright spot in our Market outlook. Unfortunately, this positive performance is built into our Models; so it provides no relief from with our valuation problem.

    Fed induced confusion over monetary policy continues. Yellen spoke this week and delivered her most dovish performance ever. Like last week's FOMC minutes, investors elected to zero in on her latest pronouncement and ignore the prior hawkish comments of both her and several other high ranking Fed officials. Investor reaction aside, I don't see anything clarifying about Yellen's remarks when taken in the context of everything else that we have heard from the Fed in total. This keeps me of the opinion that the Fed is shooting in the dark when it comes to a transition to normalized monetary policy---which in turn means a higher probability of a botched transition and, hence, more pain with the caveat that the pain will be felt less in the economy and more in the Markets for the simple reason that the QE's have had more impact on the Markets than on the economy.

    The biggest risks to the Market, in my opinion, come from potential negative events overseas. China heads the list as its economy slows, bankruptcies are increasing, its financial markets are going through a massive deleveraging, the yuan carry trade is being unwound and the government insists that it will allow the markets to take their own course.

    Japan and to a lesser extent the EU are having problems getting any economic growth; and worse, so far the only remedies the ruling classes are considering is doubling down on policies that already haven't worked (QE). Of course, that is exactly what the Markets want because it means more 'money for nothing' carry trade profits. To be fair, the politicians have thus far managed to maintain control of their difficulties; and they may very well continue to do so until their respective economies are out of trouble. The risk is that they won't.

    http://www.zerohedge.com/news/2014-04-17/wtf-moment-week-no-one-bought-japanese-bonds-36-hours-week

    Ukraine isn't going away; I suspect because Putin doesn't want it to go away. It seems a foregone conclusion to me that this situation will end as Putin wants it to. Figuring out what form that will take is above my pay grade, but I seriously doubt that he is concerned about any fallout from the US. My real concerns are that (1) the US get humiliated in the process because I don't think that will be well received by the Markets and (2) in the fallout from any invasion/military action, the price of oil will likely spike.

    http://www.zerohedge.com/news/2014-04-17/full-geneca-statement-ukraine-de-escalation

    http://www.zerohedge.com/news/2014-04-17/so-much-deescalation-kiev-says-military-operation-east-ukraine-continue

    Overriding all of these considerations is the cold hard fact that stocks are considerably overvalued not just in our Model but with numerous other historical measures which I have documented at length. This overvaluation is of such a magnitude that it almost doesn't matter what occurs fundamentally, because there is virtually no improvement in the current scenario (improved economic growth, responsible fiscal policy, successful monetary policy transition) that gets valuations to Friday's closing price levels.

    Bottom line: the assumptions in our Economic Model haven't changed. The assumptions in our Valuation Model have not changed either. I remain confident in the Fair Values calculated---meaning that stocks are overvalued. So 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.

    Another must read from Lance Roberts (medium):

    http://advisorperspectives.com/dshort/guest/Lance-Roberts-140417-Historical-Market-Comparisons.php

    What individual investors are doing? (short):

    http://pragcap.com/chart-of-the-day-showing-up-late-to-the-party

    Who's buying? (short):

    http://www.zerohedge.com/news/2014-04-17/if-smart-money-selling-whos-buying

    The latest stats on this quarter's earnings and revenue 'beat' rates (short):

    http://www.zerohedge.com/news/2014-04-17/more-half-companies-have-missed-sales-estimates-so-far-earnings-season

    DJIA S&P

    Current 2014 Year End Fair Value* 11900 1480

    Fair Value as of 4/30/14 11700 1452

    Close this week 16408 1864

    Over Valuation vs. 4/30 Close

    5% overvalued 12285 1524

    10% overvalued 12870 1597

    15% overvalued 13455 1669

    20% overvalued 14040 1742

    25% overvalued 14625 1815

    30% overvalued 15210 1887

    35% overvalued 15795 1960

    40% overvalued 16380 2032

    45%overvalued 16965 2105

    Under Valuation vs. 4/30 Close

    5% undervalued 11115 1379

    10%undervalued 10530 130615%undervalued 9945 1234

    * 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 with somewhat higher inflation.

    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 10:28 AM | Link | Comment!
  • The Morning Call---Yesterday's Aphrodisiac

    The Market

    Technical

    The upside follow through continued yesterday, but with no gyrations. The indices (DJIA 16462, S&P 1862) advanced nicely. The S&P closed within uptrends across all timeframes: short (1810-1987), intermediate (1760-2560) and long (739-1910). The Dow remained within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5050-17400). They continue out of sync in their short and intermediate term trends; but both closed above their 50 day moving averages.

    Volume was down (pattern re-sets); breadth improved. The VIX fell 10%, finishing within its short term trading range and its intermediate term downtrend and below its 50 day moving average.

    http://advisorperspectives.com/commentaries/charter_041614.php

    The long Treasury continued to climb, ending within a short term uptrend and an intermediate term downtrend and above its 50 day moving average.

    GLD was up fractionally, leaving it within short and intermediate term downtrends and below its 50day moving average.

    Bottom line: Tuesday's Market advance was on bad news, yesterday's explosion was on good news (if you love QE). All the divergences I repeatedly refer to aside, when the investors are in an 'all news is good news' mode, the safe assumption has to be that the indices are headed up---which likely means they will challenge the upper boundaries of their long term uptrends; though as a reminder I do not believe that challenge will be successful.

    Meanwhile, with the Averages still out of sync, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

    Fundamental

    Headlines

    Yesterday's US economic data were mixed to positive: weekly retail sales were mixed, March new home starts were up but less than anticipated, weekly mortgage and purchase applications were up and March industrial production was strong. I consider these stats reflective of our forecast.

    Overseas, the numbers continue to disappoint. This time the Chinese latest GDP growth was the lowest in a year and a half. Given current investor psychology, I am assuming that they view this as a sign that the Chinese government will provide economic stimulus irrespective of their recent insistence otherwise.

    Another Chinese trust can't make its interest payments (medium):

    http://www.zerohedge.com/news/2014-04-16/special-forces-confront-chinese-investors-demanding-failed-trust-pay-back-our-money

    Richest man in Asia sells all his Chinese investments (medium):

    http://www.zerohedge.com/news/2014-04-16/richest-man-asia-selling-everything-china

    The Chinese property market (medium):

    http://money.cnn.com/2014/04/15/news/economy/china-property-market/index.html?iid=Lead

    The real headlines of the day came from the Fed. First, the latest Beige Book was released and portrayed a growing economy recovering from a weather (mentioned 103 times) induced slowdown but with prices and wage pressures contained. I don't think that there is anything new in this information; it certainly includes nothing that would prompt me to even consider altering our own forecast. But in the sense that it highlights the major if not the only strength in the investment landscape, it could be interpreted positively.

    http://www.calculatedriskblog.com/2014/04/feds-beige-book-economic-activity.html

    Of course, the aphrodisiac in yesterday's Market psychology was a Yellen speech in which she was her dovish best, prompting yet another round of euphoria over the likelihood of QEInfinity.

    http://www.calculatedriskblog.com/2014/04/yellen-three-big-questions-for-fomc.html

    On the other hand, investors elected to ignore yet another speech that injected cognitive dissonance into their 'money for free' mindset; this one by Dallas Fed head who was a lot less confident in Fed policy (short):

    http://www.zerohedge.com/news/2014-04-16/fed-policies-have-made-rich-much-richer-fed-president-admits

    To put a finer point on 'the Fed (central bank) has you back' sentiment, investors unbelievably (at least to me) piled into the sovereign debt of the EU periphery. As I have noted before, when investors are chasing prices higher for bonds of countries like Italy and Spain, risk is being mispriced and the ultimate impact on investors will almost surely be negative (short):

    http://www.zerohedge.com/news/2014-04-16/european-investors-rush-safe-havens-italyspain-bond-yields-new-record-low

    Finally, shots fired in Ukraine and the natives are growing restless in Moldova:

    http://www.zerohedge.com/news/2014-04-16/moldovas-transnistria-region-approves-appeal-russia-independence

    http://www.zerohedge.com/news/2014-04-16/pro-russian-separatists-attack-ukraine-soldiers-guns-molotov-cocktails-local-tv-stat

    http://www.zerohedge.com/news/2014-04-17/putin-slams-kievs-serious-crime-says-will-respond-nato-moves

    Bottom line: when all news is good news, there is no point in arguing with sentiment. Investors seem intent on pushing prices higher; so higher they will go. Perhaps this leg will be the one that pushes the Dow above the upper boundary of its short and intermediate term trading ranges and concludes with an assault on the upper boundaries of the Averages' long term uptrend.

    None of this alters either the economic outlook or stock valuations---and it is the latter that keeps me concerned. Equities are generously valued by multiple metrics that have in the past proven reliable for the long term. Sure prices can go higher. But the potential upside (upper boundaries of the indices long term uptrends) from here is a fraction of the potential downside (year-end Fair Value) ---at least by my calculation.

    My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

    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.

    It is a cautionary note not to chase this rally.

    Investing for Survival

    Curing your money losing habits (medium):

    http://www.marketwatch.com/story/can-your-money-losing-behavior-be-cured-2014-04-12

    Company Highlight

    United Technologies is an industrial conglomerate which manufacturers and services aircraft engines (Pratt & Whitney), manufacturers heating, ventilating and air conditioning equipment (Carrier), manufacturers and services elevators (Otis), builds helicopters (Sikorsky), manufacturers aerospace and industrial products (Hamilton Sundstrand) and provides security and fire protection services (UTC Fire and Security). The company has earned an 18-20% return on equity over the last ten years while growing profits and dividends at a 10-15% rate. While UTX's businesses are impacted by the global economic activity, the company has grown fairly consistently returned because:

    (1) its main businesses possess a large parts and service component which adds stability to earnings,

    (2) the diversity of its product line allows for consistency in revenue and earnings performance,

    (3) its strong cash flow allows for further acquisitions and product innovation.

    Negatives:

    (1) a significant portion of its business is subject to government funding,

    (2) its international operations are subject changes in foreign economies growth rates as well as currency fluctuations and government regulations,

    UTX is rated A++ by Value Line, its balance sheet carries a debt/equity ratio of 40%, its stock yields 2.1%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    UTX 2.1% 9% 36% 10

    Ind Ave*

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    UTX 40% 20% 2 10% A++

    Ind Ave*

    *Because the market segments in which these companies operate are so diverse, comparable data would be meaningless.

    Chart

    Note: UTX stock made great progress off its March 2009 low, surpassing the downtrend off its October 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 day moving average. The Dividend Growth Portfolio owns a 75% position in UTX. The upper boundary of its Buy Value Range is $76; the lower boundary of its Sell Half Range is $143.

    (click to enlarge)

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

    4/14

    News on Stocks in Our Portfolios

    Rockwell Collins EPS in-line, beats on revenue

    • Rockwell Collins (COL): FQ2 EPS of $1.07 in-line.
      • Revenue of $1.27B (+12.4% Y/Y) beats by $20M.

    Sonoco Products EPS in-line, misses on revenue

    |7:03 AM|

    Sherwin Williams beats by $0.02, misses on revenue

    • Sherwin Williams (SHW): Q1 EPS of $1.14 beats by $0.02.
      • Revenue of $2.36B (+8.8% Y/Y) in-line.

    Philip Morris beats by $0.03, misses on revenue

    • Philip Morris (PM): Q1 EPS of $1.19 beats by $0.03.
      • Revenue of $6.9B (-9.0% Y/Y) misses by $160M.

    BlackRock, Inc. beats by $0.29, revenues in line

    • BlackRock, Inc. (BLK): Q1 EPS of $4.43 beats by $0.29.
    • Revenue of $2.67B (+9.0% Y/Y) in-line.

    Schlumberger Limited EPS in-line, misses on revenue

    • Schlumberger Limited (SLB): Q1 EPS of $1.21 in-line.
    • Revenue of $11.24B (+5.3% Y/Y) misses by $250M.

    Kinder Morgan Energy Partners L.P misses by $0.06, beats on revenue

    • Kinder Morgan Energy Partners L.P (KMP): Q1 EPS of $0.67 misses by $0.06.
      • Revenue of $3.65B (+37.2% Y/Y) beats by $240M.

    |4:11 PM

    Economics

    This Week's Data

    March industrial production rose 0.7% versus expectations of up 0.4% and February's number was revised from +0.6% to +1.2%; capacity utilization was 79.2 versus estimates of 78.7

    Weekly jobless claims rose 2,000 versus forecasts of a 12,000 increase.

    http://www.calculatedriskblog.com/2014/04/weekly-initial-unemployment-claims-at.html

    Other

    Politics

    Domestic

    The new census bureau survey on health insurance (short):

    http://gregmankiw.blogspot.com/2014/04/sometimes-its-better-to-split-baby.html

    Mark Steyn on free speech (medium):

    http://www.spectator.co.uk/australia/australia-features/9187741/the-slow-death-of-free-speech-2/?utm_source=rss&utm_medium=rss&utm_campaign=the-slow-death-of-free-speech-2

    International

    BRICS consider IMF alternative (medium):

    http://www.zerohedge.com/news/2014-04-16/brics-consider-creating-imf-alternative-us-loses-credibility

    Disclosure: I am long UTX, PEP, SLB, SON, KMP, BLK.

    Apr 17 9:07 AM | Link | Comment!
  • The Morning Call--Bad News Is Still Good News

    The Market

    Technical

    How do you say, schizophrenia? Yesterday was another roller coaster day for the indices (DJIA 16262, S&P 1842) and once again, they ended in the plus column. The S&P closed within uptrends across all timeframes: short (1807-1984), intermediate (1758-2558) and long (739-1910). The Dow remained within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5050-17400). They continue out of sync not only in their short and intermediate term trends but also in their 50 day moving average (Dow above, S&P below). The Market remains trendless.

    Volume managed to rise fractionally; breadth, however, was mixed. The VIX fell, finishing within its short term trading range and its intermediate term downtrend and above its 50 day moving average (a potential negative for stocks).

    http://www.bespokeinvest.com/thinkbig/2014/4/15/an-update-on-breadth-levels.html

    The long Treasury rose, closing within its short term uptrend, its intermediate term downtrend and above its 50 day moving average.

    GLD got hammered, leaving it within its short and intermediate term downtrends and below its 50 day moving average.

    Bottom line: despite the huge increase in the intraday volatility over the last two days, in the end, the Averages closed up nicely on both days. Yesterday's follow through was a clearly a positive as was the S&P bouncing off the lower boundary of its short term uptrend---especially since it occurred in the face of an overwhelmingly negative news flow. On the other hand, volume has been low, breadth mixed and the indices are out of sync in their short and intermediate term trends as well as their 50 day moving averages. In short, the technical picture is a bit murky. Hence, prices could go either way (duh). That said, I think that the safe assumption has to be that the indices will challenge the upper boundaries of their long term uptrends and will remain so until the S&P starts breaking support levels.

    Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

    Fundamental

    Headlines

    Yesterday was not a good day for the news flow. US economic numbers were all negative: March CPI was hotter than expected, the April NY Fed manufacturing index was a disappointment and weekly retail sales were mixed at best. Overseas, Chinese auto sales slowed, UK retail sales fell, the Bank of China tightened money supply, the Japanese government said first quarter GDP would be below forecasts and the Ukrainian government sent in the troops to re-take some of the government buildings occupied by (Russian) dissidents.

    The Japanese government downgrades its outlook for growth

    http://www.zerohedge.com/news/2014-04-15/japan-downgrade-economic-assessment-april-does-it-make-additional-boj-qe-more-likely

    Latest from Ukraine:

    http://www.zerohedge.com/news/2014-04-15/ukraine-very-dangerous-situation-no-lethal-assistance-coming-says-white-house

    http://www.zerohedge.com/news/2014-04-15/putin-tells-merkel-ukraine-verge-civil-war

    ***overnight, Chinese GDP growth slowed to lowest level in 18 months.

    Bottom line: that stocks could finish as strongly on the upside when the news flow was so negative suggests that (1) stocks were more oversold than I thought and/or (2) the underlying bullish sentiment is much more powerful than the divergent sentiment/technical indicators imply and/or (3) all those fundamental factors about which I am concerned are already priced in the Market and/or (4) investors interpreted all the bad news as meaning that QEInfinity remains the US and Japanese dominant monetary policy and/or (5) some combination of some or all of the above or (6) it was random noise. There could be more alternatives although it wouldn't matter, because if it wasn't (6) then I am clueless---which wouldn't be the first time.

    My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

    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.

    It is a cautionary note not to chase this rally.

    Will first quarter earnings be down? (short):

    http://www.thereformedbroker.com/2014/04/15/the-first-down-quarter-for-earnings-since-2012/

    And the weakest earnings cycle in 55 years (short):

    http://www.thereformedbroker.com/2014/04/15/jeffrey-kleintop-the-weakest-earnings-cycle-in-55-years/

    Investing for Survival---20 Rules of Engagement

    17. Trade to win; never trade "not to lose."

    If you enter a trade with trepidation or self-doubt, you'll second-guess your decision the moment it moves against you. Don't trade defensively; trade with controlled aggression, and always remember that profitability begins within.

    18. Know your own imperfections.

    I wrote 12 Cognitive Biases that Endanger Investors earlier this year, which was an adaptation of a similar discussion surrounding rational behavior. I identified with several of the pitfalls discussed and as they say, admitting you have problems is the first step toward conquering them.

    News on Stocks in Our Portfolios

    W.W. Grainger, Inc. beats by $0.11, revenues in line

    • W.W. Grainger, Inc. (GWW): Q1 EPS of $3.07 beats by $0.11.
      • Revenue of $2.39B (+4.8% Y/Y) in-line.

    Economics

    This Week's Data

    The International Council of Shopping Centers reported weekly sales of major retailers down 0.3% versus the prior week but up 2.3% on a year over year basis; Redbook Research reported month to date retail chain store sales down 1.0% versus the comparable period last month but up 2.6% versus the similar timeframe a year ago.

    Weekly mortgage applications rose 4.3% while purchase applications were up 1.0%.

    March housing starts advanced 2.8% versus estimates of up 6.3%.

    http://www.calculatedriskblog.com/2014/04/housing-starts-at-946-thousand-annual.html

    Other

    A closer look at Monday's March retail sales number (medium):

    http://www.alhambrapartners.com/2014/04/14/ignorance-or-deceit/

    The US economy in charts (medium):

    http://www.zerohedge.com/news/2014-04-15/us-economy-pictures

    Adding to the confusion over Fed policy (short):

    http://www.zerohedge.com/news/2014-04-15/tuesday-humor-biggest-fed-dove-concerned-about-real-erosion-peoples-purchasing-power

    And possibly this (short):

    http://www.zerohedge.com/news/2014-04-15/shocking-buying-spree-americas-mysterious-third-largest-treasury-holder-ramps-higher

    Two measures of inflation (medium):

    http://advisorperspectives.com/dshort/updates/CPI-PCE-Comparison.php

    And (short):

    http://blog.yardeni.com/2014/04/the-feds-questionable-inflation-mandate.html

    Homebuilder sentiment declines (short):

    http://www.bespokeinvest.com/thinkbig/2014/4/15/homebuilder-sentiment-declines.html

    Politics

    Domestic

    Thought police (medium):

    http://www.washingtonpost.com/opinions/charles-krauthammer-thought-police-on-patrol/2014/04/10/2608a8b2-c0df-11e3-b195-dd0c1174052c_story.html

    Statistical frauds (medium):

    http://townhall.com/columnists/thomassowell/2014/04/15/statistical-frauds-n1824357

    Quote of the day (short):

    http://cafehayek.com/2014/04/quotation-of-the-day-962.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

    International War Against Radical Islam

    Disclosure: I am long GWW.

    Apr 16 9:00 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.