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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 Morning Call---Will History Repeat Itself?

    The Market

    Technical

    The indices (DJIA 16974, S&P 1982) waffled around yesterday, as investors anticipated the Fed statement, then tried to figure out what it meant. The Dow finished above the upper boundary of its short term downtrend for the third day, thereby confirming the break and re-setting to a trading range (15857-17158). It also ended within an intermediate term trading range (15132-17158), a long term uptrend (5148-18484) but above its 50 day moving average.

    The S&P closed within a short term trading range (1820-2019), an intermediate term trading range (1740-2019), a long term uptrend (771-2020) but above its 50 day moving average.

    Volume was low again; breadth deteriorated. By one measure, the Market is still overbought. The VIX rose, ending within a short term uptrend, an intermediate term downtrend and above its 50 day moving average.

    The long Treasury rose (despite the end of QE), closing within a very short term trading range, a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    GLD declined, closing below the lower boundary of its new very short term trading range; a finish below that boundary today, it will re-set to a downtrend. It remains within short and intermediate term downtrends and below its 50 day moving average.

    Bottom line: I was a bit surprised by the lack of reaction to the ending of QE and what seemed to be a more hawkish stance by the Fed. Listening to the media pundits, there was the usual confusion about what it all means and that may be as much the reason for the tempered response as anything. Further, it is not like this move wasn't telegraphed well in advance (already discounted?); although to be fair, the regional Fed chiefs did their best to cloud the issue and raise hopes that QE might be extended (or not).

    Short term, trading is apt to influenced by the extreme overbought condition of the Market. Longer term, those divergences are still there and a major prop to investor psychology has been removed. Now the issue is, do investors have sufficient confidence that the economy has more to go on the upside and that the Japanese and EU economies will have little effect?

    NYSE margin debt back near highs (medium):

    http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

    I would use any rise in prices to Sell stocks that are near or at their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    Best six months of the year begins in November (short):

    http://blog.stocktradersalmanac.com/post/Markets-Best-Six-Months-Commence-with-November-DIA-SPY-QQQ

    Fundamental

    Headlines

    Very little economic news yesterday, either from the US or overseas. The sole number was weekly mortgage and purchase applications which were both down.

    Of course, the big news of the day was the end of the FOMC meeting and the accompanying statement. Several important points:

    1. the Fed ended QE,
    1. it gave a generally upbeat assessment of the economy,
    1. it said that it saw substantial improvement in the labor market. That is a major change in language---to the positive. Its prior more downbeat wording had been interpreted by Fed watchers as a major reason for keeping interest rates low,
    1. however, it made no changes in the language on interest rates, leaving in the 'considerable period of time' wording.

    The general reading of this statement was that it was much less dovish than prior ones. The $64,000 question is, is it really pushing the economy out of the QE nest and how will that impact the economy and more importantly the markets?

    http://www.zerohedge.com/news/2014-10-29/fomc-ends-qe-dream-keeps-considerable-period-hopes-alive

    And from Fed whisperer, Hilsenrath (medium):

    http://www.zerohedge.com/news/2014-10-29/hilsenrath-warns-feds-vote-confidence-us-economy-means-mid-2015-rate-hike-possibilit

    Bottom line: we about to see if my thesis that an end of QE will have little effect on the economy but a major influence on asset pricing. History suggests that the market reaction will not be positive. The other thesis about to be challenged is whether or not Japan and the EU are sliding toward recession and that this will impact growth in the US. I wait with bated breathe.

    That said, stocks are still overvalued even if I am wrong on both counts.

    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.

    Great article on knowing when to lighten up (medium and today's must read):

    http://www.advisorperspectives.com/commentaries/streettalk_102814.php

    Bear markets are caused by one of two conditions (short):

    http://www.businessinsider.com/rosenberg-stock-market-corrections-come-and-go-but-the-bear-market-wont-come-until-2016-at-the-earliest-2014-10

    Company Highlights

    Brown Forman (BFB) produces and markets Jack Daniel's, Southern Comfort, Finlandia, Canadian Mist, and Korbel. The company has earned a 20-25%+ return on equity and grown profits and dividends between 10% and 11% over the past 10 years. Historically, BFB has managed to increase earnings per share through even the toughest economic period and should continue to do so as a result of:

    (1) the competitive advantage offered by its strong portfolio of brands,

    (2) geographic expansion into developed [France] as well as emerging [Russia, Poland, Mexico] markets,

    (3) broadening of its Jack Daniels product offerings [Gentleman Jack, Jack Daniels Single Barrel],

    (4) a stock buyback program.

    Negatives:

    (1) its products are sensitive to economic developments,

    (2) a highly competitive industry,

    (3) distilled spirits are subject to excise taxes in various countries; increases can have an adverse effect on the company's financial results,

    (4) increasingly hostile business environment in Russia.

    Brown Forman is rated A+ by Value Line, has a 40% debt to equity ratio and its stock yields 1.3%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    BFB 1.3% 7% 32% 10

    Ind Ave 2.3 10 38 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    BFB 40% 28% 1 24 A+

    Ind Ave 37 24 NA 14 NA

    Chart

    Note; BFB stock made great progress off its March 2009 low, quickly surpassing the downtrend off its August 2008 high (straight red line) and the November 2008 trading high (green line). Long term it is in an uptrend (blue lines). Intermediates term it is in an uptrend (purple lines). The wiggly red line is the 50 day moving average. The Dividend Growth Portfolio owns a full position in BFB but that is due to Selling Half in mid 2012 and the stock continuing to rise (reminder, our discipline is to only Sell Half once). The upper boundary of its Buy Value Range is $36; the lower boundary of its Sell Half Range is $65.

    (click to enlarge)

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

    10/14

    News on Stocks in Our Portfolios

    MasterCard beats by $0.11, beats on revenue

    • MasterCard (NYSE:MA): Q3 EPS of $0.89 beats by $0.11.
    • Revenue of $2.5B (+12.6% Y/Y) beats by $50M.

    Altria beats by $0.01, beats on revenue

    • Altria (NYSE:MO): Q3 EPS of $0.69 beats by $0.01.
    • Revenue of $4.75B (-0.2% Y/Y) beats by $20M.

    ConocoPhillips beats by $0.09

    • ConocoPhillips (NYSE:COP): Q3 EPS of $1.29 beats by $0.09.

    Economics

    This Week's Data

    Weekly mortgage applications fell 6.6% while purchase applications were down 5.0%.

    http://www.calculatedriskblog.com/2014/10/mba-mortgage-applications-decrease-in.html

    Weekly jobless claims rose 3,000 versus expectations of a 3,000 decline.

    http://www.advisorperspectives.com/dshort/updates/Weekly-Unemployment-Claims.php

    The initial third quarter GDP report showed a 3.5% advance down from the second quarter number of 4.6% but better than estimates of 3.0%; the GDP deflator was +1.3% versus forecasts of +1.4%.

    http://www.calculatedriskblog.com/2014/10/bea-real-gdp-increased-at-35-annualized.html

    Other

    Last chance for Japan (medium):

    http://www.project-syndicate.org/commentary/china-us-rebalancing-benefits-japan-by-stephen-s--roach-2014-10#F3zyf3wer4C5OFU4.99

    Politics

    Domestic

    Another scandal buried by the press (medium):

    http://www.powerlineblog.com/archives/2014/10/more-on-the-obama-administration-scandal-that-the-washington-press-corps-tried-to-bury.php

    More on press bias (medium):

    http://www.zerohedge.com/news/2014-10-29/20-year-cbs-news-veteran-details-massive-censorship-and-propaganda-mainstream-media

    International War Against Radical Islam

    Disclosure: The author is long BF.B, MA, MO, COP.

    Oct 30 9:28 AM | Link | Comment!
  • The Morning Call---All Eyes On The Fed

    The Market

    Technical

    The indices (17005, 1985) had another gangbusters day. The Dow finished above the upper boundary of its short term downtrend (15665-16745) for the second day; if it remains above that level through the close on today, the trend will re-set to a trading range. It also ended within an intermediate term trading range (15132-17158), a long term uptrend (5148-18484) but above its 50 day moving average.

    The S&P closed above the upper boundary of its a short term downtrend for the third day, thereby confirming the break and re-setting to short term trading range (1820-2019) It also finished within an intermediate term trading range (1740-2019), a long term uptrend (771-2020) but above its 50 day moving average.

    Volume was abysmal; though breadth improved. By one measure, the Market is increasingly overbought. The VIX fell 10%, ending within a short term uptrend, an intermediate term downtrend and below its 50 day moving average.

    The long Treasury fell, closing within a very short term trading range, a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    GLD rose, remaining within a very short term trading range, short and intermediate term downtrends and below its 50 day moving average.

    Bottom line: the 'don't fight the Fed' crowd continues to provide upside momentum; although volume is terrible and equities are in extreme overbought territory. I continue to feel completely out of touch with Market sentiment. When I am, it is always best to do nothing. Nonetheless, I would use any rise in prices to Sell stocks that are near or at their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    Best six months of the year begins in November (short):

    http://blog.stocktradersalmanac.com/post/Markets-Best-Six-Months-Commence-with-November-DIA-SPY-QQQ

    Fundamental

    Headlines

    We had a full plate of US economic data yesterday: the August Case Shiller home price index fell versus expectations of an increase, September durable goods orders both the headline number and the ex transportation reading were both negative versus estimates of a rise, weekly retail sales were positive, the October consumer confidence index was a blowout number as was the October Richmond Fed manufacturing index. By volume this data was a plus; however, the durable goods orders were by far the most important, so I would judge the day as a wash.

    Overseas, there were no reported stats; however, there was a slew of negative articles on China, Japan and the EU.

    China's 'ghost' cities (medium):

    http://www.zerohedge.com/news/2014-10-28/china-ghost-town-index-here-are-chinas-10-ghastliest-cities

    Can China achieve a 'soft' landing? (short):

    http://www.zerohedge.com/news/2014-10-27/chinese-soft-landing-will-inevitably-lead-very-brutal-hard-landing-pettis-warns

    Head of Bank of Japan lies and lies and then lies some more (medium):

    http://www.zerohedge.com/news/2014-10-27/kuroda-comedy-hour-or-has-world-gone-mad-again

    Eurozone remains challenged (short):

    http://blog.yardeni.com/2014/10/eurozone-remains-challenged-excerpt.html

    Why the ECB stress test was a farce (medium and today's must read):

    http://www.nakedcapitalism.com/2014/10/yanis-varoufakis-european-bank-stress-tests-phony.html

    None of this made any difference because the QEInfinity dreamweavers were anticipating some kind of good news out of the Fed today. Maybe so.

    Bottom line: if the Fed stays loose, it would seem to indicate that the EU recession/deflation scenario is alive and well and living in the Eccles Building. If it tightens, well we are back of looking at the charts following QEI, II and III---which were not pretty.

    I won't even attempt to guess what Yellen et al will do today. But I am unshaken in our investment strategy.

    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 latest from John Hussman (medium):

    http://advisorperspectives.com/commentaries/hussman_102714.php

    For the bulls (medium):

    http://www.capitalspectator.com/monitoring-bear-market-risk/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheCapitalSpectator+%28The+Capital+Spectator%29

    Investing for Survival

    Ten rules from Bernard Baruch

    1. Don't speculate unless you can make it a full-time job.

    2. Beware of barbers, beauticians, waiters - of anyone - bringing gifts of "inside" information or "tips."

    3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.

    4. Don't try to buy at the bottom and sell at the top. This can't be done - except by liars.

    5. Learn how to take your losses quickly and cleanly. Don't expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

    6. Don't buy too many different securities. Better have only a few investments which can be watched.

    7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

    8. Study your tax position to know when you can sell to greatest advantage.

    9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

    10. Don't try to be a jack of all investments. Stick to the field you know best.

    News on Stocks in Our Portfolios

    Cummins beats by $0.04, beats on revenue

    • Cummins (NYSE:CMI): Q3 EPS of $2.32 beats by $0.04.
    • Revenue of $4.9B (+14.8% Y/Y) beats by $180M.

    Sherwin Williams beats by $0.15, misses on revenue

    • Sherwin Williams (NYSE:SHW): Q3 EPS of $3.35 beats by $0.15.
      • Revenue of $3.15B (+10.5% Y/Y) misses by $20M.

    Automatic Data Processing beats by $0.02, beats on revenue

    • Automatic Data Processing (NASDAQ:ADP): FQ1 EPS of $0.62 beats by $0.02.
    • Revenue of $2.57B (+8.9% Y/Y) beats by $20M.

    Praxair misses by $0.01, misses on revenue

    • Praxair (NYSE:PX): Q3 EPS of $1.62 misses by $0.01.
    • Revenue of $3.14B (+4.3% Y/Y) misses by $30M.

    Western Gas Partners beats by $0.01, misses on revenue

    • Western Gas Partners (NYSE:WES): Q3 EPS of $0.60 beats by $0.01.
    • Revenue of $346.5M (+24.6% Y/Y) misses by $2.19M.

    C.H. Robinson Worldwide beats by $0.05, misses on revenue

    • C.H. Robinson Worldwide (NASDAQ:CHRW): Q3 EPS of $0.85 beats by $0.05.
    • Revenue of $3.47B (+4.5% Y/Y) misses by $30M

    Economics

    This Week's Data

    From Monday:

    The October Markit flash PMI came in at 57.3 versus expectations of 58.0.

    September pending home sales rose 0.3% versus estimates of up 0.8%.

    The October Dallas Fed manufacturing index was reported at 10.5 versus forecasts of 7.5.

    Yesterday:

    The International Council of Shopping Centers reported weekly sales of major retailer up 0.3% versus the prior week and up 3.8% on a year over year basis; Redbook Research reported month to date retail chain store sales up 0.3% versus the comparable period last month and up 4.4% versus the similar timeframe a year ago.

    September durable goods orders fell 1.3% versus expectations of +0.9%.

    http://www.advisorperspectives.com/dshort/updates/Durable-Goods-Real-Per-Capita.php

    The August Case Shiller home price index declined 0.1% versus estimates of +0.1%.

    October consumer confidence came in at 94.5 versus forecasts of 86.8.

    http://www.advisorperspectives.com/dshort/updates/Conference-Board-Consumer-Confidence-Index.php

    And: confidence inequality (short):

    http://www.bespokeinvest.com/thinkbig/2014/10/28/confidence-inequality.html

    The October Richmond Fed manufacturing index was reported at 20 versus an anticipated reading of 10.

    Other

    The other recession indicator (short):

    http://www.zerohedge.com/news/2014-10-28/other-recession-indicator-flashing-red

    Politics

    Domestic

    International War Against Radical Islam

    Disclosure: The author is long CHRW, WES, PX, ADP, SHW, CMI.

    Oct 29 9:15 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    The S&P is in the midst of a challenge to its short term downtrend. A close above the upper boundary of this trend today will re-set that trend to a trading range (by the way, the Dow finished above the upper boundary of its short term downtrend on Friday; and if that holds through tomorrow night, it too will re-set to a trading range). The S&P ended within an intermediate term trading range, a long term uptrend and above its 50 day moving average.

    (click to enlarge)

    The long Treasury traded down last week, breaking its very short term uptrend and re-setting to a trading range. It remains within a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    (click to enlarge)

    GLD broke below the lower boundary of its very short term uptrend and confirmed the break. It re-set to a trading ranges. GLD remains within short and intermediate term downtrends and below its 50 day moving average.

    (click to enlarge)

    The VIX fell but stayed within its short term uptrend, intermediate term downtrend and above its 50 day moving average.

    (click to enlarge)

    Fundamental

    The Markets have a lot to digest this week. First is the Sunday release of the ECB bank stress test. The following three articles all address this issue. Given that this will be on everyone's minds, they are must reads:

    25 banks fail ECB stress test (medium):

    http://www.zerohedge.com/node/496210

    And the scariest number in this report (medium):

    http://www.zerohedge.com/news/2014-10-26/scariest-number-revealed-today-1114-trillion-eurozone-bad-debt

    More disturbing incompetence by the ECB (medium):

    http://www.zerohedge.com/news/2014-10-26/chart-crushes-all-credibility-ecbs-latest-stress-test

    The FOMC meets Tuesday and Wednesday this week; this is the meeting where QE is supposed to come to a halt. Even if it does, my guess is that the language in the statement following the meeting and the minutes will be so dovish, it will make me want to puke.

    German confidence index falls.

    http://www.zerohedge.com/news/2014-10-27/ecb-stress-again-fails-inspire-confidence-euro-stocks-slide-after-early-rally-monte-

    Investing for Survival

    How to ruin your life (medium):

    http://www.fool.com/investing/general/2014/10/14/how-to-ruin-your-life.aspx

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    Other

    Politics

    Domestic

    International War Against Radical Islam

    Oct 27 8:54 AM | Link | Comment!
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