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 46 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 16331-17158

    Intermediate Trading Range 15132-17158

    Long Term Uptrend 5101-18464

    2013 Year End Fair Value 11590-11610

    2014Year End Fair Value 11800-12000

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Trading Range 1814-1991

    Intermediate Term Uptrend 1881-2681

    Long Term Uptrend 762-1999

    2013Year End Fair Value 1430-1450

    2014 Year End Fair Value 1470-1490

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 44%

    High Yield Portfolio 53%

    Aggressive Growth Portfolio 46%

    Economics/Politics

    The economy is a modest positive for Your Money. This week's data releases, while sparse, were quite upbeat: positives---weekly mortgage applications, July housing starts, July existing home sales, the July NAHB confidence index, weekly jobless claims, the Philly Fed index, July leading economic indicators and second quarter CPI: negatives---weekly purchase applications; neutral---weekly retail sales.

    I supposed that the fact that the stats this week were overwhelmingly positive is important in itself. Certainly, they reinforce the notion of economic growth. However, the housing numbers bear special attention. This sector has been the 'sick puppy' in the economy. So to have housing starts and existing home sales trounce expectations is clearly a promising sign that this sector is starting to catch up and now contributing to any further advance. I say that with the usual caveat that one week's worth of data does not make a trend.

    Also of note is the continuing deterioration in the European and Japanese economies. To date, the US economy has been carrying a heavy burden in the form of domestic fiscal, monetary and regulatory policies and yet has still managed to grow. The question in my mind is, can it bear the additional weight of a slowing global economy? As yet, there is no sign that it can't; but I am leaving open the possibility of recession or at least a slowdown in the already sluggish US rate of advance.

    The Fed, which has been one of, if not the, leading factor in investors' decision making for the last three years, drew its share of headlines this week. First on Wednesday, the minutes from the last FOMC meeting were released. The bottom line was that they were more hawkish in tone than anticipated due primarily to the improved flow of economic data, in particular on employment. That was followed by a speech by Yellen at Jackson Hole which, to summarize, was wishy washy with a hawkish overtone. Taken together that suggests that the Fed may start to tighten sooner than many now assume---which is fine by me.

    As you may know, Draghi also spoke at Jackson Hole and in his speech, he basically said that (1) the ECB while will do all it can to prevent recession, it pretty much has already done all that it could and (2) the next move had to come from fiscal policy---the cry for fiscal help echoing some of Bernanke's speeches. The difference being that Bernanke had a lot more flexibility to manipulate monetary policy and he used every bit of it. Indeed more than he should have, I would argue. In any case, there doesn't seem to be a QEIV coming from the ECB.

    http://www.calculatedriskblog.com/2014/08/ecbs-draghi-unemployment-in-euro-area.html

    In sum, I am almost back to what has been our base forecast for the last three years with the caveat that a slowdown among our major trading partners could adversely impact our outlook.

    Our forecast:

    '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/us-economic-profile-20-august-2014/

    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.

    The negatives:

    1. a vulnerable global banking system. This week's bankster bad guy was Bank of America, agreeing to a $17 billion settlement over mortgage fraud--- providing yet another chapter in the going saga of wanton disregard for rules and regulations [most designed to either prevent a financial meltdown or the damage depositors] by bank management and regulators inability to stop this behavior before the fact [read disastrous consequences].

    Apropos of both the above problems, here is a great piece on what the BofA settlement actually consisted of (medium):

    http://www.nakedcapitalism.com/2014/08/high-bullshit-to-cash-ratio-in-17-billion-bank-of-america-deal.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. 'With election season in full swing, nothing is likely to happen to alleviate the problems of an inefficient tax code, too much irresponsible spending and too much government regulations. The one bright spot is that the growing economy is generating sufficient tax revenue to drive down the budget deficit.'

    The good news is that Washington is on vacation. So we are blessed with the usual summer time lull that insulates us from the nefarious goings on that typically penalize us when our ruling class is assembled. The bad news is that they are coming back; and this is an election year. I think it likely that their time will be largely spent trying to score political points versus doing the people's work. That said, wasting their time scoring political points should be better for us and the economy than the work they have actually done over the last six years.

    The best news that I think that we can hope for is the absence of bad news.

    Goldman's assessment of how Washington politics will work after the November election (medium):

    http://www.zerohedge.com/news/2014-08-21/midterm-election-prospects-republican-senate-majority

    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.

    As I noted above, the minutes from the latest FOMC meeting were released this week and Yellen gave a keynote speech at Jackson Hole. My take is that both suggest that monetary tightening could come sooner than many expected. I consider that relatively great news---the faster the Fed exists QE and stops interfering with the Market setting interest rates, the better.

    The operative word in the prior sentence being 'relatively'. As you know, I have long expected that 'the botched return to normal' scenario would play out with the Fed staying too loose too long and that would lead to higher inflation. I haven't changed that view. Given the enormous expansion of its balance sheet and the suppression of interest rates for such an extended period of time, this process should have commenced long ago---even assuming that I am reading the FOMC/Yellen speech tea leaves correctly.

    So I see inflation in our future---with the caveat noted above, i.e. if the European and/or the Japanese economies tank, we could see new weakness in our own economy, in which case, the Fed may luck out on a short term basis. In other words, global malaise could take some steam out of our economy that would tamp down inflationary pressures. (And that seems to be what the bond and gold Markets are telling us.) If, and it is a big if, the Fed continues to tighten (and by the way, it doesn't have to be a 'slam on the brakes and come to a screeching halt' type tightening) in the face of that a slowing economy, it could escape its self-made trap. But as I said that is a big 'if' and it is much too soon to be making odds on it occurring.

    However, as you know, I am not that worried about the economy, whether there is a slowdown in global activity or a pick up inflation. To be clear, I am not saying that these factors will no impact; I am saying that it is not likely to be particularly severe. Rather my concern is that the Markets could take it on the chin. Specifically, Fed's historically unprecedented expansion of its balance sheet and the artificial pressure it has maintained on interest rates have led, in my opinion, to the gross mispricing of assets. A return to a more normal/less intrusive Fed policy suggests lower prices to me.

    The consequences of substituting debt for income (medium):

    http://www.zerohedge.com/news/2014-07-31/substituting-debt-income-not-success-its-failure-epic-scale

    1. rising oil prices. Turmoil in Ukraine and the geopolitical ramifications of the US/EU imposed sanctions on Russia as well as the continuing turmoil in Iraq and Israel/Palestine remain a threat to global oil/gas supplies/prices. To date, none of this has served to disturb the oil market. Indeed, because of the favorable supply/demand picture, oil prices are almost assuredly higher than they would be in the absence of all these conflicts. However, all of these issues remain unresolved. Indeed they continue to deteriorate---which leaves open the prospect that we still may face higher prices.

    The latest from Ukraine (medium):

    http://www.zerohedge.com/news/2014-08-22/pentagon-demands-russia-remove-convoy-immediately-nyt-reports-russians-firing-artill

    http://www.zerohedge.com/news/2014-08-23/ukraine-humanitarian-aid-convoy-returns-russia

    1. economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. Europe remains a trouble spot. Its economy continues to deteriorate; and despite the recent ECB move to provide additional liquidity to the banks, a recession could play merry hell with overly indebted sovereigns and overly leveraged banks.

    http://www.washingtonpost.com/blogs/wonkblog/wp/2014/08/20/worse-than-the-1930s-europes-recession-is-really-a-depression/

    In addition, questions are being raised about which side is being hurt the most by the Russian sanctions and counter sanctions. Ultimately, I think that Putin has the hammer because [a] at least at the moment, his popularity is soaring despite the pain being imposed by sanctions---so the domestic pressure on him is less than it is on the European governments and [b] he can turn off the gas if he chooses---which could really tighten some sphincter muscles.

    So far, the EU has 'muddled through'. Indeed, that is our forecast; but potential risks remain from multiple sources.

    The economic news out of Japan has been no better than that from the EU. I am not sure how far economic conditions will have to deteriorate before the Japanese bureaucrats cry 'uncle' and alter policy. But I assume that the longer it takes, the greater the impact on the economy and any trading partners.

    Update on China (medium):

    http://www.project-syndicate.org/commentary/yu-yongding-warns-that-unless-officials-stem-the-rise-in-corporate-leverage--economic-crisis-is-inevitable

    Bottom line: the US economy continues to progress despite little to no help from fiscal and monetary policy. This week's housing figures reinforce the recent improvement in the dataflow, while the CPI number could keep the pressure off the Fed to raise interest rates.

    That said, the economic news from two of our major trading partners (Europe and Japan) keeps getting worse. Plus Europe is in a pissing contest with Russia over Ukraine/Crimea related sanctions; and, in my opinion, Putin holds the upper hand. Any serious hiccup in either [or God forbid both] could have an impact on our own rate of growth. Hence, while I think the US recession scenario is not a high probability outcome, I am not dismissing it.

    http://www.zerohedge.com/news/2014-08-20/alternative-measures-suggest-weaker-economy a must read

    Finally, the political instability in Ukraine and throughout the Middle East is not getting any better. Certainly, the oil markets have taken events in stride. But that aside, I am concerned about the psychological impact of (1) losing a faceoff between the US and Russian and/or (2) a 9/11 type event executed by ISIS in retaliation for our stepped up involvement in Iraq.

    In sum, the US economy remains a plus, though the twin risks of inflation and recession are there. Unfortunately, these are not the only potentially troublesome headwinds.

    This week's data:

    1. housing: weekly mortgage and purchase applications were mixed; but both July housing starts and existing home sales were well above expectations and the NAHB builders confidence index rose,
    1. consumer: weekly retail sales were mixed; weekly jobless claims fell more than forecast,
    1. industry: The August Philly Fed manufacturing index jumped dramatically,
    1. macroeconomic: July CPI was in line; ex food and energy it was lower than anticipated; the July leading economic indicators were stronger than estimated.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 17001, S&P 1988) had a good week, despite Friday's weakness. The Dow is in short (16331-17158) and intermediate (15132-17158) trading ranges, though clearly it is close to the upper boundaries of those ranges. It remained within its long term uptrend (5101-18464) and above its 50 day moving average.

    The S&P closed within intermediate term (1881-2681) and long term (762-1999) uptrends, above its 50 day moving average and within a short term trading range (1814-1991). As you know, it broke above 1991 on Thursday, but gave that back on Friday. That leaves the short term trading range intact. It is also out of sync with the Dow on its intermediate term trend.

    On the other hand, the pin action was relatively quiet this week, especially in light of the slightly more hawkish commentary out of the FOMC minutes and the Yellen/Draghi speechathon on Friday. That is attribute to how well this Market is working off its overbought condition.

    Volume on Friday was flat (at an anemic level); breadth was negative. The VIX fell, finishing within short and intermediate term downtrends and below its 50 day moving average.

    The long Treasury had a see saw week (up, down, up) but remained within its short term uptrend, intermediate term trading range and above its 50 day moving average. It continues to be less impressed with the positive trend in the economic stats and less concerned about rising interest rates or it is more worried about a geopolitical incident (or both) than the stock boys. As you know, I have been somewhat confounded of late by the seemingly different interpretation of events by stock and bond investors---that hasn't changed.

    GLD was up on Friday (what, it goes up?), bouncing off the lower boundary of that developing pennant formation---which is a very mild plus. It remains within a short term trading range, an intermediate term downtrend and below its 50 day moving average.

    Bottom line: the Averages have done a fair amount of repair work to the technical damage inflicted two weeks ago and took the FOMC/Yellen/Draghi show surprisingly well. But all is not joy in Mudville. Both indices have still not managed to break above their former highs. Indeed, the S&P broke above its former high on Thursday only to be slapped back down of Friday. And the indices are out of sync on the intermediate term uptrends. Further, in this latest rebound, the numerous divergences that have emerged did not show signs of correcting. Finally, bonds and gold aren't acting like the economy is improving and inflation is a risk.

    This all sounds like a topping process. But the 'buy the dippers' just haven't given up. And until they do, any sell off will be short lived. It does remain to be seen whether the Averages can break (and confirm) (1) their former all-time highs. I think that they will and (2) the upper boundaries of their long term uptrends. That is a bigger nut to crack and at the moment, my bet is that they won't make it.

    Our strategy remains to do nothing. Although it is not too late to Sell stocks that are near or at their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    I am staying with my bond positions in our new ETF Portfolio and have not Sold the trading position in HDGE.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (17001) finished this week about 44.0% above Fair Value (11806) while the S&P (1988) closed 35.6% overvalued (1465). 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.

    The US economic dataflow continues to point to a sluggishly growing economy. Indeed over the last several weeks, it has relieved some anxiety about the potential onset of a recession. On the other hand, the stats out of Europe and Japan have been abysmal. Plus both are more indebted and their banks more leveraged than our own. So I think that it makes sense to be concerned that economic malaise within two of the US's biggest trading partners could impact our own economy and securities markets if conditions continue to worsen.

    Meanwhile, back at the Fed, the tone became slightly more hawkish this week. That has a positive bias to it (for me), if it will only quit fiddle fuckin' around and get on with the show (raising interest rates). I don't think that this seeming change in attitude lessens the risk of inflation; but it may lessen the ultimate magnitude of inflation---if these guys (and gal) really mean it. In any case, I don't think what happens to the economy is the key consequence to a more firm monetary policy. The key consequence is, in my opinion, the unwinding of artificially set asset pricing---which is to say, prices are likely to decline.

    I continue to believe that the faceoff in Ukraine has reached the point that it is a lose/lose game for the US. It makes no sense to escalate; and even on the outside chance that it occurred, there would be no winners. That leaves negotiations/compromise/blah, blah, blah in which Putin is going to win because he holds many of the important cards and he has brass balls. The only question is, how much will the US be embarrassed by the resolution? If a lot, Markets aren't apt to like it.

    The other big question, is how logistically sophisticated is ISIS? Now that Obama has decided to reverse the policy that He spent the first six years of His presidency condemning, what kind of hornet's nest has He stirred up in Iraq? Specifically, has the US engaged an enemy with the will power and resources to launch another attack on the US or its citizens overseas? I have no clue what the answer is; but I would really like somebody to give me a hint.

    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 (though our inflation forecast may have to be revised up and/or our global 'muddle through' scenario seems more at risk than a week ago). 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.

    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.

    DJIA S&P

    Current 2014 Year End Fair Value* 11900 1480

    Fair Value as of 8/31/14 11806 1465

    Close this week 17001 1988

    Over Valuation vs. 8/31 Close

    5% overvalued 12396 1538

    10% overvalued 12986 1611

    15% overvalued 13576 1684

    20% overvalued 14167 1758

    25% overvalued 14757 1831

    30% overvalued 15347 1904

    35% overvalued 15938 1977

    40% overvalued 16528 2051

    45%overvalued 17118 2124

    Under Valuation vs. 8/31 Close

    5% undervalued 11215 1391

    10%undervalued 10625 131815%undervalued 10035 1245

    * 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.

    Aug 23 1:29 PM | Link | Comment!
  • The Morning Call--Why Did The Hawkish FOMC Minutes Spawn A Stock Rally?

    The Market

    Technical

    The indices (DJIA 16979, S&P 1986) had another good day. The Dow remained within its short (16331-17158) and intermediate term (15132-17158) trading ranges but is clearly drawing ever closer to the upper boundaries of those ranges. It also finished above its 50 day moving average and within a long term uptrend (5101-18464).

    The S&P also closed near the top end of its short term trading range (1814-1991). It also remained within its intermediate (1881-2681) and long term (752-1999) uptrends and above its 50 day moving average.

    Volume again declined. Surprisingly, breadth remained mixed. The VIX, not surprisingly, fell, finishing within short and intermediate term downtrends and below its 50 day moving average.

    The long Treasury dropped again; but remained within its short term uptrend, above its 50 day moving average and within an intermediate term trading range.

    http://advisorperspectives.com/commentaries/gavekal_082014.php

    GLD continued its dismal performance, closing within a short term trading range, an intermediate term downtrend, a developing pennant formation and below its 50 day moving average.

    Bottom line: the indices seem poised to bust through their former all-time highs and re-set short and intermediate term trends to the upside. Adding credence to that assessment, I thought that the more hawkish tone in the FOMC minutes would have put a crimp in investors' enthusiasm. Not so. Furthermore, the Market is way overbought; but investor euphoria reigns supreme. So it seems likely that prices will push through those former highs (17158, 1991) today or after the Yellen speech. Nonetheless, I remain of the belief that the Averages will be unable to confirm a breach above the upper boundaries of their long term uptrends.

    Our strategy remains to Sell stocks that are near or at their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    The latest from Stock Traders' Almanac on bull markets and corrections (short and a must read):

    http://blog.stocktradersalmanac.com/post/1025-Days-and-Counting-Since-Last-10-SPY-Correction

    Fundamental

    Headlines

    There was not much by way of economic data releases yesterday. Weekly mortgage applications were up, but the more important purchase applications were down. These numbers have little meaning following Tuesday's terrific housing starts report.

    Overseas, Japan reported that its July trade deficit widened yet again. I am not sure how long the Japanese electorate will put up with the failed policies of their government; but at some point, there has to be either a turnaround or a movement to correct those policies. In the meantime, it is not great news for US companies with exposure to Japan.

    ***overnight. Speaking of a turnaround, the Japanese July PMI surged to a five month high. However, that was offset by a lousy Chinese PMI.

    Of course, the high point of the day was the release of the minutes of the latest FOMC meeting which I would characterize as more hawkish than the statement immediately following that meeting. The primary reason seems to be that the improvement in the labor markets has an increasing number of Fed members wanting to start to raise interest rates sooner than previously implied.

    Summary of FOMC minutes

    http://www.calculatedriskblog.com/2014/08/fomc-minutes-most-participants-will.html

    Fed mouthpiece, Hilsenrath's take (medium):

    http://www.zerohedge.com/news/2014-08-20/hilsenrath-warns-fed-rate-hike-timing-debate-intensifying

    What is important about Jackson Hole (medium)?

    http://www.bloombergview.com/articles/2014-08-19/why-you-should-care-about-jackson-hole

    Bottom line: as I noted above, I was surprised that the more hawkish tone to the Fed minutes didn't cause more heartburn for investors than it did. Perhaps it is what I suggested yesterday, i.e. that investors have unbridled faith that the Fed will get its policy right irrespective of the rate of progress of the economy---hence any policy move will be the correct one.

    'As you know, my mantra on this issue is that if this assumption proves correct, it will be the first time in history. Not that it won't; but there sufficient evidence to warrant healthy skepticism.

    Or as Citi suggests, perhaps investors believe that Yellen's Jackson Hole speech will be uber dovish and negate the impact of the FOMC minutes.

    http://www.zerohedge.com/news/2014-08-20/jackson-hole-tremendous-downside-risks-if-yellen-doesnt-go-full-dovish

    There is nothing for me to do but wait and see; and given the current lofty equity valuations, I believe cash is of inestimable worth while I do.'

    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.

    Does it matter is stocks are currently not is a 2000 type bubble? (medium):

    http://pensionpartners.com/blog/?p=652

    Another thought on current valuation (medium):

    http://pragcap.com/is-a-big-equity-correction-imminent-not-yet

    CAPE and math (medium and a good read):

    http://statisticalideas.blogspot.com/2014/08/cape-and-math.html

    Investing for Survival from Warren Buffett

    http://www.farnamstreetblog.com/2014/08/what-makes-warren-buffett-a-great-investor/

    Company Highlights

    Reliance Steel provides value-added metals processing services and distributes more than 100,000 metal products. The company has grown profits and dividends at a 17-18% rate and earned a 7-19% return on equity over the last ten years. RS operations are subject to macroeconomic forces; however, it should grow at an above average pace over a business cycle as a result of:

    (1) despite slow economic growth, it is witnessing improvement in its core customer base (aerospace and energy) resulting in both rising demand and prices,

    (2) acquisitions (latest: Metals USA),

    (3) an excellent cost control discipline.

    Negatives:

    (1) the lackluster nonresidential construction market is impacting sales of carbon steel,

    (2) rising raw material costs,

    (3) industry overcapacity.

    RS is rated B++ by Value Line, has a debt/equity ratio of approximately 35% and its stock yields 2.0%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    RS 2.0% 16 22% 7

    Ind Ave 2.3 7 36 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    RS 35% 11% 2 5% B++

    Ind Ave 37 7 NA 4 NA

    Chart

    Note: RS stock made great progress off its March 2009 low, quickly surpassing the downtrend off its June 2008 high (straight red line) and the November 2008 trading high (green line). Long term, it is in an uptrend (blue lines). Earlier this year, it broke its intermediate term uptrend and re-set to a trading range (purple lines). The wiggly red line is the 50 day moving average. The Aggressive Growth Portfolio owns a full position in RS. The upper boundary of its Buy Value Range is $33; the lower boundary of its Sell Half Range is $95.

    (click to enlarge)

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

    8/14

    News on Stocks in Our Portfolios

    Hormel Foods beats by $0.03, beats on revenue

    • Hormel Foods (NYSE:HRL): FQ3 EPS of $0.51 beats by $0.03.
      • Revenue of $2.28B (+5.6% Y/Y) beats by $50M.

    Economics

    This Week's Data

    Weekly jobless claims fell 14,000 versus expectations of an 11,000 decline.

    Other

    Update on the auto loan market (medium):

    http://www.zerohedge.com/news/2014-08-20/car-repos-soar-70-auto-subprime-bubble-pops-its-contained-promises-fed

    Argentina 'crams down' holdouts (medium):

    http://www.zerohedge.com/news/2014-08-20/argentina-stuns-bondholders-scorched-earth-cramdown-plan

    Brazil joins the QE club (medium):

    http://www.ft.com/intl/cms/s/0/eeda051a-2886-11e4-8bda-00144feabdc0.html?siteedition=uk#axzz3AeIFqdWT

    Update on real household incomes (medium):

    http://www.advisorperspectives.com/dshort/commentaries/Real-Incomes-Five-Years-After-the-Great-Recession.php

    Politics

    Domestic

    More on the collusion of the banksters and the regulators (medium):

    http://www.nakedcapitalism.com/2014/08/nyts-william-cohan-blasts-holder-doctrine-headfake-bank-settlements-prosecutions.html

    International

    How successful have the sanctions been (medium)?

    http://www.newyorker.com/business/currency/hurt-putin-hurt

    Disclosure: The author is long RS, HRL.

    Aug 21 9:11 AM | Link | Comment!
  • The Morning Call--A Good Day For Economic News

    The Market

    Technical

    The indices (DJIA 16919, S&P 1981) repaired a bit more technical damage yesterday. The Dow is in short term (16331-17158) and intermediate term (15132-17158) trading ranges. However, it is nearing the upper boundary of both trends; and if it breaks above 17158, then both trends will re-set to uptrends. The DJIA is above its 50 day moving average and within its long term uptrend (5101-18464).

    The S&P is within a short term trading range (1814-1991). But like the Dow, it is very close to that upper boundary which if penetrated will re-set to an uptrend. It is above its 50 day moving average and within intermediate term (1881-2681) and long term (772-1999) uptrends.

    Volume was anemic; breadth was mixed (indicators have gone straight from oversold two weeks ago to overbought at yesterday's close). The VIX confirmed the break of its very short term uptrend and remains below its 50 day moving average and within short term and intermediate term downtrends. As I noted yesterday, this indicator is pointing to higher stock prices. Nevertheless, all those divergences to which I have been referring are not going away:

    http://www.crossingwallstreet.com/archives/2014/08/the-diverging-market-2.html

    And:

    http://jlfmi.tumblr.com/post/95117483155/divergence-in-discretionary-vs-staples-stocks-a

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

    http://gavekal.blogspot.com/2014/08/treasury-bond-yields-continue-to-fall.html

    GLD declined, closing within a short term trading range, an intermediate term downtrend, a developing pennant formation and below its 50 day moving average.

    Bottom line: the indices are pushing near to their former highs (17158, 1999) which if breached would completely reverse the recent technical damage. That has yet to occur; and until it does the Averages are out of sync. Nevertheless, if it does, the upper boundaries of the long term uptrends become the next resistance level. I have opined that I don't see any meaningful violation of those levels. I am sticking with it.

    Our strategy remains to Sell stocks that are near or at their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    Stock Traders' Almanac updates its Sixth Year of Presidential Cycle chart (short):

    http://blog.stocktradersalmanac.com/post/Can-Market-Break-Free-of-Sixth-Year-Hold-SPY-DIA

    Fundamental

    Headlines

    The only mentionable news yesterday came in the form of US economic data. Most important was surprisingly strong July housing starts---which backed up Monday's home building confidence number and, more significant, reflects some life in a lagging sector of the economy.

    http://www.capitalspectator.com/a-sharp-revival-in-housing-construction-for-july/

    Also notable, July CPI, both the headline as well as ex food and energy figure, came in tame. That should keep the pressure off the Fed to move toward raising interest rates---something that will likely make investors feel all warm and fuzzy and is sure to be trumpeted at the upcoming Jackson Hole conference.

    Finally, weekly retail sales was mixed; but that little bit of disappointing news was offset by some good reports from Home Depot and TJMaxx.

    This all provided an encouraging atmosphere for investors as they anticipate the release the FOMC minutes today and Yellen's speech at Jackson Hole on Friday.

    Bottom line: investors continue to assume that the Fed will get it all correct, which seems to mean that monetary policy will remain supportive of the financial markets irrespective of the rate of progress of the economy. As you know, my mantra on this issue is that if this assumption proves correct, it will be the first time in history. Not that it won't; but there sufficient evidence to warrant healthy skepticism.

    There is nothing for me to do but wait and see; and given the current lofty equity valuations, I believe cash is of inestimable worth while I do.

    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.

    More on valuation (short):

    http://advisorperspectives.com/commentaries/gavekal_081914.php

    Investing for Survival

    6 mistakes investors make in planning for retirement

    1. I didn't save enough for retirement, and I spent more than I should have in my peak years. "You should be saving significant amounts in those peak earning years as you get closer to retirement. People see their salaries go up, and they continue to spend instead of save. People have been living beyond their means, and their retirement expectations are not realistic."

    2. I leveraged myself too much during my peak earnings year. "People go out and live on credit cards," says Kehoe. "It's a terrible way to spend and live." Those who use home equity to buy a car or take a vacation often regret it, he says. "People are losing focus in that they should be saving. They over-leverage themselves and borrow too much. I teach this to all my kids. If you can't afford to pay a card off at the end of the month, you can't afford to be buying on the credit card."

    3. I retired too early. The two problems with retiring too early: "You have less (time) to save, and you have a longer period of retirement that you have to provide yourself for with an inflow of income," Kehoe says.

    4. Why did I take that money out of my IRA or 401(k)? "To take money out of your plan at an early age is a real killer, because that dollar you take out in your 20s compounded over 30 or 40 years, could grow into a significant amount. It's in your plan; leave it there."

    5. I thought Social Security was supposed to provide for me. "A lot of people have the perception that Social Security would take care of them," Kehoe says. "It was originally part of a three-legged stool - your pension, your own savings and Social Security. People put their stock and faith in the Social Security system. Even if you believe in the Social Security system, demographically it's a bad time. When it was put in place, it was supposed to pay people at just about the expected age of death. More and more people are counting on it more and more. Ten employees were supporting every one retiree; now its three employees supporting every one retiree. There are more people on retirement and less people to pay for the system."

    6. I was a picture of health in my middle age. "As we get older, the strain on our bodies increases," Kehoe says. "You can't keep up with things. It surprises a lot of people what the cost of good medical care can be. We do rely on government to take care of us, but there are outside expenses the government won't pay for. Consider long-term care insurance or some sort of supplementary insurance."

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The International Council of Shopping Centers reported weekly retail sales of major retailers down 1.3% versus the prior week but up 3.8% on a year over year basis; Redbook Research reported month to date retail chain store sales up 0.5% versus the comparable period last month and up 3.7% versus the similar timeframe a year ago.

    Weekly mortgage applications rose 1.4% though purchase applications dropped 0.4%.

    Other

    Update on Big Four Economic Indicators (medium):

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

    The latest from Mohammed El Erian (medium):

    http://www.bloombergview.com/articles/2014-08-19/how-to-survive-a-secular-stagnation

    What backs money? (short and a good read):

    http://pragcap.com/what-backs-the-value-of-money

    QE, the stock market and jobs (short):

    http://www.zerohedge.com/news/2014-08-19/charting-diminishing-effects-qe

    This recovery's wage gain worse in post WWII era (short):

    http://www.zerohedge.com/news/2014-08-19/worst-recovery-ever

    Japanese trade deficit widens again (short):

    http://www.zerohedge.com/news/2014-08-19/japanese-trade-deficit-streak-hits-40-months-biggest-miss-october

    Politics

    Domestic

    NY Times reporter threatened with jail (short):

    http://www.zerohedge.com/news/2014-08-19/pulitzer-prize-winner-obama-greatest-enemy-press-freedom-generation

    International

    Why free trade is better than tariffs (short):

    http://www.aei-ideas.org/2014/08/were-better-off-with-free-trade-so-why-do-we-have-tariffs/

    Ukraine's next crisis is economic (medium):

    http://www.nakedcapitalism.com/2014/08/ukraines-next-crisis-economic-disaster.html

    Aug 20 8:51 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.