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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
My company:
Strategic Stock Investments
My blog:
Investing for Survival
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    The S&P closed right on the trend line connecting the lower highs. The brief period above that trend line did not meet our time and distance discipline, so it was negated. Clearly, the close today will be important.

    (click to enlarge)

    On Friday, the long Treasury closed below its 100 day moving average, the lower boundary of its short term trading range and the lower boundary of its intermediate term uptrend. If it remains below the trading range by the close Tuesday, the trend will be negated. If it remains below the intermediate term uptrend by the close Wednesday, the trend will be negated. Our muni bond holdings in the ETF Portfolio have not started to challenge comparable trends yet; but they are getting close.

    (click to enlarge)

    No change here: head and shoulders formation still intact. Avoid.

    (click to enlarge)

    The VIX is still near lows but also still in a very short term downtrend. I continue to believe that this represents cheap portfolio insurance.

    (click to enlarge)

    Fundamental

    Friday's economic data was universal misses versus expectations. Most were slight misses to the downside: April manufacturing PMI (54.1 versus 54.5), April light vehicle sales (16.5 million versus 16.9 million), April ISM manufacturing index (51.5 versus 52.0) April consumer sentiment (95.9 versus 96.0); with one really lousy number thrown in for good measure: March construction spending (-0.6 versus +0.4%). So thirteen of the last fourteen weeks have been disappointments.

    ***overnight, April Chinese PMI was reported at 48.9 versus 49.6 in March; April EU PMI was reported at 52.0 versus 52.2 in March; and according to Greek officials, progress is being made in that country's bail out negotiations with the Troika.

    http://www.reuters.com/article/2015/05/04/us-eurozone-greece-talks-idUSKBN0NP0BA20150504

    What bubble? An up to date look at investor psyche (medium):

    http://www.zerohedge.com/news/2015-05-03/what-bubble-wall-street-turn-p2p-loans-cdos

    QE and creative destruction (medium and a must read):

    http://www.zerohedge.com/news/2015-05-03/socialists-central-banks-credit-not-capital

    Investing for Survival

    12 things I have learned from Morgan Housel: Part 1

    1. "'I don't know' are three of the most underused words in investing."

    "What's really interesting about finance - and I think this is true for a lot of fields whether you're in physics, math, chemistry, history, or whatever it is - the more you learn, the you more you realize how little you know."

    There is nothing more fundamental to investing than understanding that risk comes from not knowing what you are doing. And as Morgan Housel is saying here: the more you know, the more you know that there is even more that you do not know. If you are not getting more humble as you: 1) get older, 2) grow as a person, or 3) learn, then you are not paying attention. The best investors keep their circle of competence tightly defined and limited in scope. Skills can atrophy or become outdated. New competencies can be developed with time and effort.

    What you are doing when you are investing is buying an ownership interest in an actual business. No matter how hard you may work to know everything about that business, the phenomenon effecting that business, and the markets in which it competes, there always be much that you do not know. Even if you may chose an index-based approach to investing, you are making choices about what types and amounts of assets to buy. The very best investors have been able to develop systems that deal effectively with the fact that investing is probabilistic process. The best systems are designed to enable the investor to buy and sell assets in a way that is "net present value positive" over time after fees and expenses. Systems that do not produce net present value positive results over time after fees and expenses, are speculation and are not investing.

    News on Stocks in Our Portfolios

    Chevron beats by $0.58, beats on revenue

    · Chevron (NYSE:CVX): Q1 EPS of $1.37 beats by $0.58.

    · Revenue of $34.56B (-35.1% Y/Y) beats by $10.19B.

    Economics

    This Week's Data

    Other

    WSJ slams Bernanke (medium):

    http://www.zerohedge.com/news/2015-05-03/wsj-slams-bernankes-rambling-blog-post-stop-blaming-everyone-your-mistakes

    Politics

    Domestic

    International War Against Radical Islam

    May 04 8:40 AM | Link | Comment!
  • The Morning Call---You Mean QE Leads To Economic Stagnation?

    The Market

    Technical

    The indices (DJIA 17840, S&P 2085) followed Wednesday's decline with another stout selloff. The S&P remained above its 100 day moving average but below its prior high. The Dow closed right on its 100 day moving average and well below its prior high. So the trend of lower highs persist in both of the Averages.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17072-19869, 2001-2982), intermediate term (17213-22339, 1805-2578 and long term (5369-18873, 797-2129).

    Volume rose; breadth was terrible. The VIX lifted another 9% on top of Wednesday's up 8%, finishing back above its 100 day moving average and within short and intermediate term trading ranges. Despite a couple lousy Market days, nothing in the VIX right now suggests anything ominous on the downside for stocks.

    https://www.bespokepremium.com/think-big-blog/breadth-turns-negative/

    The long Treasury recovered from a couple of rough down days, ending above its 100 day moving average and the lower boundary of its short term trading range. While avoiding, at least temporarily, more damage to the downside, TLT is developing a very short term downtrend. So what stability it had established over the past couple of weeks has been dissipated. I remain cautious and concerned about the potential that its recent move could be signaling a major change in the underlying fundamentals. As I noted yesterday, I have no conclusions, just worries.

    GLD was down again, closing below its 100 day moving average and continuing to build a head and shoulders formation.

    Bottom line: the trend of lower highs continues. However, stocks are getting oversold, so no immediate reason to get beared up. It may be nothing more than a reflection of the Markets acting on the poor short term risk/reward equation which I have noted several times recently. Longer term, the momentum remains to the upside and will continue at least until the lower boundaries of the indices short term uptrends (17072, 2001) are successfully challenged.

    The TLT chart is again in a state of flux, though yesterday's rally offered hope that the Treasury could be trying again to establish some price stability. We need more of that before getting too comfortable.

    Fundamental

    Headlines

    Yesterday's US economic news was mixed: weekly jobless claims fell more than expected but March personal income and spending were less than anticipated. The more important being the latter since it is primary indicator. If the week ended at Thursday's close, this would be the thirteenth negative data week out of the last fourteen. There are four big numbers that will be reported this morning but I will be on the road by then. So I will make the final tally Monday morning.

    Update on big four economic indicators (medium):

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

    Atlanta Fed just released its forecast for second quarter GDP, drumroll please, at +0.9%.

    http://www.zerohedge.com/news/2015-04-30/scariest-spreadsheet-fed-possession-just-revealed-just-scary-gdp-number-q2

    Oversea, the news was no better.

    (1) the Bank of Japan voted to maintain QE but failed to meet expectations of an even greater commitment [oh, boo whoo]; Russia's central bank lowered key interest rates

    (2) April inflation in the EU was reported flat versus the March report of -0.1%. Some investors are pointing at this a sign of inflation; but I think that is a bit of stretch, at least for the moment,

    (3) Moody's cut Greece's credit rating, again. Meanwhile, the government scrambled to make May pension payments; not exactly confidence building. In addition, it began meetings with EU officials in hopes of having a preliminary deal by May 3rd. Monday should be fun.

    ***overnight, April Chinese PMI was unchanged while the UK number was well below expectations; Japanese March inflation was 0.2%.

    Nothing illustrates the fragile, schizophrenic mood of investors than the above: (1) the perpetrator of the greatest expansion of a central bank balance sheet in history stays the course but doesn't increase it to even more ridiculous heights and that prompts whiney butt complaints, (2) inflation in Europe is flat [i.e. 0], but that generates worries that inflation is surely on the way.

    Bottom line: US economic news remains lousy; QE remains the policy of choice among the central banksters; and investors maybe, just maybe, starting to realize that (1) those two are somehow related, i.e. that QE, wherever it has been implemented, has done nothing for the respective economies and, indeed, have made things worse and (2) all that ecstasy created by QE and priced into assets [risk] may have been a mistake. When, as and if that happens, the mean reversion of asset [risk] pricing will begin in earnest.

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

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

    Thoughts on Investing

    There is no reliable way to invest in an environment of easy money. I've worked in a wide number of environments and studied many approaches that I don't use, and I can tell you one thing: there is no approach that will give you easy money.

    The easy money promoters make money off of subscription revenue. They are not investing alongside you, as I do with my clients. What I own, they own. 80%+ of my liquid assets are invested in my strategies, and most of the rest is in cash. Our interests are aligned. This is like not true of those that suggest easy money strategies.

    When you see books suggesting that you can flip houses, avoid them. Few make money off that regularly. If that were true, someone would form a REIT to do it, and do it far better than you could.

    The same applies to books offering a simple trading strategy. If that worked, there would be a lot of stupid people losing money. Wait, there are a lot of stupid people losing money, at least on a relative basis. But that doesn't mean that particular simple trading strategy works.

    Wherever it appears the lure of "easy money" brings out the worst in people economically. The love of money is a root of all kinds of evil. (1Tim 6:10a) Organically, value grows bit-by-bit, but often prices move in a more volatile fashion. Try to win by buying stocks that grow value. Winning from speculation is a crapshoot. Avoid it, the odds are against you.

    Imagine for a moment that we did not have financial markets. Who would do the best? Those that compounded their economic activities the best - those who were the most productive. The same is true for us today. Focus on companies that are productive, growing organically. That is almost always a good road to profits.

    News on Stocks in Our Portfolios

    V.F. EPS and revenue in-line

    · V.F. (NYSE:VFC): Q1 EPS of $0.67 in-line.

    · Revenue of $2.84B (+2.2% Y/Y) in-line.

    Economics

    This Week's Data

    The April Chicago PMI was reported at 52.3 versus expectations of 50.0.

    Other

    The lower long term economic growth rate (short):

    http://gavekal.blogspot.com/2015/04/the-step-down-in-long-term-us-growth.html

    The real financial crisis that is looming (medium and a must read):

    http://streettalklive.com/index.php/blog.html?id=2704

    More on student loans (medium):

    http://www.zerohedge.com/news/2015-04-30/one-more-reason-why-student-debt-bubble-about-get-lot-larger

    Politics

    Domestic

    International War Against Radical Islam

    The Iranian Foreign Minister speaks at New York University (medium)

    http://www.powerlineblog.com/archives/2015/04/zetetic-with-zarif.php

    Meanwhile, tensions escalate (short):

    http://www.zerohedge.com/news/2015-04-30/inching-toward-conflict-us-navy-escort-cargo-ships-persian-gulf-iran-refuses-back-do

    May 01 8:56 AM | Link | Comment!
  • The Morning Call---Bad Economic News And Stocks Are Down?????

    The Market

    Technical

    The indices (DJIA 18035, S&P 2106) were off yesterday---despite some lousy economic numbers which usually have investors all giddy about more easy money. The S&P remained above its 100 day moving average but traded back below its prior high for the second time---keeping the trend to lower highs intact. The Dow continued to trade above its 100 day moving average and below its prior high.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17066-19863, 1999-2980), intermediate term (17193-22319, 1805-2578 and long term (5369-18873, 797-2129).

    Volume was down; breadth deteriorated. The VIX jumped 8%, finishing below its 100 day moving average and within short and intermediate term trading ranges. It remains a short distance away from the lower boundaries of both its short and long term trading ranges. The latter should provide strong support. For that reason, I continue to think that the VIX remains a reasonably priced hedge.

    The value of margin debt as a stock market indicator (short):

    http://www.bloombergview.com/articles/2015-04-29/don-t-count-on-margin-debt-as-a-crash-indicator

    Traderfeed looks at yesterday's pin action (short):

    http://traderfeed.blogspot.com/2015/04/three-questions-crucial-to.html

    Stock Trader's Almanac on sentiment (short):

    http://jeffhirsch.tumblr.com/post/117766553028/is-market-sentiment-finally-forewarning-a

    The long Treasury got whacked hard again---like stocks, somewhat surprising in the face of poor economic data and a noncommittal Fed statement. It ended below its 100 day moving average, the lower boundary of the very short term trading range---negating that trend and right on the lower boundary of its short term trading range.

    It is now only a point and a half from the lower boundary of its intermediate term uptrend. If that trend is broken, aside from doing some serious technical damage to the TLT chart, it also opens questions regarding the fundamentals behind such a move.

    At first blush, it appears that the poor GDP number (suggesting the US economy may not be the best economy in a sloppy world) pushed the dollar and US Treasuries down. Of course, if the US economy is slipping, rates should decline especially if the Fed remains easy.

    Another explanation is that the bond guys think that the Fed may tighten sooner than later. That doesn't fit yesterday's FOMC narrative but does reflect the opinion voiced in the Fed mouthpiece Hilsenrath's article (see below).

    Or it could mean that investors have had enough of QE, they see the end game and don't like it, and are no longer willing to hold low yielding sovereign debt.

    Or it could mean that fears of inflation are being rekindled; although gold's performance doesn't support that notion. On the other hand, oil does.

    Or more sellers than buyers (short):

    http://www.zerohedge.com/news/2015-04-30/what-wall-street-thinks-caused-bund-rout

    Two points here: (1) the TLT chart has not yet broken down; so all of the above is just speculation, (2) but IF the interest rate charts turn negative, it may well be a signal that something is changing in the economic outlook. I am just trying to anticipate what force may be accounting for this. At the moment, I have no clue what it is (if indeed there is anything); but if I am paying attention, then I hopefully catch it early on.

    http://www.advisorperspectives.com/commentaries/20150429-gavekal-capital-the-smart-money-is-getting-long-treasury-bonds-again

    GLD returned to its old ways (down), closing back below its 100 day moving average and continuing to build a head and shoulders formation.

    Bottom line: the bull/bear battle continues around the trend line forming by a string of lower highs. While yesterday favored the bears, I count that for little. What is needed is strong follow through in either direction before we can make any judgment about short term price movement. As you know, I believe that the short term risk/reward (as defined by the upper boundaries of the Averages long term uptrend and the lower boundaries of their short term uptrends) suggests lower prices. Longer term, the momentum remains to the upside.

    The TLT chart is getting sloppy and if it continues, suggests the economy is not weakening and/or the Fed is about to tighten and/or the bond guys have had enough of the Fed's QE routine.

    Fundamental

    Headlines

    No relief for the weary. Yesterday, mortgage applications were reported down, purchase applications flat; but the real downer was first quarter GDP which grew considerably less than anticipated. This was hardly news to me; but investors didn't seem to care for the number which is surprising given their predilection for indications of more Fed easing. In any case, it reaffirms our forecast of an economy growing even slower than our original outlook with the danger of slipping into recession.

    GDP per capita (medium):

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

    In addition as everyone in the investing universe knows, yesterday ended the latest FOMC meeting. In the trailing statement, the Fed (1) removed all calendar references regarding the decision to raise interest rates, (2) stated that economic growth 'slowed' versus 'moderated' in its prior statement, and (3) attributed that to 'transitory' factors [weather, the dollar]. In short, it appears to have no idea when, as or if it will raise rates. And if I am correct about a permanent versus 'transitory' slowdown, it most likely won't raise rates at all.

    http://www.zerohedge.com/news/2015-04-29/not-patient-fed-blames-snow-weakness-removes-calendar-guidance

    On the other hand, Fed whisperer Hilsenrath says the Fed isn't worried and rate hikes are on the way (medium):

    http://www.zerohedge.com/news/2015-04-29/hawkish-hilsenrath-confirms-fed-not-worried-about-q1-growth-rate-hikes-coming

    Let me repeat a couple of my opinions: (1) the economy is slowing as a direct result of the effects of QE, (2) hence, ending QE [easy money]/raising rates will likely have little impact on the economy, (3) however, because QE's primary result has been to drive asset prices higher, then any reversal would have a greater consequence on asset prices than the economy.

    So you might ask, if QE doesn't end, will asset prices continue to rise? Here are a couple of reasons why that might not happen: (1) in my opinion is that unlike the government, corporations and individuals have finite capacity to borrow whether set internally by their own discipline or externally by their creditors. So matter no how cheap or easy money is or continues to be, when those corporations/individuals reach their finite capacity, there will still be no corporate or individual borrowers---which is another way of saying that the demand created by spending the borrowed money falls into the toilet, the r word. In short, assets may likely continue to rise until investors realize that corporations and individuals have maxed out the ability to borrow against future income; demand then craters and along with it, the economy [read corporate profits]. I have a problem believing investors will continue to push stock prices higher in the face of recession and declining corporate earnings.

    (2) another angle of this answer is that by keeping rates so low and the supply of money high, the Fed has created conditions where anyone can borrow money (anecdotally, I had a conversation this week with an acquaintance with a so so personal balance sheet who had just financed a B++ apartment house with no recourse) and in doing so has minimized the risk/price of failure. On a global scale, the world's central banks have done the same thing with sovereign debt---there are huge chunks of which investors have to pay the sovereign to take their money. In other words, investors are saying that there is less risk holding a sovereign debt than cash. Bear in mind, a portion of Spain's debt is priced at negative interest rates. Again, I have a problem believing that investors will price risk at zero for the rest of history.

    I have no clue how all this gets resolved. I do know that risk has been mispriced but it has not gone away.

    Oversea, the news was no better.

    (1) the central banks of Thailand and Sweden made additional monetary easing moves [see above],

    ***overnight, the Bank of Japan voted to maintain QE but failed to meet expectations of an even greater commitment; Russia's central bank lowered key interest rates.

    (2) it was reported that lending by EU banks to companies and households rose for the first time in three years [see above],

    (3) today Greece will present a [new and improved] draft for fiscal reforms mandated by the troika.

    The latest from Greece (medium):

    http://www.zerohedge.com/news/2015-04-29/greek-deposits-now-lowest-2005-one-third-bank-assets-now-ecb-funded

    Coming defaults in Greece (medium):

    http://www.nakedcapitalism.com/2015/04/coming-defaults-greece.html

    ***overnight, Moody's cut Greece's credit rating, again; Greece scrambled to make pension payment; and today, the government is meeting with EU officials in hopes of having a preliminary deal by May 3rd.

    ***overnight, April inflation in the EU was flat versus the March report of -0.1%;

    Bottom line: the economic news was not great (again), but Markets failed to get jiggy with it. A slowing or declining economy (ies) didn't conjure QE sugarplums in investors' heads. Meanwhile, the global central banks continue merrily down the path of greater monetary ease, creating risk then mispricing it. I have to wonder is yesterday's pin action was one off or if investors are starting to doubt the notion of QEInfinity. We will know soon enough.

    The Treasury market pin action (discussed above) may be an early warning or it may be nothing. I will be watching just in case. In the meantime, I feel very comfortable with the cash in our Portfolios.

    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.

    Company Highlight

    The 3M Company (formerly Minnesota Mining and Manufacturing) is a broadly diversified technology and manufacturer of great brands in industrial, health care, consumer, safety and graphics and electronics and energy (50,000 products sold in over 70 countries). The company earns over a 20%+ return of equity and has generated profit growth of 7-10% over the past 10 years. While dividends have not kept pace as the company reinvested cash flow in new businesses, the dividend payout ratio should increase in the next several years. The pillars of its business plan are:

    (1) invest in strengthening and streamlining its supply chain,

    (2) increase its brand building marketing focus on high growth overseas markets, using acquired local or regional brands where it makes sense,

    (3) raise its investment in R&D to advance the 3M brands,

    Negatives:

    (1) its large international business exposes it to currency fluctuation risks,

    (2) its businesses are highly competitive,

    (3) success depends on new product acceptance.

    MMM is rated A++ by Value Line, carries a 24% debt to equity ratio and its stock yields 2.6%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    MMM 2.6% 11% 49% 10

    Ind Ave *

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    MMM 24% 30% 2 16% A++

    Ind Ave*

    *the Diversified Company Industry operates in so many varied products and services, comparable numbers would be of little analytical value.

    Chart

    Note: 3M stock made great progress off its March 2009 low, quickly surpassing the downtrend off its October 2007 high (straight red line) and the November 2008 trading high (green line). MMM is in uptrends long term (blue lines) and intermediate term (purple lines). The wiggly red line is the 100 day moving average. The Dividend Growth and High Yield Portfolios own full positions in 3M. The upper boundary of its Buy Value Range is $88; the lower boundary of its Sell Half Range is $228.

    (click to enlarge)

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

    4/15

    Investing for Survival

    You may need less money in retirement than you think (medium):

    http://www.marketwatch.com/story/retiring-why-you-will-need-less-money-than-you-think-2015-04-13?link=MW_popular

    News on Stocks in Our Portfolios

    Exxon Mobil beats by $0.35, beats on revenue

    · Exxon Mobil (NYSE:XOM): Q1 EPS of $1.17 beats by $0.35.

    · Revenue of $67.62B (-36.7% Y/Y) beats by $14.47B.

    Automatic Data Processing beats by $0.02, beats on revenue

    · Automatic Data Processing (NASDAQ:ADP): FQ3 EPS of $1.04 beats by $0.02.

    · Revenue of $3.03B (+7.1% Y/Y) beats by $10M.

    Teva Pharmaceutical beats by $0.11, beats on revenue

    · Teva Pharmaceutical (NYSE:TEVA): Q1 EPS of $1.36 beats by $0.11.

    · Revenue of $4.98B (-0.4% Y/Y) beats by $140M.

    ConocoPhillips beats by $0.01

    · ConocoPhillips (NYSE:COP): Q1 EPS of -$0.18 beats by $0.01

    Franklin Resources beats by $0.12, misses on revenue

      • Franklin Resources (NYSE:BEN): FQ2 EPS of $0.98 beats by $0.12.
      • Revenue of $2B (-2.9% Y/Y) misses by $50M.

    MasterCard beats by $0.09, misses on revenue

    · MasterCard (NYSE:MA): Q1 EPS of $0.89 beats by $0.09.

    · Revenue of $2.23B (+2.8% Y/Y) misses by $50M.

    Economics

    This Week's Data

    Weekly jobless claims fell 34,000 versus expectations of an 8,000 decline.

    March personal income was flat versus estimates of a rise of 0.2%; personal spending was up 0.4% versus forecasts of up 0.5%.

    Other

    Politics

    Domestic

    Quote of the day (short):

    http://cafehayek.com/2015/04/quotation-of-the-day-1337.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

    International War Against Radical Islam

    Apr 30 9:33 AM | Link | Comment!
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