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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
  • The Morning Call---Overnight News Is Not Good

    The Market

    Technical

    The indices (DJIA 16528, S&P 1972) started the week on a down note. The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {17044-17959}, [c] in an intermediate term trading range {15842-18295}and [d] in a long term uptrend {5369-19175}.

    The S&P finished [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] below the upper boundary of a very short term downtrend, [c] in a short term downtrend {2028-20930, [d] within an intermediate term uptrend {1900-2673} and [e] a long term uptrend {797-2145}.

    Volume rose; breadth was negative. The VIX was up 10% closing [a] above its 100 day moving average, now support, [b] within a short term uptrend, [c] within an intermediate term trading range {it remains well above the upper boundary of its former intermediate term downtrend and [d] a long term trading range.

    The long Treasury fell again, ending [a] above its 100 day moving average, now support and [b] within short and intermediate term trading ranges. The question remains, is this down move a function of heavy sales by the Chinese and emerging market central banks or a sign that the Fed will lift rates in September and/or the economy is improving? You know my answer.

    GLD rose again, remaining below its 100 day moving average, within short, intermediate and long term downtrends but it a very short term uptrend. The odds of a bottom having been made continue to go up.

    Oil was strong again, ending above the upper boundary of its short term downtrend for a second day; if it remains there through the close on today, that trend will re-set to a trading range. It remained below its 100 day moving average and within short (temporarily?), intermediate and long term downtrends.

    http://www.zerohedge.com/news/2015-08-31/citi-slams-todays-historic-oil-surge-another-false-start-time-fade-rally

    Oil driving market turmoil (medium):

    http://www.zerohedge.com/news/2015-08-31/forget-china-oil-price-main-driver-market-turmoil

    The dollar fell, finishing below its 100 day moving average, now resistance, and within short and intermediate term trading ranges.

    Bottom line: while the Averages were down yesterday, the only technically significant item was the close of the S&P above 1970 after an intraday challenge. As I noted previously, a lot of technical investors' eyes are focused on that level. So that has to be scored as a plus for the bulls. That said, many support levels have been decisively busted and volatility remains quite high; so there is no 'all clear' signal. Indeed, I think that the lows of last week will, at the very least, be tested. Still my ultimate conclusion remains that the volatility has been so extreme, it is almost impossible to make any meaningful comment on the Market's direction.

    Is a retest of the recent lows likely? (medium):

    http://blog.gavekalcapital.com/us-stock-market-internals-update-a-retesting-of-the-low-seems-likely/

    Thoughts from technician Tom DeMark (medium):

    http://www.zerohedge.com/news/2015-08-31/more-bad-news-tom-demark-we-should-see-market-drift-lower-next-month

    Fundamental

    Headlines

    Yesterday's US economic data was disappointing: the August Chicago PMI and the Dallas Fed manufacturing index came in below estimates. In addition overseas, August Japanese industrial output was below forecast. So nothing in the numbers to get us feeling warm and fuzzy.

    ***overnight, twin August Chinese manufacturing indices fell to the lowest levels in three years; EU August Markit PMI declined; South Korean exports declined the most in six years.

    http://www.zerohedge.com/news/2015-09-01/biggest-plunge-south-korea-exports-2009-confirms-collapse-global-trade

    In addition, the Chinese government imposed reserve requirements on futures positions to stem the downward pressure on the yuan.

    http://www.zerohedge.com/news/2015-09-01/china-takes-10-steps-back-slaps-20-reserve-requirement-currency-forwards

    And Russian military forces arrive in Syria (medium):

    http://www.zerohedge.com/news/2015-08-31/russian-military-forces-arrive-syria-set-forward-operating-base-near-damascus

    Brazil in danger of credit down grade (medium):

    http://www.zerohedge.com/news/2015-08-31/brazil-throws-towel-budget-citi-compares-fiscal-outlook-bloody-terror-film

    The main headline of the day was the Fed vice chair Stanley Fischer's speech in Jackson Hole on Saturday, in which, he sounded a more hawkish tone, suggesting that a September Fed Funds rate hike is still a real possibility. I don't need to remind you that the narrative from the Fed over the last two weeks has been on the dovish side. So Fischer's comments just support my thesis that these guys know they are caught in their own Catch 22 and have no idea what to do about it. For them to be niggling over 25 basis point move in the Fed Funds rate off a near zero base and whether or not this or that economic data point could alter that decision, to me, is either the height of mental masturbation or unbridled hubris---you choose.

    The cold hard fact is that whatever the Fed does is irrelevant to the economy. The only point here is, when will the Markets realize the pickle the Fed has put them in and how much damage will be done when everyone hits the door at the same time?

    http://www.zerohedge.com/news/2015-08-31/age-voodoo-finance

    Fischer's hawkish rumblings (medium):

    http://economistsview.typepad.com/timduy/2015/08/hawkish-rumblings-.html

    David Stockman on Fischer's Jackson Hole speech (medium):

    http://www.zerohedge.com/news/2015-08-31/stanley-fischer-speaks-more-drivel-dangerous-academic-fool

    Time to reform the Fed (medium):

    http://www.nationalreview.com/article/423289/federal-reserve-more-harm-than-good

    Bottom line: last week's rally may have been a relief to all those who are up to their snoot in stocks. But it is only widening back out the gap between prices and values; and nothing has occurred to warrant any optimism on that count.

    I don't believe that the 'all clear' whistle has been blown; so I remain patient and skeptical. Now may be one last chance to Sell your losers or a portion of your winners.

    Robert Shiller: are stocks overpriced? (medium):

    http://www.nytimes.com/2015/08/30/upshot/rising-anxiety-that-stocks-are-overpriced.html?_r=0

    Seriously? (medium):

    http://www.minyanville.com/business-news/markets/articles/oil-prices-etf-federal-reserve-michael/8/31/2015/id/56158

    Investing for Survival

    How to retire early:

    http://awealthofcommonsense.com/how-to-retire-early/

    Bonus: If you need to reduce risk, do it now

    http://www.advisorperspectives.com/commentaries/20150831-hussman-funds-if-you-need-to-reduce-risk-do-it-now

    Company Highlight

    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) intense promotional activity.

    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) currency fluctuations.

    Brown Forman is rated A+ by Value Line, has a 35% debt to equity ratio and its stock yields 1.3%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    BFB 1.3% 7% 39% 10

    Ind Ave 2.5 9 50 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    BFB 35% 30% 1 22 A+

    Ind Ave 36 22 NA 13 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 100 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 $40; the lower boundary of its Sell Half Range is $70.

    (click to enlarge)

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

    9/15

    News on Stocks in Our Portfolios

    · Donaldson: FQ4 EPS of $0.45 beats by $0.03.

    · Revenue of $609.75M (-8.8% Y/Y) beats by $13.

    Economics

    This Week's Data

    The August Chicago PMI was reported at 54.4 versus expectations of 54.9.

    http://www.calculatedriskblog.com/2015/08/chicago-pmi-decreases-slightly-in-august.html

    The Dallas Fed manufacturing index came in at -15.8 versus estimates of -2.5.

    http://www.calculatedriskblog.com/2015/08/dallas-fed-texas-manufacturing-activity.html

    Other

    Politics

    Domestic

    International War Against Radical Islam

    Sep 01 9:04 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    I don't need to point out that the S&P had an extraordinarily volatile week. However, it ended as it had begun the week---below its 100 and 200 day moving averages and in a short term downtrend. I marked the 1970 level which many technicians are watching as a critical level.

    (click to enlarge)

    The long Treasury has a rough week, negating a very short term uptrend. However, as I have been discussing, much of the poor pin action has been a function liquidation of Treasuries by the Chinese and emerging market central banks---not the expectation of improving economic activity. Although it clearly presents a dilemma to the Fed because these transactions are effectively a tightening of Fed policy.

    (click to enlarge)

    GLD was up 1% on Friday, reversing Thursday's challenge of the lower boundary of its very short term uptrend. The bounce is a positive sign that a bottom may have been made. Given the volatility of late, I am hesitant to get too jiggy about this. But I am now watching for an entry point.

    (click to enlarge)

    Oil is challenging the upper boundary of its short term downtrend; if it remains there through the close on Tuesday, the trend will re-set to a trading range. Like GLD, it may be trying to make a bottom.

    (click to enlarge)

    The VIX appears to be telling us that there is a lot more volatility to come; meaning patience. And whether you are a bull or a bear, make our bets small whatever you do.

    (click to enlarge)

    Fundamental

    Investing for Survival

    Never invest in something that you don't understand (short):

    http://www.pragcap.com/never-invest-in-something-you-cannot-understand

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    Other

    Update on big four economic indicators (medium):

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

    Real household net worth (short):

    http://angrybearblog.com/2015/08/real-household-net-worth-look-out-below.html

    China steps up its drive to cower anyone selling stock (medium):

    http://www.zerohedge.com/news/2015-08-31/china-punishes-hundreds-maliciously-manipulating-market

    But has lots more problems than a falling stock market (medium):

    http://www.zerohedge.com/news/2015-08-30/policy-confusion-reigns-china-caps-muni-debt-uncaps-bank-debt-and-sees-bad-loans-soa

    More on emerging markets credit problems (medium):

    http://www.zerohedge.com/news/2015-08-30/jpmorgan-nothing-appears-be-breaking-something-happened

    Politics

    Domestic

    Trumponomics (short):

    http://cafehayek.com/2015/08/trumponomics-is-notonomics.html

    US ranking on the 'freedom' index (short):

    http://www.zerohedge.com/news/2015-08-28/us-falls-behind-canada-finland-and-hong-kong-human-freedom-index

    International War Against Radical Islam

    Ten questions for Obama on the Iranian nuke deal (medium):

    http://www.powerlineblog.com/archives/2015/08/satloffs-ten-questions.php

    Ukraine starting to heat up again (medium):

    http://www.zerohedge.com/news/2015-08-31/ukraine-reignites-50-injured-after-grenade-attack-parliament

    Aug 31 8:46 AM | Link | Comment!
  • The Closing Bell

    Statistical Summary

    Current Economic Forecast

    2014

    Real Growth in Gross Domestic Product +2.6

    Inflation (revised) +0.1%

    Corporate Profits +3.7%

    2015 estimates

    Real Growth in Gross Domestic Product (revised) 0-+2%

    Inflation (revised) 1.0-2.0

    Corporate Profits (revised) -5-+5%

    Current Market Forecast

    Dow Jones Industrial Average

    Current Trend (revised):

    Short Term Downtrend 17044-17957

    Intermediate Term Trading Range 15842-18295

    Long Term Uptrend 5369-19241

    2014 Year End Fair Value 11800-12000

    2015 Year End Fair Value 12200-12400

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Trading Range 2031-2094

    Intermediate Term Uptrend 1898-2671

    Long Term Uptrend 797-2145

    2014 Year End Fair Value 1470-1490

    2015 Year End Fair Value 1515-1535

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 53%

    High Yield Portfolio 54%

    Aggressive Growth Portfolio 53%

    Economics/Politics

    The economy provides no upward bias to equity valuations. The dataflow this week was to the negative side of mixed: above estimates: weekly mortgage and purchase applications, month to date retail chain store sales, August consumer confidence, July durable goods orders, the July Chicago national activity index, revised second quarter GDP; below estimates: June new home sales, July pending home sales, the June Case Shiller home price index, weekly jobless claims, July personal spending, August consumer sentiment, the August Richmond and Kansas City Fed manufacturing indices and second quarter corporate profits; in line with estimates: July personal income.

    The primary indicators included July durable goods (+), revised second quarter GDP (+), July new home sales (-), July personal spending (-) and second quarter corporate profits (-). In sum, the balance of both all the indicators as well as the primary indicators was negative. However, the anecdotal evidence was a bit more positive, at least for oil: SLB acquiring another oil services company and rising oil prices. That said, the Atlanta Fed again lowered its third quarter GDP forecast.

    http://www.zerohedge.com/news/2015-08-28/atlanta-fed-cuts-q3-gdp-forecast-paltry-12

    Overseas, the Chinese government spent the week intervening in both its stock and currency markets in an attempt to stem losses. In addition, the economic data was on balance negative: better numbers from China (though many continue to have doubts about their veracity), poor stats from Japan, a failed bond offering in Vietnam and recession in Brazil.

    http://www.zerohedge.com/news/2015-08-28/no-recovery-you-brazil-officially-enters-recession-goldman-calls-numbers-disquieting

    Also this week, the NY Fed head made some dovish comments. I covered that in our Morning Calls and re-hash a bit of it below. But the bottom line is that monetary policy (except for QE1) has not, is not and is not apt to be of any help to our economy; so debating a rate hike or no rate hike is a giant circle jerk. All QE has done is create asset mispricing and misallocation of major portions.

    In summary, both total and primary stats were negative, anecdotal data was mixed to positive, the Fed is a menace and the global economy provided no relief. For the time being, I am staying with our forecast but it appears increasing likely that I will have to revise it down again.

    a much below average secular rate of recovery, exacerbated by a declining cyclical pattern of growth resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with conflicting profit incentives and a business community hesitant to hire and invest because the aforementioned, the weakening in the global economic outlook, along with the historic inability of the Fed to properly time the reversal of a vastly over expansive monetary policy.

    A neutral and getting less so:

    (1) our improving energy picture. Oil production in this country continues to grow which is a significant geopolitical plus. On the other hand, there has been no 'unmitigated' positive from lower oil prices. In addition, [a] there is mounting evidence that the continuing decline in oil prices is at least partly a function of falling demand and [b] lower oil prices have a pronounced negative impact on countries in which oil is a primary export and highly leveraged oil companies. The failure of either or both would feed the global economic slowdown [deflation] story.

    http://www.zerohedge.com/news/2015-08-27/scariest-number-oil-industry-550-billion

    The negatives:

    (1) a vulnerable global banking system. A week free of bankster misdeeds.

    (2) fiscal/regulatory policy. A week free of ruling class misdeeds.

    (3) 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.

    The 'no rate increase' crowd received a boost this week from NY Fed chief Dudley, who, in a speech, accounted as how a rise in the Fed Funds rate was 'less compelling' now, given the turmoil in the international markets.

    On the flip side, long rates have been rising due primarily to the heavy liquidation of Treasury holdings held in Chinese and emerging market foreign exchange reserves. In addition, these sales have the effect of tightening money supply [money is spent to buy the bonds]. Clearly, this represents, at least, a partial usurpation of the Fed's prerogative to expand or tighten monetary policy. Given the dovish bent of our Fed [i.e. it is scared sh*tless to make a 25 basis point increase in the Fed Funds rate], it could potentially lead, believe it or not, to QEIV.

    http://www.zerohedge.com/news/2015-08-28/most-important-chart-global-finance

    Just to summarize my continuing theses on Fed policy:

    [a] QE rate cuts had little to no positive effect on the economy, so a rate increase will also likely have no consequence,

    [b] what they did do was create major distortions in asset pricing and allocation,

    [c] even if the Fed did initiate an increase, a quarter point rise from such a low base wouldn't have an impact anyway,

    [d] in any case, the Fed has waited too long to begin the transition from an extraordinarily accommodative policy; so that when it does undo this mistake, it will likely result in a lot of pain in the asset pricing and allocation spheres,

    [e] keeping perfect its long term record of never getting its timing right.

    You know my bottom line: sooner or later, the price will be paid for asset mispricing and misallocation. The longer it takes and the greater the magnitude of QE, the more the pain.

    (4) geopolitical risks: the Iranian nuke deal, the secession vote in eastern Ukraine and the hot war in the Middle East remain the trouble spots. There was only one notable bit of news related to any of the above; and that was a Ukrainian/creditors deal to write off a portion of its debt, providing some much needed relief. Nevertheless, all these situations have the potential to escalate and spill over into the economic arena.

    (5) economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. China held the spotlight this week which included:

    [a] another small decline in the value of the yuan, accompanied by increasing efforts to stabilize it, including massive liquidation of reserves to support the yuan,

    [b] a dive in the Chinese securities markets followed by another round of government intervention in the form of interest rate cuts, enhanced tactics to cower sellers and new money pumped into the markets,

    [c] improvement in official economic data {electric power generation, leading economic indicators} but a disturbing report from an outside party that estimates that the Chinese economic activity is declining.

    None of the above is a plus in that more central government intervention hinders price discovery and the best and highest use of assets. The worry is that the market will ultimately prevail and the consequences negatively impact the global economy---like the report this week that global trade is shrinking.

    The impact of Chinese government meddling (medium):

    http://news.investors.com/ibd-editorials/082615-768334-chinas-market-weakness-continues-as-chinese-government-fumbles-response.htm

    For the moment, I am holding to our global economic 'muddling through' assumption; but the yellow light is flashing.

    Bottom line: the US economic data continues to reflect very sluggish growth in the US economy. However, developments is China reinforce the notion that economic conditions there are worse than portrayed by official pronouncements. In addition, the news out of emerging markets reflects rapidly deteriorating economic conditions. The biggest economic risk to our forecast is growth problems in the rest of the world. The warning light is flashing.

    This week's data:

    (1) housing: June new home sales were below expectations; July pending home sales were below forecast; mortgage and purchase applications were up; the June Case Shiller home price index was below estimates,

    (2) consumer: July personal income was up, in line, however personal spending was below consensus; month to date retail chain store sales growth was up; August consumer confidence was better than anticipated though consumer sentiment was less; weekly jobless claims fell less than expected,

    (3) industry: July durable goods orders were much better than forecast, though ex transportation the 'beat' was slight; both the August Richmond and Kansas City Fed manufacturing indices were disappointing; the July Chicago Fed national activity index was above estimates, but June's reading was revised down,

    (4) macroeconomic: revised second quarter GDP improved, though revised corporate profits were worse.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 16643, S&P 1988) finished a stomach churning week with something of a whimper---the DJIA down fractionally and the S&P up slightly. The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {17044-17959}, [c] in an intermediate term trading range {15842-18295}and [d] in a long term uptrend {5369-19175}.

    The S&P finished [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] below the upper boundary of a very short term downtrend, [c] in a short term downtrend {2031-2087}, [d] within an intermediate term uptrend {1898-2661} and [e] a long term uptrend {797-2145}.

    Volume spiked during the week but fell back near normal levels on Friday; breadth was negative, with the flow of funds indicator having been negative for almost the entire week. The VIX broke several trends to the upside and remained there, ending [a] above its 100 day moving average, now support, [b] within a short term uptrend, [c] within an intermediate term trading range {it remains well above the upper boundary of its former intermediate term downtrend and [d] a long term trading range.

    http://thereformedbroker.com/2015/08/28/the-new-1-regime/

    A look at margin debt (medium):

    http://wolfstreet.com/2015/08/27/stocks-crashed-the-last-two-times-this-happened/

    The long Treasury performance this week was a bit of cognitive dissonance for me, in that I am a proponent of the no Fed rate hike/economic slowing camp. The most significant item being that it broke down below the lower boundary of a very short term uptrend---suggesting a Fed rate hike and/or a stronger economy is a possibility.

    However, as I have noted, much of the move is being attributed to substantial US Treasury sales by the Chinese and emerging markets central banks. While that could certainly mean higher rates in the short term, it actually supports the notion that the Fed won't raise rates (if it is as worried as much about the spillover effects of overseas turmoil as it says). In addition, those Treasury sales are a back door form of US monetary tightening which suggests an increase likelihood of either slowing economic growth or another round of QE.

    TLT remained [a] above its 100 day moving average, now support and [b] within short and intermediate term trading ranges.

    GLD rose again, remaining below its 100 day moving average and within short, intermediate and long term downtrends. However, it traded back above the lower boundary of its very short term uptrend, voiding the challenge initiated on Thursday. The odds of a bottom having been made are up.

    Oil was strong again and broke above the upper boundary of its short term downtrend; if it remains there through the close on Tuesday, that trend will re-set to a trading range. It remained below its 100 day moving average and within short (temporarily?), intermediate and long term downtrends.

    The dollar also rose, but closed below its 100 day moving average, now resistance, and within short and intermediate term trading ranges.

    Bottom line: after all that volatility, the indices finished basically flat for the week---though remember last Friday was a big down day. Nothing occurred that undid the technical damage done earlier. True, it rendered the challenges to the DJIA intermediate term trading range and the S&P intermediate term uptrend void. However, until there is some test of this very short term uptrend created by the bounce this week, we can't really say a bottom has been made. Plus as I noted above, the VIX is in no way suggesting that the worst is over. Still my ultimate conclusion remains that the volatility has been so extreme it is almost impossible to make any meaningful comment on the Market's direction.

    The long Treasury continues to challenge the notion that there will be no Fed rate hike and no recession. However, as I noted above, there are short term outside factors, only tangentially related to the US economy, driving Treasury bonds down (yields up)---that being selling of Treasury securities by China and other emerging markets attempting to defend their currencies.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (16643) finished this week about 36.7% above Fair Value (12169) while the S&P (1988) closed 31.7% overvalued (1509). 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 data continues to support our forecast and hence the economic assumptions in our Valuation Model. On the other hand, the turmoil in the Chinese currency and stock market as well as the numbers from emerging markets are not signs of economic health and that was reflected in this week's international trade data. My primary concern is that American business and labor can't overcome the hurdles presented by this problem. Clearly this poses a risk to the economy, and hence our forecast, and hence, the assumptions in our Valuation Model.

    Here is the problem stated in more apocalyptic terms (medium):

    http://www.zerohedge.com/news/2015-08-28/when-yen-was-last-resort-safety-bid-you-know-it-was-bad

    NY Fed chief Dudley backed up last week's narrative from the FOMC minutes, to wit, the seeming retreat from a September rate hike. Don't get me wrong. I don't think the FOMC's decision will make a hill of beans to the economy one way or the other. What worries me is the complete loss of investor faith in our Fed as well as the other major central banks in the world as a result of having pursued an unproven, ineffective, nay, harmful policy [asset mispricing and misallocation] and the subsequent reaction of the Markets.

    To be fair, Wednesday's powerful rally on the same day as Dudley's speech and the imposition of strong currency and stock market measures by the Chinese central bank directly conflicts with that notion. Whether that rally was a function of those circumstances or simply a dead cat bounce off an extremely oversold condition will likely be determined this coming week.

    Net, net, my two biggest concerns for the Markets are (1) the economic effects of a slowing global economy and (2) Fed [central bank] policy actions whatever that are or are not and the loss of confidence in those actions.

    Bottom line: the assumptions in our Economic Model are unchanged. If they are anywhere near correct, they will almost assuredly result in changes in Street models that will have to take their consensus Fair Value down for equities. Unfortunately, our assumptions may be too optimistic, making matters worse.

    The assumptions in our Valuation Model have not changed either; though at this moment, there appears to be more events (greater than expected decline in Chinese economic activity; turmoil in the emerging markets and commodities; miscalculations by one or more central banks that would upset markets) that could lower those assumptions than raise them. That said, our Model's current calculated Fair Values under the best assumptions are so far below current valuations that a simple process of mean reversion is all that is necessary to bring Market prices down significantly.

    I can't emphasize strongly enough that I believe that the key investment strategy today is to take advantage of any further bounce in stock 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; but 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.

    DJIA S&P

    Current 2015 Year End Fair Value* 12300 1525

    Fair Value as of 8/31/15 12169 1509

    Close this week 16643 1988

    Over Valuation vs. 8/31 Close

    5% overvalued 12777 1584

    10% overvalued 13385 1659

    15% overvalued 13994 1735

    20% overvalued 14602 1810

    25% overvalued 15211 1886

    30% overvalued 15819 1961

    35% overvalued 16428 2037

    40% overvalued 17036 2112

    45%overvalued 17645 2188

    50%overvalued 18253 2263

    Under Valuation vs. 8/31 Close

    5% undervalued 11560 1433

    10%undervalued 10952 1358

    15%undervalued 10343 1282

    * 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.

    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 47 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 29 10:09 AM | Link | Comment!
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