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Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 46 years of investment... More
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Investing for Survival
  • The Morning Call--Is The Long Treasury Trying To Tell Us Something?

    The Market

    Technical

    The indices (DJIA 18070, S&P 2114) rallied yesterday. The S&P remained above its 100 day moving average and rose above its prior high---this is the second attempt to break this trend. A close above it today will negate it---though remember last time, it negated the trend, then reversed sharply the following day. The Dow closed above its 100 day moving average (it bounced off this support level on Friday) and below its prior high. So the Averages may once again be out of sync with respect to their recent trend of lower highs.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17091-19888, 2003-2984), intermediate term (17213-22339, 1807-2580 and long term (5369-18873, 797-2129).

    Volume fell sharply (UK and Japanese markets were closed); breadth was mixed. The VIX rose slightly, finishing below its 100 day moving average and within short and intermediate term trading ranges. Its pin action remains supportive of rising stock prices.

    http://www.zerohedge.com/news/2015-05-04/no-really-who-buying

    Seasonal MACD sell signal (short):

    http://jeffhirsch.tumblr.com/post/118146339888/seasonal-macd-sell-signal

    The long Treasury was seriously pounded again, ending below its 100 day moving average and the lower boundaries of its short term trading range and intermediate term uptrend. If TLT remains below these boundaries, the short term trading range will be negated today and the intermediate uptrend tomorrow.

    As I noted last week, a break of the intermediate trend would raise questions about our underlying fundamental assumptions, i.e. a weak economy/potential deflation. What could account for rising rates?: (1) an anticipated burst of inflation, though GLD performance belies that, (2) an improving US economy of which there is little evidence, (3) investors are sick and tired of getting paid little to nothing and are fearful that others may feel the same; then what about stocks? (4) an improving EU economy prompting a shift by investors from dollar assets to EU assets. This is a possibility. It is supported by [a] a weakening dollar [b] a stronger bund and [c] better numbers from Europe of late; though I think it way too early to soon to make the call of a recovery, especially with the Greek bailout talks unresolved. Nevertheless, it seems that TLT is potentially signaling that changes are afoot. I am not convinced of any scenario yet; but if our muni bond holdings in the ETF Portfolio break a major trend, I will lighten up.

    GLD was up but closed below its 100 day moving average and continued to build a head and shoulders formation.

    Bottom line: the S&P is back challenging the recent trend of lower highs. If it is successful and the Dow can confirm the break, I remain doubtful that the Averages can break above the upper boundaries of their long term uptrends in any meaningful way.

    The long Treasury seems to be alerting us that times, they are a'changin'. To that I would add that historically, the bonds guys have been smarter than stock guys in anticipating an alteration in trend. May not happen this time; indeed, nothing may be happening. But the warning light is flashing and I am watchful

    Fundamental

    Headlines

    We got one US economic indicator yesterday: March factory orders which were up and in line. Positive news is always welcome.

    Overseas, the April Chinese and EU PMI's were below expectations (more of the same); and according to Greek officials, progress is being made in that country's bail out negotiations with the Troika.

    Although the IMF apparently didn't get the memo (medium):

    http://www.zerohedge.com/news/2015-05-04/imf-splinters-rest-troika-threatens-cut-greek-funding

    ***overnight, Australia's central bank lowered its key interest rate; and the EU raised in 2015 economic growth forecast (see above).

    Bottom line: nothing in yesterday's news suggests any improvement in the global economy or in any particular country. Nor were there any changes in monetary/fiscal/regulatory policies to offer hope of some subsequent advance. What did occur was that stocks got more expensive while a key component of the discount factor (interest rates) used for their valuation rose. And there is a whiff in the air that a key element (inflation) of that component may also be moving higher. To be clear, I am not making an inflation call; I am saying that there is evidence that it may be about to rise and we need to pay attention.

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

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

    The latest from Bill Gross (medium and a must read):

    https://17eb94422c7de298ec1b-8601c126654e9663374c173ae837a562.ssl.cf1.rackcdn.com/Documents/umbrella/bill%20gross/30638%20TL-Bill%20Gross%20Investment%20Outlook_May%202015_exp%205.30.16_3.pdf

    How does a bursting bubble sound? (medium):

    http://www.marketwatch.com/story/heres-how-a-stock-market-sounds-when-the-bubble-bursts-2015-05-04?link=MW_popular

    Stephen Roach on central bankers' delusions (medium and today's must read):
    http://www.zerohedge.com/news/2015-05-04/stephen-roach-derides-central-bankers-mass-delusion

    Update on valuation:

    http://www.advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

    http://www.advisorperspectives.com/dshort/updates/Crestmont-PE-Ratio.php

    http://www.advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php

    http://www.advisorperspectives.com/dshort/updates/Regression-to-Trend.php

    Of the S&P 500 members that have already released results this season, 73 percent beat profit projections and 49 percent topped sales estimates. Analysts have tempered their predictions for a corporate profit slump, now projecting a first-quarter drop of 0.4 percent, compared with April 17 calls for a 4.3 percent decline.

    On the other hand, estimates continue to drop (short):

    http://blog.yardeni.com/2015/05/analysts-continue-to-lower-s-500.html

    Company Highlight

    The Bank of Nova Scotia (Scotiabank) is Canada's third largest bank with operations in Canada, the US and 50 foreign countries. BNS has earned a 14-20% return on equity over the last ten years and has grown profits and dividends at a 9-11% pace. While the 2008-2009 financial credit crisis impacted BNS, it weathered the storm much better than most large US banks and should continue to grow earnings and dividends as a result of:

    (1) an improving Canadian economy,

    (2) a very strict cost control program,

    Negatives:

    (1) a slowdown in the Canadian mortgage market,

    (2) increased losses in the Caribbean and Puerto Rico,

    (3) margin pressures.

    BNS is rated A by Value Line, carries a 15% debt to equity ratio and its stock yields 4.3%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    BNS 4.3% 9% 48% 9

    Ind Ave 2.6 11 35 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    BNS 15% 14% 2 NA* A

    Ind Ave 28 10 NA NA* NA

    *banks' income statements don't provide a Net Margin number

    Chart

    Note: BNS stock made good progress off its March 2009 low, surpassing the downtrend off its October 2007 high (straight red line) and its November 2008 trading high (green line). Long term, it is in an uptrend (blue lines), Intermediate term, it is in a trading range (purple lines). The wiggly red line is the 100 day moving average. The High Yield Portfolio owns an 85% position in BNS. The upper boundary of its Buy Value Range is $33; the lower boundary of its Sell Half Range is $84.

    (click to enlarge)

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

    5/15

    Investing for Survival

    12 things I have learned from Morgan Housel: Part 2

    2. "There are no points awarded for difficulty."

    The best investors make frequent use of a "too hard" pile when it comes to investing. One of the many things that investors like Morgan Housel have learned from great investors like Charlie Munger is how much investing performance can be improved by just avoiding some of the boneheaded mistakes made by other investors. For example, there is no shame in admitting that a given business can't be valued. There are plenty of other businesses that are understandable which present investment decisions that are not very difficult. Most of the time what an investor should do is nothing. And there is no better time to do nothing than when something is difficult.

    On this point Warren Buffett likes to say "I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over." These 1-foot bar jumping opportunities with big financial payoffs don't appear very often, but when they do, it is wise to bet big.

    News on Stocks in Our Portfolios

    Emerson Electric misses by $0.11, misses on revenue

    o Emerson Electric (NYSE:EMR): FQ2 EPS of $0.65 misses by $0.11.

    o Revenue of $5.4B (-7.1% Y/Y) misses by $20M.

    AmeriGas Partners misses by $0.34, misses on revenue

    · AmeriGas Partners (NYSE:APU): FQ2 EPS of $2.17 misses by $0.34.

    · Revenue of $1.1B (-26.2% Y/Y) misses by $60M.

    EOG Resources beats by $0.03, misses on revenue

    · EOG Resources (NYSE:EOG): Q1 EPS of $0.03 beats by $0.03.

    · Revenue of $2.32B (-43.1% Y/Y) misses by $390M.

    Economics

    This Week's Data

    March factory orders came in at +2.1%, in line.

    The April US trade deficit was $51.4 billion versus expectations of $42.0 billion.

    Other

    The liquidity paradox (medium):

    http://www.zerohedge.com/news/2015-05-04/nor-any-drop-drink-citi-maps-liquidity-paradox

    David Einhorn on the price of oil and oil company balance sheets (medium):

    http://www.zerohedge.com/news/2015-05-04/us-shale-sector-crashes-after-david-einhorn-repeats-what-everyone-knows-already

    Is the ECB running out of bonds to buy? (medium):

    http://www.zerohedge.com/news/2015-05-04/has-ecb-run-out-willing-bonds-sellers-long-end

    Politics

    Domestic

    International War Against Radical Islam

    May 05 9:08 AM | Link | Comment!
  • 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!
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