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 Morning Call--We Have Seen This Before

    The Morning Call

    7/9/14

    The Market

    Technical

    The indices (DJIA 16906, S&P 1963) got smacked yesterday. Not enough to do any technical damage; so the assumption remains that the momentum is to the upside. The Averages closed above their 50 day moving averages and within uptrends across all time frames: short (16168-17647, 1901-2068), intermediate (16422-20781, 1843-2643) and long (5083-18464, 762-1999).

    Volume inched higher; breadth was lack luster. The VIX rose, finishing above the upper boundary of its very short term downtrend. A close above that boundary today will confirm the break. In the meantime, it remains within short and intermediate term downtrends and below its 50 day moving average.

    http://www.capitalspectator.com/sorting-out-market-volatilitys-lessons/#more-3778

    The level of short selling is declining (medium):

    http://www.ft.com/intl/cms/s/0/b5445190-069c-11e4-8c0e-00144feab7de.html#axzz36yJmhjPG

    The long Treasury had another strong up day. It closed within short and intermediate term trading ranges and above its 50 day moving average. In addition, it is nearing the upper boundary of a very short term downtrend. If it fails to push through that boundary, it will set a third lower high which would strengthen that downtrend. If it does break above it, then it is setting up to test the upper boundary of its short term trading range.

    GLD inched higher for a second day, remaining above its 50 day moving average and within a short term trading range and an intermediate term downtrend.

    Bottom line: yesterday's pelting of stocks is not unusual, given last week's advance (consolidation). On the other hand, with the Averages' proximity to their all-time highs, a battle over valuation is also not surprising.

    I have opined that while I think that the indices will challenge the upper boundaries of their long term uptrends, they are not likely to confirm any penetration. The recent confusing pin action in bonds and gold supports that notion.

    That said, it takes a lot more than a couple of down days to break a trend as powerful as the current one.

    As far as stocks are concerned, our strategy remains to do nothing save taking advantage of the current momentum to lighten up on stocks whose prices are pushed into their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    Two out of three low volatility ramps end in a decline (short):

    http://blog.stocktradersalmanac.com/post/2-Out-Of-3-SPY-Low-Volatility-Periods-End-With-a-Decline

    Fundamentals

    Headlines

    Yesterday's US economic news consisted of two secondary indicators: weekly retail sales were mixed while the June small business optimism index was below estimates. While nobody likes disappointing data, two minor indicators are certainly not enough to move the needle on any forecast.

    Overseas, the UK factory output and German industrial production were below expectations. Those stats are a bit more important in that they are primary indicators and they come from two of the strongest economies in Europe---strongest being a relative term.

    Alcoa kicked off the earnings season with a beat. At the moment, expectations for second quarter are sanguine and no one seems to be anticipating any surprises. So it is probably reasonable to assume that the upcoming weeks will be filled with good news and countless pretexts for higher prices.

    Finally, remember that the minutes from the last FOMC meeting will be released today; so we could have a moment of joy or angst this afternoon depending on how they read.

    Bottom line: equities (as defined by the S&P) are overvalued (as defined by our Model). But nothing has occurred that forces investors to re-examine the assumptions that have driven prices from Fair Value to the current elevated state. Until we get that event, momentum will remain to the upside. To be sure, there are numerous divergences that suggest some distress in the bowels of the Market; but that means nothing until the investors get hit between the eyes with a two by four.

    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.

    The latest from Marc Faber:

    http://www.zerohedge.com/news/2014-07-08/marc-faber-stocks-could-crash-30-because-obamas-very-poor-president

    The case for stocks being reasonably valued (short):

    http://www.ritholtz.com/blog/2014/07/how-expensive-are-stocks-not-terribly/

    It is not different this time (medium):

    http://www.zerohedge.com/news/2014-07-08/saxo-bank-warns-not-different-times

    More on valuation (medium):

    http://advisorperspectives.com/dshort/guest/Lance-Roberts-140708-Mid-Year-Update.php

    Investing for Survival

    Decisions in the financial arena are especially complex and are complicated by a host of outside forces. As an investor, in particular, you should be aware that you're subject to biases which occur during the decision making process. Recognizing and minimizing their importance in your financial choices will make you that much better off and (hopefully) quite a bit richer.

    Read on below for our list of the 10 most common biases affecting the psychology of investing.

    1) Anchoring & Adjustment: This combination occurs when initial information unduly influences decisions by shaping the view of subsequent information. Once the "anchor" or initial information is set, there exists a bias for interpreting other information around the anchor. Car salesmen frequently use this tactic when presenting an initial sales price, making the subsequent negotiated prices seem lower than the initial price even though they are still higher than what the vehicle is actually worth.

    2) Attribution Asymmetry: The concept here involves people's tendency to attribute success to internal characteristics (such as talent and innate abilities) and to attribute failures to external factors (like simple bad luck). Research has shown the reverse to be true when evaluating the successes and failures of others. The lesson here is most valuable when you hit a "hot streak." When you experience speed bumps, don't be quick to write them off as poor luck - there could be a fundamental problem with your strategy.

    3) Choice-Supportive Bias: By distorting recollections of chosen courses of action versus the rejected courses of action, people tend to make the chosen outcomes seem more attractive that the foregone ones. Just as people more frequently remember "good" memories than they do "neutral" or "bad" memories, the belief that "I chose this option therefore it must have be superior" can lead to a false recollection of the ultimate outcome. Learn from your mistakes - don't forget them.

    4) Cognitive Inertia: This is just psychological speak for the unwillingness to change thought patterns in light of new circumstances. Quite simply, do your homework and keep up on your investments. If a company slashes guidance, for example, perhaps you should consider altering your investment accordingly.

    5) Incremental Decision Making & Escalating Commitment: These biases occur when people view a decision as a small step within a larger process, rather than as a singular choice. As a result, this viewpoint perpetuates a series of similar decisions, when perhaps many of those decisions should be evaluated with a fresh mind.

    6) Group Think: Grown-up lingo for peer pressure, group think occurs when one feels compelled to adhere to opinions held by a larger group. This one's easy - don't let others sway your opinion. Groups tend to form a singular opinion based on the opinion of the loudest or most influential person in the group. Doesn't mean he's right.

    7) Prospect Theory: This theory explains that people are more likely to take on risk when evaluating potential losses; though in looking at potential gains, humans have the tendency to be risk-averse. In other words, losses feel worse than gains feel good.

    8) Repetition Bias: The bias results from the willingness to believe what one has been told most often and by the greatest number of different sources. Remember all the hoopla over Facebook's IPO? And then its year one performance? Yeah, everybody though it was a hot stock and only now has it drifted above its IPO price.

    9) Sunk-Cost Fallacy: If someone makes a decision about a current situation, based all or in part on what they have previously invested (money, time or otherwise) in the situation, they are suffering from sunk-cost fallacy. Not matter how much you're down on an investment, if it's likely to never be recovered, then cut your losses and let it go.

    10) Wishful Thinking: This "problem" happens when people are too optimistic; wanting to see things in a positive light can distort perception and objective thinking. Just because you really really really want your investment to appreciate, doesn't mean it will. Investing should not be treated as gambling.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The International Council of Shopping Centers reported weekly sales of major retailers up 1.7% versus the prior week and up 3.3% on a year over year basis; Redbook research reported month to date retail chain store sales down 1.2% versus the comparable period a month ago but up 6.0% versus the similar timeframe last year.

    Weekly mortgage applications rose 1.9% while purchase applications were up 4.0%.

    Other

    The latest JOLTS survey (short):

    http://blog.yardeni.com/2014/07/the-jolt-in-jolts-excerpt.html

    The good news (medium):

    http://scottgrannis.blogspot.com/2014/07/good-news-risk-aversion-is-declining.html

    Thoughts on inversion (medium):

    http://fortune.com/2014/07/07/taxes-offshore-dodge/

    Citicorp is set to pay $7 billion in mortgage fraud suit; still no jail time (medium):

    http://www.reuters.com/article/2014/07/09/citigroup-investigation-idUSL2N0PJ26W20140709?feedType=RSS&feedName=governmentFilingsNews

    Politics

    Domestic

    When regulations make matters worse (short):

    http://www.coyoteblog.com/coyote_blog/2014/07/when-regulation-makes-things-worse-banking-edition.html

    The irony of it all (short):

    http://www.zerohedge.com/news/2014-07-08/freedom-summed-one-image

    International

    The hostilities in Israel/Palestine are now adding to the volatile mix in the Middle East (medium):

    http://www.zerohedge.com/news/2014-07-08/israel-escalates-gaza-assault-air-sea-threatens-lengthy-ground-operation

    Jul 09 9:10 AM | Link | Comment!
  • The Morning Call--A Pause That Refreshes?

    The Market

    Technical

    Yesterday, the indices (DJIA 17024, S&P 1977) paused to digest last week's gains. They remain above their 50 day moving averages and within uptrends across all time frames: short (16145-17624, 1901-2068), intermediate (16422-20781, 1843-2643) and long (5083-18464, 762-1999).

    Volume fell; breadth was really terrible---much worse than seems normal for small down day. The VIX popped 10%, but remained within very short term, short term and intermediate term downtrends and below its 50 day moving average

    The long Treasury recovered some of its losses from last week, bouncing off what is the lower boundary of its new short term trading range. However, it remained below its 50 day moving average. It is also within an intermediate term trading range.

    GLD was off fractionally. While it is in a very short term uptrend and above its 50 day moving average, it is in a short term trading range and an intermediate term downtrend.

    http://www.marketwatch.com/story/gold-might-be-up-this-year-but-its-worth-only-800-2014-07-04

    Bottom line: yesterday's quiet down day was to be expected after last week's robust performance. Volume was low, as you might think, though I was struck with how very poor the breadth numbers were. I have no idea whether that is a sign of things to come; but until we get some serious whackage to prices, it is best to assume that it was an outlier. So my expectation remains that the Averages will assault the upper boundaries of their long term uptrends.

    That said, the pin action in the bond and gold markets continues to create enough uncertainty that I don't think an upside spike is in the offing. As I noted in last weekend's Closing Bell, our ETF Portfolio did lighten up on its bond position, but I have done nothing with GLD.

    As far as stocks are concerned, our strategy remains to do nothing save taking advantage of the current momentum to lighten up on stocks whose prices are pushed into their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    Update on sentiment (short):

    http://www.bespokeinvest.com/thinkbig/2014/7/7/big-tick-higher-in-bullish-sentiment.html

    Fundamental

    Headlines

    No economic releases yesterday. That starts a week that will be very light on economic data, save the release of the minutes of the last FOMC meeting---which I am sure will be entertaining and regale the masses.

    With the ruling class on break, there is also not likely to be much news domestically except for the usual election posturing.

    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.

    The latest from John Hussman (medium):

    http://advisorperspectives.com/commentaries/hussman_070714.php

    Systematic suckers (short):

    http://www.thereformedbroker.com/2014/07/07/systematic-suckers/

    An interview with three legendary investors (medium):

    http://www.zerohedge.com/news/2014-07-07/worst-all-possible-worlds-fed-borrowing-returns-future

    The Buffett indicator (medium):

    http://advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php

    Company Highlights

    Blackrock Inc. provides investment management services (fixed income, equity and cash management) to institutional clients and individual investors worldwide as well as a family of open-end and closed-end mutual funds and offers risk management, investment system outsourcing and financial advisory services. The company has grown its earnings per share between 19-23% over the last five years and raised its dividend per share from $.40 in 2003 to $7.72 in 2013. In addition, BLK earned an 8-10% return on equity. Growth should continue as the company:

    (1) introduces new financial services, especially ETF's,

    (2) expands globally,

    (3) buys back stock,

    (4) makes acquisitions.

    Negatives:

    (1) a large portion of its fees are performance based,

    (2) increasing operating expenses,

    (3) global presence increases currency and regulatory risks.

    Blackrock is rated A by Value Line, has only 16% debt and its stock currently yields 2.6%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    BLK 2.6% 9% 44% 10

    Ind Ave 2.1 9 29 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    BLK 16% 12% 1 28% A

    Ind Ave 33 19 NA 18 NA

    Chart

    Note: BLK stock made good progress off its March 2009 low, quickly surpassing the downtrend off it September 2008 high (straight red line) and the November 2008 trading high (green line). Long term it is in an uptrend (blue lines). Intermediate term it is in a trading range (purple line). The wiggly red line is the 50 day moving average. The Aggressive Growth Portfolio owns a 75% position in BLK. The upper boundary of its Buy Value Range is $278. The lower boundary of its Sell Half Range is $450.

    (click to enlarge)

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

    7/14

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The June Small Business Optimism index came in at 95.0 versus expectations of 97.0.

    Other

    Why you feel poorer (medium):

    http://www.zerohedge.com/news/2014-07-07/why-you-feel-poorer

    And this---real earnings of private employees (medium):

    http://advisorperspectives.com/dshort/updates/Employment-Wages-and-Hours.php

    The latest on the Chinese banking system (medium):

    http://www.zerohedge.com/news/2014-07-07/could-be-last-straw-90-china-loan-guarantors-bankrupt

    Ken Rogoff on the EU's debt problem (medium):

    http://www.project-syndicate.org/commentary/kenneth-rogoff-is-convinced-that-economic-recovery-will-require-some-form-of-debt-restructuring-or-rescheduling#A1j6jitbALvmPr6f.99

    Another foreign bank is getting whacked over sanctions abuse (medium):

    http://www.zerohedge.com/news/2014-07-08/us-set-alienate-angry-germany-next-crackdown-shifts-bnp-commerzbank-deutsche-bank

    Weather disasters and GDP (short):

    http://www.zerohedge.com/news/2014-07-07/chart-day-weather-apologist-economists-worst-nightmare

    Politics

    Domestic

    International

    The latest from Ukraine (medium):

    http://www.zerohedge.com/news/2014-07-07/russia-rushes-seal-south-stream-pipeline-lavrov-pays-bulgaria-visit

    Disclosure: The author is long BLK.

    Jul 08 9:09 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    It was a joyous week in Mudville. Employment numbers were good; Yellen promised to never raise interest rates; the Fairy Godmother was out turning sows' ears into silk purses; and the S&P hit an all-time high. It is still a short hair away from the upper boundary of its long term uptrend; but what's to argue. As of Friday's close, that number in 1999; so clearly, it could take out both the upper boundary and the 2000 'round' number at the same time.

    (click to enlarge)

    Last week was rough on the long Treasury. As you can see, it confirmed the break of the lower boundary of its short term uptrend and finished below its 50 day moving average. TLT now re-sets to a trading range. You will recall that in a similar break two weeks ago, it recovered the trend line the day following the confirmation (which I then negated). Unfortunately, it then made a lower high, rolled over and here we are again. There is some small chance of a repeat; but it seems far more likely that a trend reversal has occurred. Notice TLT closed at the same level as the previous low. Any further move to the downside will re-set the short term trend to down.

    (click to enlarge)

    While the bond chart seems to be gaining some clarity (however negative that might be), GLD is losing it. It traded back into the prior week's trading range. That doesn't necessarily have to be negative; but it certainly not positive. It does remain over its 50 day moving average which is a plus.

    (click to enlarge)

    Not surprisingly, the VIX is a near mirror image of the S&P. Note that the lower boundary of its long term trading range (9.87) is the all-time historical low.

    (click to enlarge)

    Fundamental

    The latest from Bill Gross (medium):

    http://www.minyanville.com/business-news/markets/articles/Bill-Gross-One-Big-Idea-255EGSPC/7/3/2014/id/55470?refresh=1

    For the bulls (short):

    http://advisorperspectives.com/dshort/guest/Georg-Vrba-140707-Estimating-Returns.php

    Investing for Survival from Morgan Housel

    http://www.fool.com/investing/general/2014/07/02/how-to-win-by-doing-less.aspx

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    Other

    David Stockman on Yellen (medium and today's must read):

    http://www.zerohedge.com/news/2014-07-04/yellen-resilience-doctrine-dangerous-keynesian-blather

    The latest on the ECB's easing (medium):

    http://www.bloomberg.com/news/2014-07-06/draghi-s-1-4-trillion-shot-silver-bullet-or-misfire-.html

    Politics

    Domestic

    International

    Largest Austrian bank reveal 40% jump in bad loans (medium):

    http://www.zerohedge.com/news/2014-07-04/stock-largest-austrian-bank-crashes-after-revealing-40-surge-bad-debt-provisions-rec

    The latest from Ukraine (medium):

    http://online.wsj.com/articles/ukrainian-government-troops-target-further-gains-in-east-1404644564?mod=fox_australian

    Jul 07 9:01 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.