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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
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Investing for Survival
  • The Morning Call & Subscriber Alert---The Economic Numbers Need To Improve

    The Market

    Technical

    The indices (DJIA 17172, S&P 1994) has a rough day. The Dow did manage to close above the upper boundary of its short term trading range (17158) for the requisite time period---though not by much. I am going to re-set the short term trend to up (16608-19000). It must close above 17158 today to re-set the intermediate term trend to up. However, if today, DJIA has another day like Monday and finishes well below 17158, I will crawfish on the short term call and leave it as a trading range. The Dow is still above its 50 day moving average.

    The S&P remained in uptrends across all time frames: short term (1955-2146), intermediate term (1922-2722) and long term (771-20200.

    Volume was below last Thursday's (Friday quadruple expiration doesn't count); breadth continued to deteriorate. The VIX spiked 13% and ended above its 50 day moving average; however, it remains within short and intermediate term downtrends.

    http://www.zerohedge.com/news/2014-09-22/us-stocks-give-dovish-fomc-gains-russell-2000-completes-death-cross

    The long Treasury was up fractionally; so the initial pounding it took following the FOMC meeting seems stalled at the least. It finished within short and intermediate term trading ranges and above its 50 day moving average.

    GLD (116.50) can't catch a break. It was off again, closing within short and intermediate term downtrends, below its 50 day moving average and near the lower boundary of its long term trading range (114.40).

    Bottom line: despite yesterday's sell off the Dow still finished above the upper boundary of its short term uptrend for the time stipulated by our time and distance discipline. Hence, I re-set the short term trend to up; although if the DJIA mirrors Monday's performance today, I will return the short term trend to a trading range.

    I will observe again that following the post-FOMC dichotomy of stocks up (easier Fed) and bonds down (tighter Fed) performance, the trade has reversed in the last two trading days, i.e. stocks down, bonds up.

    I am no less confused than I was on Saturday---although stocks down and bonds up fit with my number one risk scenario---global economic slowdown/recession. However, as I noted, it is too soon to make any changes in our forecast.

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

    From a long time bull (short):

    http://blog.yardeni.com/2014/09/the-bears-are-growling-again-excerpt.html

    Fundamental

    Headlines

    US economic data was not good: the August Chicago National Activity Index registered a negative reading versus estimates of a positive one; further August existing home sales fell versus expectations of a slight rise. That doesn't inspire confidence after the disappointing industrial production and housing starts stats last week.

    Not helping matters was a host of lousy developments overseas: '(1) Japan announced that it intended to go ahead with the second step of raising its consumption tax [which re-begs the question, what are these guys thinking about?], the Bank of China stated there would be no more monetary easing [remember, they lie a lot], (3) the ECB said it may not do anymore easing, given that its first try was a bust, and (4) the global leading economic indicator just did a triple back flip with a two and one half twists in the pike position.'

    More problems for China (medium):

    http://www.zerohedge.com/news/2014-09-22/chinas-economy-slams-breaks-30-coal-miners-unable-pay-employees-time

    More problems from a continually weakening yen (medium):

    http://www.zerohedge.com/news/2014-09-22/albert-edwards-presents-most-important-chart-investors

    ***overnight, September European PMI's were down, again; however, the Chinese PMI rose.

    As I noted above, it is too soon to start wringing our hands; but the longer this string of poor numbers goes on, the closer we get.

    Bottom line: the negative economic data from around the global continues unabated. As you know, I think this is now the major threat to our own progress. Unfortunately, whether coincidentally or not, the US has hit its own rough patch in the stats defining its recovery. For the moment, I am not going to blow this into a dire scenario. Although some upbeat economic news would certainly ease my concerns. We still need at least another two to three more weeks of convincing (poor) data before I alter out forecast. But the yellow light is flashing.

    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 Mauldin (a bit long but a must read):

    http://www.advisorperspectives.com/commentaries/mauldin_092114.php

    Subscriber Alert

    I will take luck over skill any day. Yesterday, Sigma Aldrich (NASDAQ:SIAL) received an offer from Merck (Germany) and the stock popped about 33%. That is a gift. At the Market open this morning, the Dividend and Aggressive Growth Portfolios will Sell their positions.

    Investing for Survival

    Stay humble and grow wealthy (medium):

    http://www.psyfitec.com/2014/09/be-humble-become-wealthy.html

    Company Highlights

    Boeing Co. is a leading manufacturer of commercial aircraft, business jets, military aircraft as well as variety of command and control and advanced radar systems. The company has grown profits and dividends at a 9-10% annual rate over the past 10 years earning a return on equity in excess of 20%.

    The key factor in BA's financial performance of late has been the 787 Dreamliner. While the company was initially plagued with delays, those problems appear to have been corrected and back log now stands at approximately 5200 and should keep Boeing at full production for years. Other positive factors include:

    (1) an underlying demand driven by increasing commercial air travel and the need to reduce fuel costs are pushing airlines to replace their fleets,

    (2) a broadly diversified defense business that has strong bookings and a rising backlog,

    (3) strong international demand for its defense products,

    (4) an ongoing stock buy back program.

    Negatives:

    (1) a large percentage of its sales are to governments and therefore subject to cutbacks as budgets are tightened,

    (2) most of its contracts are fixed price, hence requiring constant vigilance in holding costs down,

    (3) mounting competition against its 737.

    Boeing is rated A++ by Value Line, has a 33% debt to equity ratio (though this is largely a function of accounting treatments) and its stock yields 2.3%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    BA 2.3% 15% 44% 8

    Ind Ave 1.8 9* 26 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    BA 33% 33% 2 6% A++

    Ind Ave 40 16 NA 8 NA

    *most companies in BA industry do not pay a dividend

    Chart

    Note: BA stock made great progress off its March 2009 low, quickly surpassing the downtrend off its September 2007 high (straight red line) and the November 2008 trading high (green line). BA is in uptrends across all timeframes: long term (blue lines), intermediate term (purple lines) and short term (brown line). The wiggly red line is the 50 day moving average. The Dividend Growth and High Yield Portfolios own 90% positions in BA. The upper boundary of its Buy Value Range is $73; the lower boundary of its Sell Half Range is $199.

    (click to enlarge)(click to enlarge)

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

    9/14

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    August existing home sales fell 1.8% versus expectations of a slight increase.

    Other

    Fed hubris sets the stage for another financial crisis (medium):

    http://www.forbes.com/sites/johntamny/2014/09/21/stanley-fischers-systemic-risk-hubris-sets-the-stage-for-the-next-fed-created-crisis/

    Politics

    Domestic

    Tuesday morning humor (1 minute video):

    http://www.zerohedge.com/news/2014-09-22/monday-humor-pot-club-owning-alaska-reporter-fk-it-i-quit-live-air

    How to fix the current business environment (short):

    http://www.zerohedge.com/news/2014-09-22/peter-thiel-fixes-americas-anti-business-policies-6-words

    International War Against Radical Islam

    More confusion over Obama's ISIS policy (short):

    http://www.zerohedge.com/news/2014-09-22/first-germany-now-france-folds-syrian-airstrikes

    Disclosure: The author is long BA, SIAL.

    Sep 23 8:58 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    No sign of trouble here. The S&P stays well within uptrends across all timeframes.

    http://www.advisorperspectives.com/dshort/guest/Urban-Carmel-140920-Market-Summary.php

    (click to enlarge)

    The long Treasury broke down from its short term uptrend; then bounced strongly enough to mark a new lower boundary of a re-set short term trading range. It is also in an intermediate term trading range and is below its 50 day moving average.

    (click to enlarge)

    GLD's chart is as ugly as the S&P is beautiful. Here is an interesting theory on why gold is acting as poorly as it is (short):

    http://pragcap.com/why-is-the-price-of-gold-falling

    (click to enlarge)

    The VIX remains of no help in assessing the Market.

    (click to enlarge)

    Stock Trader's Almanac looks at the current week (short):

    http://blog.stocktradersalmanac.com/post/Week-after-September-Options-Expiration-One-of-the-Worst-Weeks-DIA-SPY-QQQ-IWM

    Fundamental

    ***overnight, (1) Japan announced that it intended to go ahead with the second step of raising its consumption tax [which re-begs the question, what are these guys thinking about?], the Bank of China stated there would be no more monetary easing [remember, they lie a lot], (3) the ECB said it may not do anymore easing, given that its first try was a bust, and (4) the global leading economic indicator just did a triple back flip with a two and one half twists in the pike position.

    http://www.zerohedge.com/news/2014-09-21/global-leading-indicator-plunges-economic-slowdown-goldman-warns

    Update on valuation:

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

    Investing for Survival

    Enduring lessons from the financial crisis (medium):

    http://awealthofcommonsense.com/lifetime-investing-lessons-decade-half/

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The August Chicago National Activity Index came in at -.21 versus expectations of +.35.

    http://www.calculatedriskblog.com/2014/09/chicago-fed-index-shows-economic-growth.html

    Other

    Update on household net worth (short):

    http://scottgrannis.blogspot.com/2014/09/solid-gains-in-net-worth.html

    Politics

    Domestic

    More government incompetence (medium):

    http://www.zerohedge.com/news/2014-09-19/congress-brings-atlas-shrugged-america-new-bill

    International War Against Radical Islam

    Sep 22 8:54 AM | Link | Comment!
  • The Closing Bell

    Statistical Summary

    Current Economic Forecast

    2013

    Real Growth in Gross Domestic Product: +1.0-+2.0

    Inflation (revised): 1.5-2.5

    Growth in Corporate Profits: 0-7%

    2014 estimates

    Real Growth in Gross Domestic Product +1.5-+2.5

    Inflation (revised) 1.5-2.5

    Corporate Profits 5-10%

    2015 estimates

    Real Growth in Gross Domestic Product +2.0-+3.0

    Inflation (revised) 1.5-2.5

    Corporate Profits 5-10%

    Current Market Forecast

    Dow Jones Industrial Average

    Current Trend (revised):

    Short Term Trading Range 16331-17158

    Intermediate Trading Range 15132-17158

    Long Term Uptrend 5148-18484

    2013 Year End Fair Value 11590-11610

    2014Year End Fair Value 11800-12000

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Uptrend 1944-2145

    Intermediate Term Uptrend 1917-2717

    Long Term Uptrend 771-2020

    2013Year End Fair Value 1430-1450

    2014 Year End Fair Value 1470-1490

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 45%

    High Yield Portfolio 53%

    Aggressive Growth Portfolio 47%

    Economics/Politics

    The economy is a modest positive for Your Money. This week's data releases by volume were positive but two primary indicators were negative: positives---weekly mortgage and purchase applications, weekly jobless claims, the NY Fed manufacturing index, August CPI and the second quarter US trade deficit; negatives---August housing starts, August industrial production and August leading economic indicators; neutral---weekly retail sales, the Philly Fed manufacturing index and August PPI.

    August housing starts and industrial production are this week's stand out numbers. Both are primary indicators and both suggest a potential slowing in the US economy---as does the latest reading of the leading economic indicators. Certainly, it is much too early to tell. But the big question is, is the slowdown in the global economy beginning to impact our own? Clearly it reinforces my recent reordering of risks to the economy---with global recession now numero uno. Stay tuned.

    Of course, all the above was overshadowed by the FOMC meeting, the release of an updated Fed policy statement and the subsequent Yellen news conference. I covered this all in Wednesday's and Thursday's Morning Calls; but the bottom line is that the stock boys interpreted the statement/news conference as dovish while the bond guys saw them as hawkish---which leaves me confused. It also emphasizes that the Fed policy remains a significant risk not just to the economy in that it may botch the transition to normalized policy but also to the Market in that the uncertainty created by the obtuseness of its communication could by itself spawn a huge risk-off move.

    Quantitative futility (short):

    http://www.forbes.com/sites/louiswoodhill/2014/09/16/quantitative-futility/

    What QEIII bought us (medium)?

    http://fivethirtyeight.com/features/we-still-dont-know-what-1-6-trillion-bought-us/

    Our forecast:

    'a below average secular rate of recovery resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with an impaired balance sheet, and a business community unwilling to hire and invest because the aforementioned, 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.'

    The pluses:

    1. our improving energy picture. The US is awash in cheap, clean burning natural gas.... In addition to making home heating more affordable, low cost, abundant energy serves to draw those manufacturers back to the US who are facing rising foreign labor costs and relying on energy resources that carry negative political risks.

    The negatives:

    1. a vulnerable global banking system. Surprise, surprise. We actually made it a week without learning of another bankster misdeed.

    That doesn't mean that there are no problems (medium):

    http://www.nakedcapitalism.com/2014/09/accident-waiting-happen-1-trillion-leveraged-loan-market.html

    'My concern here.....that: [a] investors ultimately lose confidence in our financial institutions and refuse to invest in America and [b] the recent scandals are simply signs that our banks are not as sound and well managed as we have been led to believe and, hence, are highly vulnerable to future shocks, particularly a collapse of the EU financial system.'

    1. fiscal policy. 'With election season in full swing, nothing is likely to happen to alleviate the problems of an inefficient tax code, too much irresponsible spending and too much government regulations. The one bright spot is that the growing economy is generating sufficient tax revenue to drive down the budget deficit.'

    Congress has already come and gone, staying just long enough to pass a continuing budget resolution and approve Obama's new war (oh, wait a minute, we aren't supposed to use that word) policy---which if you are like me, you now feel ever so much more confident in the likelihood of our success.

    The operative word above is 'gone' meaning that when the ruling class is out of town, they can't fuck with us.

    1. the potential negative impact of central bank money printing: The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn't been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.

    Cognitive dissonance reigned supreme this week. (1) the Japanese reported that August exports continued to decline making a further mockery of Abenomics' QE to infinity---as if it needed something else to make the point. (2) the ECB tried the first installment of its new liquidity injection funding facility and it was a total bust---the banks simply didn't want the money irrespective of its give-away price, (3) China injected funds into its financial system---which initially had investors getting jiggy with it. But then it stated this action was limited and should not be interpreted as the start of any loosening in monetary policy, and (4) last but certainly not least, our own Fed issued a new policy statement, which to date has had the bond and stock markets going in opposite directions. Ultimately, this whole dovish versus hawkish dichotomy will be resolved. Based on historical performance, I think that the bond guys will prevail. But that doesn't mean that they will.

    The point of this discussion is that monetary policy among the major economic powers is tuned to expansion but it is not having the impacted expected by the bureaucrats implementing it. As you know, this is hardly a surprise to me; and frankly, it shouldn't be a surprise to anyone with a reading proficiency above the third grade. The question is, have we reached the point where the global markets have had enough of central bank pumping and dumping and as a result, they will go from responding to policy moves to forcing them?

    Whether or not that happens, the above does suggest that at least some of the markets are no longer buying QEInfinity.

    1. rising oil prices. Unless the West does something really stupid, it looks to me like it is all over but the shouting in Ukraine. Putin has Crimea and a land bridge there to. To be sure, Ukraine is making noises of joining NATO; but that is more than a year away---giving Putin plenty of time to thwart that move.

    On the other hand, the action is picking up in Syria/Iraq/ISIS. Gosh only knows how this mess will work out; but given the lack of success of our foreign policy to date, I am not holding my breath for a positive ending.

    That said, the price of oil has only gone down for the last month. Indeed, because of the favorable supply/demand picture, oil prices are almost assuredly higher than they would be in the absence of all these conflicts. So barring a dramatic development, I would judge this risk as ever diminishing in magnitude.

    1. economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. The incoming economic data from Europe and Japan remain weak; and the central banks are working feverously to inject additional liquidity into their financial systems. Unfortunately, as I noted above, those efforts to date have come to naught; and I see no reason why that should change.

    The questions are, are these central banks at the end of their policy rope? And if they are, how long can the European and Japanese economies hold on before an accelerated slide into recession begins? And if that occurs, what happens to all those massively indebted sovereigns and overleveraged banks?

    The Japanification of central banks (a bit long and a bit in the weeds, but a very good read):

    http://www.realclearmarkets.com/articles/2014/09/19/the_world_slouches_toward_japanification_101283.html

    Bottom line, I have no reason to assume that the results from the latest BOJ/ECB QE will be any different from prior failed attempts. Certainly, the recent poor export data out of Japan bears witness to the lack of success of implementing competitive devaluation (devaluing the yen via excessing money printing). Which begs the question, what the fuck are these guys thinking about?

    Hence, I see continued deterioration rather than improvement in global economic activity; and that belief is what drives me to the conclusion that global recession is the number one risk to our economy.

    To be sure so far, the EU/Japan and the rest of the world have 'muddled through' with little impact on our economic progress. Indeed, that is our forecast; but as I noted, it is now the biggest risk in that outlook. And unfortunately, we may be seeing the first signs of that weakness effecting our own economy.

    Bottom line: the US economy continues to progress though this week's housing and industrial production numbers are concerning. Of course, it is too early to tell, but the worry is that they presage the impact of a slowing global economy on the US.

    The economic news from Japan, China and Europe, three of our major trading partners, keeps getting worse. True, the central banks of all these entities have instituted easier monetary policies; but history is repeating itself and to date these policies are having little effect. Although as in the US, speculators are loving the cheap money.

    The fat lady appears about to sing in standoff between the EU and Russia over Ukraine. Putin has Crimea and his land bridge to it. On the other hand, Ukraine is pushing to join NATO to which Russia very much objects. So this story is not quite over. But barring something really stupid out of the EU and US ruling class, the danger of some geopolitical nightmare seems to be subsiding.

    ISIS and Obama are poking each other in the eye. By all rights, severely disabling this group ought to be a walk in the park. But with a pacifist president who is being pushed by His party to look tough ahead of the elections and a lack of support from an imaginary 'coalition of the willing', the outcome of this conflict is anything but assured. Truth be told, US policy has done nothing but make the Middle East more volatile and uncertain since we invaded Iraq. Now with a weak and reluctant president, stability seems out of the question. I have no idea how this morality play ends; but I fear it won't be good for the US.

    Stockman on Obama's ISIS policy (long but a good read):

    http://www.zerohedge.com/news/2014-09-19/tower-babel-comes-paris-folly-obamas-war-isis

    In sum, the US economy remains a plus, assuming this week's housing and industrial production numbers are outliers. The rest of the world is not in such great shape and my main concern is that its growth rate slips further and starts to impact the US economy. The geopolitical risk from Ukraine is declining while the Middle East is heating up.

    This week's data:

    1. housing: weekly mortgage and purchase applications were up; August housing starts were extremely disappointing,
    1. consumer: weekly retail sales were mixed; weekly jobless claims fell more than forecast,
    1. industry: August industrial production was less than anticipated; the September NY Fed manufacturing index was much stronger than expected while the Philly Fed index was in line,
    1. macroeconomic: August leading economic indicators rose less than estimated; both the headline and ex food and energy components of August PPI were in line while those of August CPI were well below forecasts; the second quarter US trade deficit was lower than anticipated.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 17279, S&P 2010) had a mixed day on Friday (Dow up, S&P down) but a good overall week. The Dow broke above the upper boundaries of its short (16331-17158) and intermediate (15132-17158) term trading ranges. Under our time and distance discipline, if it remains above 17158 at the close Monday, the short term trend will re-set to up. If it does so at the close on Tuesday, the intermediate term trend will re-set to up. It finished within its long term uptrend (5148-18484) and above its 50 day moving average.

    The S&P closed within uptrends across all timeframes: short term (1944-2145, intermediate term (1917-2717) and long term (771-2020). It is also above its 50 day moving average.

    As you know, there were conflicting interpretations of the FOMC/Yellen statement; but clearly the Averages believed them to be dovish---which pushed prices higher and provided the strength for the Dow to break and hold above 17158. True, there remains some time left in our trading discipline before DJIA re-sets its short and intermediate term trends. But I assuming that those re-sets will occur. That means that the upper boundaries of the indices long term trading range are the next upside target for them to aim at.

    If the stock market's interpretation of a dovish Fed is correct, then the Averages will also surely challenge those levels; and the likelihood of confirming a break above them has become higher. That said, the further stocks advance, the more questionable valuations become and the fewer true believers will be left to buy. So even if those long term uptrends are challenged, I believe the pace of price increases will become more labored.

    Volume on Friday was through the roof---largely a function of quadruple witching (option and futures expiration); but breadth was abysmal. The VIX was up fractionally, closing within short and intermediate term downtrends and below its 50 day moving average.

    The long Treasury had a strong day on Friday, rebounding sufficiently to mark the 112.7 level as the lower boundary of a newly re-set trading range. As you know, TLT along with bonds in general had a rough week primarily as a function of a more hawkish interpretation of the FOMC/Yellen statements. I thought it curious that bonds staged a nice recovery on Friday while the S&P and small cap averages were down.

    That said, bonds, stocks and commodities all experienced volatility this week and not always in a consistent manner. That has created some confusion for me in that I am not sure what kind of scenario they might individually be discounting. Of course, it may be nothing more complicated than that investors across the board are as confused as I am and their trading reflects it.

    GLD was down on Friday, remaining stuck within short and intermediate term downtrends and below its 50 day moving average. It continues to be one of the ugliest charts around.

    Bottom line: on the surface, the Averages are telling us that it is clear sailing for as far as the eye can see. But not only are the internal divergences continuing to widen, but now bonds, commodities and real estate (REIT's) are behaving in a way inconsistent with a dovish Fed, Bank of Japan, ECB and Bank of China.

    http://www.bespokeinvest.com/thinkbig/2014/9/19/smallcaps-continue-to-struggle.html

    I could propose all kinds of possible scenarios that might explain this behavior but it would be sheer speculation. So I will stick with the easiest: I don't know; I am not sure many investors out there have a clue; hence, I wait for clarity---happy in the knowledge that our Portfolios have lots of firepower if things go awry.

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

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (17279) finished this week about 46.0% above Fair Value (11829) while the S&P (2010) closed 36.9% overvalued (1468). Incorporated in that 'Fair Value' judgment is some sort of half assed attempt at getting fiscal policy under control, a botched Fed transition from easy to tight money, a historically low long term secular growth rate of the economy and a 'muddle through' scenario in Europe, Japan and China.

    The US economic dataflow continues to point to a sluggishly growing economy---although this week's housing, industrial production and leading economic indicators reports were very disappointing and call that scenario into question. As I always say, one week does not a trend make; but it can put you on alert.

    Furthermore, the stats from overseas are not encouraging. Japan just reduced its economic growth forecast. The ECB's first attempt at pumping money into the EU financial system was a bust and while the Bank of China added liquidity, it cautioned that it remained determined to wring speculation out of its real estate market.

    As you know, I recently upgraded global recession/stagnation to the number one risk to our economy. This week's events only reinforces my conviction. Indeed, I am concerned that the aforementioned poor US economic data could be the first sign that foreign economic problems are starting to impinge on US growth. To be clear, this is a worry not a forecast. But it clearly must be watched.

    Meanwhile, the Fed managed to confuse everyone this week. Certainly, equity investors weren't confused. They interpreted the FOMC and Yellen comments bullishly and pushed the Dow through the upper boundaries of its short and intermediate term trading ranges while at the same time making a new all-time high. However, bond, commodities and real estate (REIT's) investors were not nearly as sanguine as prices in all declined on the premise that the Fed had turned more hawkish. Then on Friday, things only got even murkier when bonds rallied and the S&P and small caps declined

    Check out the recent performance of the commodity index (short):

    http://www.zerohedge.com/news/2014-09-19/did-bottom-just-fall-out-commodities

    Now the charts of bonds, the Russell and the transports (short):

    http://www.zerohedge.com/news/2014-09-19/russell-trannies-give-fomc-gains-bond-yields-tumbling

    In short as of Friday, I am clueless as to what investors in any of the aforementioned markets are discounting. Of course, I have been here before; and I do know that all will be revealed in due course. I am just glad that our Portfolios are not leveraged or overly exposed to any Market or market segment and have plenty of cash.

    Just to address the geopolitical risks for a second. The crisis in Ukraine seems to be fading fast as Putin has gotten most of what he wanted. There is still the matter of Ukraine being too cozy with the West; so the fat lady hasn't sung yet. But barring the West getting far more aggressive than it currently is, I suspect that won't be an issue a year from now.

    On the other hand, nothing good is likely to happen in the Middle East as the US lurches from one inane policy adjustment to another. My hope is that the players are too busy killing each other to have the time to come after the US. Think 9/11 or worse.

    Overriding all of these considerations is the cold hard fact that stocks are considerably overvalued not just in our Model but with numerous other historical measures which I have documented at length. This overvaluation is of such a magnitude that it almost doesn't matter what occurs fundamentally, because there is virtually no improvement in the current scenario (improved economic growth, responsible fiscal policy, successful monetary policy transition) that gets valuations to Friday's closing price levels.

    Bottom line: the assumptions in our Economic Model haven't changed (though our global 'muddle through' scenario seems more at risk every week). The assumptions in our Valuation Model have not changed either. I remain confident in the Fair Values calculated---meaning that stocks are overvalued. So our Portfolios maintain their above average cash position. Any move to higher levels would encourage more trimming of their equity positions.

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

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

    It is a cautionary note not to chase this rally.

    DJIA S&P

    Current 2014 Year End Fair Value* 11900 1480

    Fair Value as of 9/30/14 11829 1468

    Close this week 17279 2010

    Over Valuation vs. 9/30 Close

    5% overvalued 12420 1541

    10% overvalued 13011 1614

    15% overvalued 13603 1688

    20% overvalued 14194 1761

    25% overvalued 14786 1835

    30% overvalued 15377 1908

    35% overvalued 15969 1981

    40% overvalued 16560 2055

    45%overvalued 17152 2128

    50% overvalued 17743 2202

    Under Valuation vs. 9/30 Close

    5% undervalued 11237 1394

    10%undervalued 10646 132115%undervalued 10054 1247

    * Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term cyclical influences. The model is now accounting for somewhat below average secular growth for the next 3 to 5 years with somewhat higher inflation.

    The Portfolios and Buy Lists are up to date.

    Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.

    Sep 20 11:07 AM | Link | Comment!
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