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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 & Subscriber Alert

    I am leaving this afternoon for the mountains and will return Sunday. Have a great Labor Day Weekend.

    The Market

    Technical

    The indices (DJIA 17106, S&P 2000) had another up day. The Dow remained within its short term (16331-17158) and intermediate term (25132-17158), though it continues to inch toward the upper boundaries. It also closed within its long term uptrend (5101-18464) and above its 50 day moving average.

    The S&P finished above the upper boundary of its short term trading range/all-time high (1814-1991) for the second day. A close above 1991 today will re-set this trend to up. It also ended within intermediate term (1890-2690) and long term (768-2014) uptrends and above its 50 day moving average.

    Volume declined again; breadth was mixed. The VIX fell, finishing within short and intermediate term downtrends and below its 50 day moving average.

    The long Treasury dropped but remained within its short term uptrend, its intermediate term trading range and above its 50 day moving average.

    GLD rose, leaving it within that developing pennant formation as well as its short term trading range and intermediate term downtrend.

    Bottom line: the march to all-time highs and the upper boundaries of short term and intermediate term trading range seems unstoppable. No one is bothered by the anemic volume, the meager breadth or that September/October are historically the worse months for performance.

    http://blog.stocktradersalmanac.com/post/Recent-Record-Aside-September-has-a-Volatile-History-DIA-SPY-QQQ

    As I said yesterday, it sure seems like we will see trend re-sets this week---the first and most obvious being the S&P short term trend re-setting to up. In the end, I think that both of the Averages will re-set all trends across all timeframes to up. Muscling through the upper boundaries of their long term uptrends should take a lot of work. These are valuation levels that historically made investors hesitate to push higher. In addition, for that to happen, the indices are going to have to get some help from all those stocks that have to date been creating the multiple divergences I keep referring to. It could happen; but so far, they have been as stubborn in their noncompliance as the big stocks that have carried the Averages higher have been in their relentless advance. Clearly, something has to give.

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

    Fundamental

    Headlines

    Yesterday's US economic news was mixed and confusing. Weekly retail sales were up, the August Richmond Fed manufacturing index was considerably better than anticipated while the June Case Shiller home price index was below expectations. These, of course, are all secondary indicators, so they are not of overwhelming importance.

    On the other hand, the July durable goods orders (which are important) were very confusing and could be interpreted at the pleasure of the interpreter. The headline number was a blockbusting +22.6% versus expectations of +5.1%; however, ex transportation, the reading was -.8% versus estimates of +.4%. In other words, there were a lot of big aircraft order---which to be sure is a plus (especially if you are Boeing). But the bad news was that orders fell for the rest of the economy as a whole. So if you are in the growth and inflation camp, the +22.6% fits right in. If you are in the slowdown/possible recession crowd -.8% supports your forecast. Probably the best thing to do is write this report off as too confusing to provide meaning and wait for next month's number.

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

    ***overnight, Chinese industrial commodities are plunging in wake of a weak sentiment reading.

    Bottom line: that said, the Market itself remained the center of attention with virtually everyone, in the media at least, focused on whether the S&P would close over 2000. Well, it did; and a happy as that made many, it only made stocks more expensive.

    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.

    Is this rally on solid ground? (medium):

    http://www.capitalspectator.com/is-the-us-stock-market-rally-built-on-solid-ground/#more-3952

    The high yield market is on shaky ground (medium):

    http://www.zerohedge.com/news/2014-08-26/uncomfortable-myths-about-high-yield-debt

    Subscriber Alert

    As you probably know, Burger King has entered into a merger agreement with Tim Horton (NYSE:THI). The latter's stock price popped almost 30% on the move. While it has not entered into its Sell Half Range, it does nonetheless have limited upside from here. Since Burger King is not in our Universe, the Aggressive Growth Portfolio will Sell its position in THI at the Market open.

    Investing for Survival

    Spread your bets around. The most basic rule of risk control is to diversify your investments. It is also the most neglected rule.

    Perhaps the neglect is because most people don't understand what diversification means. For starters, it means building a buffer against all the stuff you would prefer not to think about-unemployment, sickness, a horrible bear market, etc. Before you start investing, you need three to six months of living expenses set aside in bank deposits, money market funds and short-term bond funds. Having this cushion protects you from having to sell investments in an emergency, which in turn allows you to take risk with your remaining assets.

    On top of your emergency funds, your portfolio should include a dollop of high quality bonds that mature in anywhere from two to 10 years. For older people, bonds cushion the downside of the total portfolio and ensure that you can't be devastated by a stock market downturn. For younger people, bonds provide an additional benefit-you can sell them to buy stocks or other investments if the market plunges and you spot tempting bargains. So how much of your portfolio should you devote to bonds? As little as 20% of your portfolio if you're in your twenties and a risk taker; 50% or more if you're above 65 or naturally cautious.

    Once you've got your emergency funds and your bonds stowed away, it's time for stocks-and, once again, diversification should be your starting point. You don't want to bet your entire future on a handful of stocks or on one industry or even on a single country. The easiest way to ensure that you're widely diversified among many different stocks is to invest in a mutual fund or exchange-traded fund that holds scores of individual stocks, representing a multitude of different industries.

    If, like me, you prefer to buy individual stocks, you have to balance your desire to be widely diversified against how much money you have to invest and-just as important-how much time you have to spend researching companies. My minimum for reasonable diversification is 15 stocks. When I started investing as a serious amateur back in 1992, I started with 15 stocks in my portfolio, and I bought $2,000 of each of them. Since then I've made maybe a dozen serious investing mistakes, but because I had my money diversified among many companies, none of my mistakes ever cost me more than 2% of my total capital.

    These days I'm even more diversified: I run with 35 stocks, which is close to the maximum an individual can hope to track and research. Generally I devote an equal amount of money to each of my stocks-an equal weight, in investment jargon-because usually I can't tell what my best ideas are. When a position gets more than 20% away from its target weight, I consider whether I should bring it back to equal weight or sell the whole thing. Occasionally I deviate from equal weighting, but only when I have a very safe stock that is grossly undervalued. I never go above a double weight, which means that a single stock rarely accounts for even 6% of my overall portfolio.

    The final way I diversify my portfolio is intellectually. I try to listen to as many viewpoints from as many different people as I can. I do this because the ideas of all but the most careful investors are internally correlated. They reflect some idea of what the economy is likely to do in the future, and they lean toward companies that fit that view. Some investors love companies with high P/E multiples and incredible growth stories. Other investors-and I'm one of them-love companies in distressed industries that are going for a song. You should listen to both camps. Doing so insures that you learn to think about investments from a wide number of perspectives. It makes investing more businesslike.

    Here's one trick you might find handy. As I gather my ideas from a wide number of sources, I print them out, and place them in a pile next to my computer. I try to forget who gave me the idea, which forces me to look at the idea fresh, without the biases that come from trusting an authority figure.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The International Council of Shopping Centers reported weekly sales of major retailers up 0.6% versus the prior week and up 4.2% on a year over year basis; Redbook Research reported month to date retail chain store sales up 4.0% versus the comparable period last year.

    The June Case Shiller home price index fell 0.2% versus expectations of up 0.1%.

    http://www.calculatedriskblog.com/2014/08/case-shiller-comp-20-house-prices.html

    The August Richmond Fed manufacturing index came in at 12 versus forecasts of 6.

    Weekly mortgage applications rose 2.8% while purchase applications were up 3.0%.

    Other

    Why you should fear rising interest rates (medium):

    http://streettalklive.com/index.php/blog.html?id=2362

    French political unrest a symptom of what is ailing the EU (medium):

    http://www.nakedcapitalism.com/2014/08/french-political-turmoil-harbinger-unrest-roiling-eurozone-new-depression.html

    What is the ECB going to do? (medium):

    http://www.zerohedge.com/news/2014-08-26/jpmorgan-sees-50-chance-ecb-qe-year-end-will-ease-more-next-week

    More on student loans (short):

    http://www.bloombergview.com/articles/2014-08-26/the-student-loan-hype-machine-ritholtz-chart

    Why oil is falling in price (short):

    http://www.zerohedge.com/news/2014-08-26/forget-geopolitical-de-escalation-heres-real-reason-why-oil-tumbling

    Politics

    Domestic

    More government incompetence (medium):

    http://www.coyoteblog.com/coyote_blog/2014/08/dont-believe-anything-the-epa-says-unless-it-is-under-oath.html

    Pompous displays of ignorance (short):

    http://cafehayek.com/2014/08/fulfilling-a-duty-to-expose-pompous-displays-of-ignorance.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

    Another genius suggestion from the ruling class (just read the intro):

    http://www.zerohedge.com/news/2014-08-26/it-begins-council-foreign-relations-proposes-central-banks-should-hand-consumers-cas

    International

    US to bomb both ISIS and the Syrian regime. Does this remind anyone else of Alice in Wonderland?

    http://www.zerohedge.com/news/2014-08-26/wtf-white-house-statement-day-syria-airstrikes-edition

    Disclosure: The author is long THI.

    Aug 27 9:02 AM | Link | Comment!
  • The Morning Call---Draghi Has Always Been 'All Talk And No Do'.

    The Market

    Technical

    The indices (DJIA 17076, S&P 1997) just keep on, keepin' on. The Dow finished within its short term (16331-17158) and intermediate term (15132-17158) trading ranges, clearly a very short distance away from the upper boundaries of those ranges. It remains above its 50 day moving average and within a long term uptrend (5101-18464).

    The S&P again traded above its all-time high (1991). That re-starts the clock on our Time and Distance Discipline. If it remains above 1991 through the close Wednesday, the break will be confirmed and the short term trading range (1814-1991) will re-set to an uptrend. It closed within its intermediate term (1887-2687) and long term (762-1999) uptrends and above tis 50 day moving average. Clearly, the S&P is a mille short hair away from the upper boundary of its long term uptrend.

    Volume remains quite low; breadth improved. The VIX rose fractionally but finished well within short and intermediate term downtrends and below its 50 day moving average---supporting the move up in stock prices.

    The long Treasury was up, staying within its short term uptrend, its intermediate term trading range and above its 50 day moving average.

    http://www.zerohedge.com/news/2014-08-25/guggenheims-minerd-dont-fight-treasury-bond-rally

    GLD returned to its old ways and declined, ending right on the lower boundary of a building pennant formation---a break below this trend line would be yet another technical negative factor weighing on GLD. It closed within short and intermediate term downtrends and below its 50 day moving average.

    Bottom line: the Dow moved closer to the upper boundaries of its short and intermediate term trading ranges (and its all-time high); while the S&P broke above the upper boundary of its short term trading range for a second time (and its all-time high). A close above that level on Wednesday will re-set the short term trend to up. Further, it is very close to the upper boundary of its long term uptrend. So it would appear that there is a decent probability that we will witness some trend re-sets this week.

    That said, the Averages are still out of sync, the short term technical indicators are stretched into overbought territory and those oft mentioned divergences persist---not the least of which is our internal indicator.

    My opinion is that the indices are likely to re-set to up across all timeframes but will be unable to confirm a breach above the upper boundaries of their long term uptrends.

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

    Update on NYSE margin debt (medium):

    http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

    Fundamental

    Headlines

    It was a busy Monday for US economic data. The problem was that it was mostly disappointing---the August Markit flash service PMI was well below expectations while July new home sales and the August Dallas Fed manufacturing index were both down right awful. The one bright spot was the July Chicago Fed national activity index which was strong. This data causes me a little cognitive dissonance following the last couple weeks' really good economic numbers. Of course, it is only one day's figures; so at this point, it is not going to cause me a lot of heartburn.

    There were a couple of international news items:

    1. Draghi made some off the cuff comments suggesting that the ECB would more aggressively pursue monetary easing (QE). Markets seem to take great heart from that. Not that the ECB won't follow through; but let's not forget that 90% of ECB [easy] monetary policy to date has been lip service versus any action,

    http://www.businessinsider.com/the-key-part-of-mario-draghis-jackson-hole-speech-2014-8

    The EU and US continue to decouple (short):

    http://blog.yardeni.com/2014/08/us-eurozone-continue-to-decouple-excerpt.html

    1. new developments occurred on the geopolitical front: [a] Russia appears to be sending another relief convoy to Ukraine, [b] the UAE is bombing Libyan insurgent positions and [c] Iran is claiming it shot down an Israeli drone. None of these seemed to hit investor radar; however, they are reminders that global exogenous risks are not going away.

    Bottom line: in the absence of some significant geopolitical event, this pre-holiday week's focus will likely be on the Market itself, i.e. whether the Averages can break to all-time highs or even challenge the upper boundaries of their long term.

    Certainly, there was nothing in last week's busy news schedule that would suggest a major follow through. The economy remains on track; though the situation in Europe and Japan are raising concerns. Geopolitical events could come into play but they are wild cards. Monetary/fiscal/regulatory policy is doing nothing to improve that outlook. Indeed, I believe monetary policy will ultimately prove the unmaking of this Market. In other words, there is nothing to improve valuations.

    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.

    First half corporate earnings and the magic of accounting (medium):

    http://www.zerohedge.com/news/2014-08-25/behold-magic-accounting-first-half-earnings

    The latest from Lacy Hunt (medium and a must read):

    http://www.zerohedge.com/news/2014-08-25/lacy-hunt-world-economys-terminal-case-debt-sclerosis

    Cumulative net equity purchases by BofA clients (short):

    http://www.zerohedge.com/news/2014-08-25/feds-mission-accomplished

    Company Highlights

    McDonald's operates, franchises or licenses more than 35,400 fast food restaurants worldwide. Over the past ten years, the company has grown profits at a 15% pace but dividends at 26% annualized while earning a 25%+ return on equity. Looking forward, the pace of advance of dividends should slow somewhat although earnings growth is expected to continue at an above average pace as a result of:

    (1) global growth not only in the number of restaurants but also in same store sales,

    (2) introduction of new higher margin products [McCafe Real Fruit Smoothies, Frappes, Angus snack wraps],

    (3) a shift to franchising which accelerates earnings growth.

    Negatives:

    (1) rising commodity prices and wage costs,

    (2) intense competition,

    (3) the potential impact on sales of continuing economic malaise.

    MCD is rated A++ by Value Line, carries a 46% debt to equity ratio, has an ongoing stock repurchase program and its stock yields 3.2%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    MCD 3.2% 8% 55% 10

    Ind Ave 2.4* 10* 44 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    MCD 46% 36% 0 20 A++

    Ind Ave 44 25 NA 9 NA

    *over 50% of the companies in this industry don't pay a dividend

    Chart

    Note: MCD stock made great progress off its October 2008 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). In late 2013, it re-set from an intermediate term uptrend to a trading range (purple lines). The wiggly red line is the 50 day moving average. The Dividend Growth and Aggressive Growth Portfolios own 50% positions in MCD, having Sold Half in early 2012. The upper boundary of its Buy Value Range is $71; the lower boundary of its Sell Half Range is $109.

    (click to enlarge)

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

    8/14

    News on Stocks in Our Portfolios

    Bank of Nova Scotia misses by C$0.01, beats on revenue

    • Bank of Nova Scotia (NYSE:BNS): FQ3 EPS of C$1.40 misses by C$0.01.
    • Revenue of C$6.49B (+17.6% Y/Y) beats by C$550M.

    Economics

    This Week's Data

    The August Markit flash services PMI came in at 58.5 versus expectations of 62.0.

    July new home sales fell 2.3% versus estimates of a 5.9% increase.

    http://www.calculatedriskblog.com/2014/08/new-home-sales-at-412000-annual-rate-in.html

    The August Dallas Fed manufacturing index was reported at 7.1 versus forecasts of 13.5.

    http://www.zerohedge.com/news/2014-08-25/dallas-fed-plunges-biggest-miss-16-months-new-orders-collapse

    A very unusual report this morning. July durable goods orders rose 22.6% versus estimates of up 5.1; but ex transportation (aircraft), they fell 0.8% versus forecasts of up 0.4%,

    Other

    The less the Fed does, the better off we are (medium):

    http://www.realclearmarkets.com/articles/2014/08/25/the_economy_will_be_better_off_when_the_fed_does_less_101237.html

    The latest from David Stockman (medium):

    http://www.zerohedge.com/news/2014-08-25/why-sp-2000-fed-manufactured-mirage-buy-dips-chart-says-it-all

    Try free enterprise in Europe (medium):

    http://www.rationaloptimist.com/blog/try-free-enterprise-in-europe.aspx

    Repeal the corporate tax (medium):

    http://www.nytimes.com/2014/08/24/upshot/one-way-to-fix-the-corporate-tax-repeal-it.html?smid=pl-share&_r=0&abt=0002&abg=0

    Politics

    Domestic

    International

    Escalation in the Middle East: UAE bombs Libya (medium):

    http://www.zerohedge.com/news/2014-08-25/us-furious-after-source-mystery-libya-bombing-raids-revealed

    Iran shoots down Israeli drone (short):

    http://www.zerohedge.com/news/2014-08-25/iran-state-tv-airs-footage-downed-israeli-drone

    Disclosure: The author is long MCD, BNS.

    Aug 26 9:05 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    On Friday, the S&P traded back below the upper boundary of its short term trading range. That negates Thursday's break and leaves the short term trend in a trading range. Intermediate term and long term it remains within uptrends. It is also well above its 50 day moving average.

    (click to enlarge)

    The long Treasury continues to perform well. It closed Friday in a short term uptrend, and intermediate term trading range and above its 50 day moving average. The bond guys don't seem worried about the Fed tightening sooner than has been expected.

    (click to enlarge)

    GLD rose fractionally on Friday, bouncing off the lower boundary of the developing pennant---a glimmer of hope. It remained within a short term trading range, an intermediate term downtrend and below its 50 day moving average.

    (click to enlarge)

    VIX fell, unusual for a day when stocks are down. It remains within short and intermediate term downtrends and below its 50 day moving average.

    (click to enlarge)

    Fundamental

    The latest from John Hussman (medium):

    http://www.zerohedge.com/news/2014-08-24/broken-links-feds-chain-cause-effect

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The July Chicago Fed National Activity Index came in at .39 versus expectations of .20 and the June reading of .12.

    Other

    What retiring boomers mean to jobs, growth, inflation and the Markets (medium, a bit wonky but a must read):

    http://www.advisorperspectives.com/dshort/guest/Franz-Lischka-140823-Impact-of-Boomer-Retirement.php

    The second lien scramble is back (medium):

    http://www.zerohedge.com/news/2014-08-24/mal-investment-mania-second-lien-scramble-back

    Politics

    Domestic

    International

    The failures of the war on terror (medium and a must read):

    http://www.nakedcapitalism.com/2014/08/patrick-cockburn-washingtons-war-terror-failed-underrated-saudi-connection.html

    Aug 25 8:51 AM | Link | Comment!
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