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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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  • 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 Downtrend (?) 15702-16782

    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 Downtrend (?) 1796-1927

    Intermediate Term Trading Range 1740-2019

    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 47%

    High Yield Portfolio 53%

    Aggressive Growth Portfolio 49%

    Economics/Politics

    The economy is a modest positive for Your Money. Though slow, this week's economic data was again weighed to the positive side: positives---weekly mortgage applications, September existing home sales, September leading economic indicators and the September Chicago Fed National Activity Index; negatives---weekly purchase applications, the October Markit flash PMI, the combo of revised August new home sales and September new home sales and October Kansas City manufacturing index; neutral---weekly retail sales, weekly jobless claims and September CPI.

    While the volume of this week's data leaned negative, the plus primary indicators (September existing home sales, September leading economic indicators) outnumbered the minus' (August/September new home sales) two to one. Tilting the balance even further to the positive is the fact that existing home sales (a plus) are about ten times the number of new home sales (a minus). Nonetheless, however hopeful these stats, this is only the second week in which they have been a net positive; and even then, I would not characterize the readings as robust. So it is way too soon to be rejoicing about an overall improvement in the data.

    In addition, while the statistics from overseas weren't as bad as they have been, they were still mixed at best. As a result, a slowdown in the global economy still ranks as the number one threat to our forecast.

    That said, the modest improvement in the dataflow over the last two weeks does lead to the question, are the more upbeat stats marking the beginning of an improvement in the economy (ies) or are they just a pause before another onslaught of lousy numbers resume?

    The answer is that I don't know; so the point is that (1) much more information is needed before I can feel comfortable that the economy isn't losing steam, (2) but at least I am questioning whether or not a slowdown is inevitable.

    In short, our outlook remains the same, and the primary risk (the spillover of a global economic slowdown) remains just so.

    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.'

    Update on big four economic indicators (medium):

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

    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.

    To date, this rising supply has led to a fairly dramatic decline in energy prices. Initially, consensus was that this was a major positive in that it served as a tax cut to consumers and a lower cost of production for industry---which was absolutely correct. However of late, as global economic activity slows, concern is growing that lower prices may be suggesting potential recession. In short, this positive appears to be transitioning into a double edged sword.

    The negatives:

    1. a vulnerable global banking system. This week, a Spanish source reported that eleven banks in six countries have failed the ECB stress test [the ECB will announce results on Sunday]. The article below suggests that the problem may be larger than that and is a must read:

    http://www.nakedcapitalism.com/2014/10/ilargi-40-eurozone-banks-bad-shape.html

    And it was revealed that the NY Fed knew about the London whale well before the disaster:

    http://www.bloombergview.com/articles/2014-10-21/new-york-fed-caught-sight-of-london-whale-and-let-him-go

    2007 redux (medium):

    http://www.zerohedge.com/news/2014-10-21/subprime-bubble-pop-20-superindendent-financial-services-slams-americas-largest-subp

    '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. As you know, the elections approach and the polls are telling us that the republicans will keep the House and win control of the Senate. Many believe that this will somehow be a plus for fiscal policy---the assumption being that the GOP is more fiscally responsible than the dems. Pardon my skepticism but that simply can't be supported by the facts from the last two decades.

    Sure, the rhetoric is there. Yes, the Tea Party has had an impact on policy positions. But I am waiting for some proof before giving the GOP a gold star for fiscal responsibility; hence, I think caution is the word in anticipating some conservative fiscal renaissance.

    Of course, even if the republicans' hearts are in the right place, it may make no difference initially because Obama can veto any measures not sufficiently 'progressive'. The good news is that if a standoff occurs, it will be the dems/Obama this time that get tarred with the obstructionist brush.

    I think that the most likely outcome will be gridlock which itself, I think, is a positive---witness the decline in the budget deficit the last two years. That said, this country needs tax and regulatory reform to boost its secular growth rate and those measures will likely remain nothing more than wishful thinking until at least 2016.

    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.

    The major news item this week was the rumor, twice denied, that the ECB, as part of their new, improved QE, would begin buying corporate debt in the near future. Even assuming that is true, a study [linked to in Thursday's Morning Call] suggests that the universe of possible purchase candidates is so small, that this program would have virtually no impact [oh darn, back to the drawing board].

    Not that it would make a difference if the numbers were substantially larger. As I keep documenting, QE [except for QEI] hasn't worked anywhere in any amounts; and there is no reason to assume it would in this case. In particular, coming as it does on the heels of Draghi's admission that economic conditions in the EU aren't going to improve until fiscal reform takes place.

    http://pragcap.com/negative-interest-rates-hows-that-working-out

    Speaking of fiscal reform, we got another stunning bit of news this week, to wit, the IMF stated that it approved of the second round of Japanese tax increases. So let me get this right. The Japanese economy is sinking like a stone and a tax increase is just what the doctor ordered to kick start activity.

    No more comment needed.

    1. geopolitical risks. Two items of note this week: (1) the Russian/Ukrainian negotiations regarding the pricing of gas this winter fell apart. Not particularly surprisingly. Putin has made it clear that he will not be intimidated by US/EU sanctions and will respond in kind. That suggests higher gas prices/lower supplies to the EU/Ukraine this winter; and that's not likely to make for great headlines, (2) a Canadian of Algerian decent, who had converted to Islam, shot and killed a soldier. This is the second such incident in Canada in as many weeks and raises the potential of stepped up terrorist activity outside the Middle East.

    http://www.zerohedge.com/news/2014-10-24/putin-warns-risk-major-conflict-says-dollar-losing-reserve-currency-status

    1. economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. For the first time in a while, the economic news out of the rest of the world was at least mixed. That hardly means a turnaround, but we have to take positive news where we get it. At the moment, I don't think it means much more than that the slide into recession is not a straight line; but my hope is that it marks the beginning of a bottoming in economic activity. So I remain alert to further data.

    My hopes aside, the facts on the ground are that the global economy continues to struggle just to stay flat. So at this moment, there is little to assuage my concerns over continued deterioration in global economic activity and that drives me to the conclusion that global recession is the number one risk to our economy.

    The slowdown in China's growth (medium):

    http://blogs.ft.com/gavyndavies/2014/10/23/chinas-slowdown-is-secular-not-cyclical/

    Bottom line: the US economy finally showed some signs of improvement, however paltry. Likewise, the data from Japan, China and Germany, three of our major trading partners, provided a modicum of hope that their economies might be stabilizing. Of course, one week's stats are hardly something on which to hang that hope; so it does little to lessen my concerns.

    Unfortunately, there hasn't been the slightest hint that the global economy will receive any help from changes in either monetary or fiscal policies. Yes, the US has elections very shortly that could alter the balance of power in congress; but that may mean little if Obama hunkers down and refuses to compromise. As for Europe, France, Italy and Germany have all let it be known that they have no intent in following suggested fiscal reforms suggested by the ECB. As for monetary policy, it remains QEForever, its continuing lack of success notwithstanding.

    Geopolitically, the world is a mess. The standoff in Ukraine has clearly not been resolved; and winter (i.e. the need for gas) is rapidly approaching. The ground action in Syria/Iraq is going against us; and this week, the war got a little closer to home. True it was Canada, not the US; and the terrorist was homegrown versus imported. But that will be of little consolation if we wake up to similar headlines here.

    In sum, the both the US and EU economies showed signs of improvement this week, though we need a lot more of that to feel comfortable that the global economy is not going to pull us into recession.

    This week's data:

    1. housing: weekly mortgage applications were up but purchase applications were down; September existing home sales were much better than anticipated; September new home sales were also up but the August number was revised down hugely,
    1. consumer: weekly retail sales were mixed; weekly jobless claims rose less than estimates,
    1. industry: September Chicago Fed National Activity Index was much better than forecast expectations; the October Markit manufacturing flash PMI was below forecast as was the Kansas City Fed October manufacturing index,
    1. macroeconomic: September leading economic indicators were stronger than anticipated; September CPI was slightly more than forecast.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 16805, S&P 1958) gave us another wild ride this week. The Dow finished above the upper boundary of its short term downtrend (15702-16782) on Friday; if it remains above that level through the close on Tuesday, the trend will re-set to a trading range. It also ended within an intermediate term trading range (15132-17158), a long term uptrend (5148-18484) and below its 50 day moving average.

    The S&P closed above the upper boundary of its a short term downtrend (1796-1927) for the second day; if it ends there on the bell Monday, the trend will re-set to a trading range. It also finished within an intermediate term trading range (1740-2019), a long term uptrend (771-2020) and below its 50 day moving average.

    Volume declined; breadth was mixed. By one measure, the Market is again dramatically overbought. The VIX fell, ending within a short term uptrend, an intermediate term downtrend and above its 50 day moving average.

    The long Treasury rose on Friday, closing within a very short term trading range, a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    GLD was down on Friday. It broke its very short term uptrend this week, re-setting to a trading range. It remained within short and intermediate term downtrends and below its 50 day moving average.

    http://ftalphaville.ft.com/2014/10/23/2017742/beware-the-chinese-fx-reserve-fall/

    Bottom line: equities recovered smartly this week; but did so with stunningly schizophrenic volatility. Many of the indicators that we follow daily made multiple trend changes in those five days despite the smoothing effect of our time and distance discipline. I am at a point where I feel completely out of touch with Market sentiment. When I am, it is always best to do nothing. Nonetheless, I would use any rise in prices 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 (16805) finished this week about 42.0% above Fair Value (11829) while the S&P (1958) closed 33.3% 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.

    This week's slightly more upbeat economic dataflow both here and aboard hardly seemed sufficient to warrant the euphoria we witnessed in equities. But when combined it with last week's souped up QE comments from the global central bankers, investors were provided with a goldilocks scenario (an improving economy and an easier Fed) to discount. Not that I think this will happen. Investors just don't seem to get that they can't have it both ways. If the global economy is suddenly healing, QE is terminal. If it is slipping into recession, QE/the central banks are going to get pilloried for not stimulating growth. But I suppose that is tomorrow's problem.

    In the end, as I have been insisting for a long time, this is not about the economy in any case. It is about asset mispricing which (excluding the stick save of QEI) appears to have been the major result of global QEInfinity. Clearly, markets are still intoxicated by the prospect of more free money; but at some point, the realization will set in that it has totally failed to generate the outcomes promised by the central bankers and so widely anticipated investors. Whenever that happens, I believe that valuations will retreat to more sensible levels.

    Fed's grand illusion

    http://www.zerohedge.com/news/2014-10-23/warning-signs-feds-grand-illusion

    The farce of European stocks (short):

    http://www.zerohedge.com/news/2014-10-24/farce-european-stocks-1-simple-chart

    Geopolitics re-emerged this week as a possible source of Market heartburn. Russia and Ukraine couldn't agree on a pricing contract for winter gas. Hardly surprising. I guess that I don't have to point out who has the hammer in any negotiations; and if nothing gets done, it will be a tough winter in euroland.

    http://origin-www.businessweek.com/articles/2014-10-23/has-putin-already-won-in-ukraine-sure-looks-that-way

    In addition, the war in the Middle East has made its way to the Western Hemisphere with the two incidents in Canada. That doesn't mean that the US will get hit; but it suggests that the odds aren't zero.

    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 is at risk). 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.

    http://www.advisorperspectives.com/commentaries/sungarden_102514.php

    DJIA S&P

    Current 2014 Year End Fair Value* 11900 1480

    Fair Value as of 10/31/14 11852 1472

    Close this week 16805 1958

    Over Valuation vs. 10/31 Close

    5% overvalued 12444 1545

    10% overvalued 13037 1619

    15% overvalued 13629 1692

    20% overvalued 14222 1766

    25% overvalued 14815 1840

    30% overvalued 15407 1913

    35% overvalued 16000 1987

    40% overvalued 16592 2060

    45%overvalued 17185 2134

    Under Valuation vs. 10/31 Close

    5% undervalued 11259 1398

    10%undervalued 10666 132415%undervalued 10074 1251

    * 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.

    Oct 25 9:52 AM | Link | Comment!
  • The Morning Call--What Does The Better Economic Data Mean?

    The Market

    Technical

    The indices (DJIA 16677, S&P 1950) exploded again yesterday. However, the DJIA remained within a short term downtrend (15724-16792), an intermediate term trading range (15132-17158) and a long term uptrend (5148-18484). It ended back above its 200 day moving average but below its 50 day moving average.

    The S&P pushed through the upper boundary of its short term downtrend (1800-1931), for the second time this week. If it remains there through the close Monday, the short term trend will re-set to a trading range. It finished within an intermediate term trading range (1740-2019) and a long term uptrend (771-2020), above its 200 day moving average but below its 50 day moving average.

    Volume was flat; breadth improved. The VIX fell, closing within a short term uptrend and an intermediate term downtrend. It closed back below its 200 day moving average and above its 50 day moving average.

    http://www.zerohedge.com/news/2014-10-23/real-stock-volatility-october-highest-lehman

    Update on sentiment (short):

    http://www.bespokeinvest.com/thinkbig/2014/10/23/bulls-running.html

    The long Treasury got whacked, ending within a very short term trading range, a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    http://www.zerohedge.com/news/2014-10-23/goldman-sachs-buying-carl-icahns-high-yield-bond-bubble

    GLD was also off big, finishing back below the lower boundary of its newly re-set very short term uptrend; if it closes there today, it will re-set to a trading range (the fourth re-set in the last week). It remained within short and intermediate term downtrends, below its 200 day and 50 day moving averages.

    Bottom line: if you are like me, you are getting air sick from the extreme ups and downs this week and are confused as hell. I wish I had some pearl of wisdom that would explain these extraordinarily schizophrenic swings in sentiment; but alas I have none.

    I developed our time and distance discipline in an attempt to reduce these kind of emotional ups and downs during periods of high volatility. But even with that, we witnessed multiple reversals of trend in the S&P, the long Treasuries and gold in the last week.

    My only decent observation is that unless you are a very talented day trader, this is a period for patience and inaction.

    That said, if this volatility pushes stock prices higher, I would use it 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 releases had something for everyone: the October Markit flash manufacturing PMI was below estimates as was the October Kansas City Fed manufacturing index; weekly jobless claims rose but less than anticipated; the September Chicago National Activity Index came in much better than expected as did October leading economic indicators. I think that the latter two were by far the most important; so I would rate the day as a plus for our forecast.

    In addition, on balance, corporate earnings reports for the day continued to surprise to the upside.

    We also received some decent September Markit flash PMI's overseas---China, Japan and Germany were up; and Spanish unemployment was down, though it was slight and off a horrendous base (23.7% unemployment). On the other hand, French PMI was down, October Chinese manufacturing declined to a five month low and September UK retail sales fell. These results are a bit more mixed; but, that said, mixed is a plus when viewed against the data flow of late.

    One final item, the IMF amazingly opined that Japan's second tax increase was a good thing. Given the abysmal state of the Japanese economy---partly a result of the first tax increase---I can only shake my head and wonder what these clowns are thinking about.

    Bottom line: the question before us is, are we starting to see real economic improvement domestically as well as overseas or is the latest dataflow from both just blips up in otherwise declining trends? Of course, irrespective of the answer, stocks are still richly valued---just less so if the US economy is able to hold its current growth rate. More importantly, if the dangers of a global slowdown that impacts the US are receding, then global QE will likely soon be on life support. And that brings me back to the theme that an unwinding of QE will be primarily be felt in asset pricing---as in lower asset pricing.

    http://www.zerohedge.com/news/2014-10-23/furious-albert-edwards-lashes-out-central-bankers-will-these-morons-ever-learn

    The latest from Van Hoisington (medium and today's must read):

    http://advisorperspectives.com/commentaries/hoisington_102314.php

    The latest from Scotiabank (medium):

    http://www.zerohedge.com/news/2014-10-24/forget-lower-longer-feds-new-message-sooner-slower

    My bottom line is that for current prices to continue 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.

    The latest from Lance Roberts (medium and a must read):

    http://www.zerohedge.com/news/2014-10-23/3-things-worth-thinking-about

    Ten insane things that Wall Street believes (short):

    http://thereformedbroker.com/2014/10/23/ten-insane-things-we-believe-on-wall-street/

    Thoughts on Investing---from Barry Ridholtz

    Mistake #5: Passive is better than Active Management

    Active fund management - the attempt by an investor or manager to try to outperform their benchmarks through superior stock picking and/or market timing - is exceedingly difficult. It has been shown (repeatedly) that every year, 80% of active managers under-perform their benchmarks.

    Those are not particularly attractive odds.

    Worse, most active managers typically run higher-fee funds. (all that activity costs money!). That combination - High Fees + Under-performance - are not the ingredients of a winning long-term strategy. This is why for the vast majority of investors, passive index investing is a superior approach.

    Why? You:

    -Remove the emotional component
    -Take advantage of (instead of working against) mean reversion
    -Garner the lowest possible fees
    -Eliminate all of the friction caused by overtrading
    -Keep capital gains taxes as low as possible
    -Get good results over the entire long cycle
    -Avoids typical cognitive errors
    -Stop chasing hot managers and funds

    Consider if your portfolio won't be better served replacing some or all of your active fund managers with passive indices.

    News on Stocks in Our Portfolios

    United Parcel Service beats by $0.03, beats on revenue

    • United Parcel Service (NYSE:UPS): Q3 EPS of $1.32 beats by $0.03.
      • Revenue of $14.29B (+5.7% Y/Y) beats by $90M.

    Colgate-Palmolive EPS in-line, misses on revenue

    • Colgate-Palmolive (NYSE:CL): Q3 EPS of $0.76 in-line.
    • Revenue of $4.37B (-0.7% Y/Y) misses by $70M.

    Procter & Gamble EPS in-line, misses on revenue

    • Procter & Gamble (NYSE:PG): FQ1 EPS of $1.07 in-line.
    • Revenue of $20.8B (-0.1% Y/Y) misses by $30M.

    Microsoft beats by $0.05, beats on revenue

    • Microsoft (NASDAQ:MSFT): FQ1 GAAP EPS of $0.54 beats by $0.05.
    • GAAP Revenue of $23.2B (+25.2% Y/Y) beats by $1.18B.

    Nucor beats by $0.03, beats on revenue

    • Nucor (NYSE:NUE): Q3 EPS of $0.76 beats by $0.03.
    • Revenue of $5.7B (+15.4% Y/Y) beats by $330M.

    Reliance Steel & Aluminum misses by $0.02, beats on revenue

    • Reliance Steel & Aluminum (NYSE:RS): Q3 EPS of $1.33 misses by $0.02.
    • Revenue of $2.71B (+11.1% Y/Y) beats by $40

    Economics

    This Week's Data

    The October Markit flash manufacturing PMI came in at 56.2 versus expectations of 57.0.

    The October Kansas City Fed manufacturing index was reported at 4.0 versus estimates of 6.0.

    The September leading economic indicators rose 0.8% versus forecasts of a 0.6% increase.

    http://www.advisorperspectives.com/dshort/updates/Conference-Board-Leading-Economic-Index.php

    Other

    More upbeat data (short):

    http://scottgrannis.blogspot.com/2014/10/robust-construction-and-cre-conditions.html

    The case for fossil fuels (short):

    http://www.aei-ideas.org/2014/10/quotation-of-the-day-on-the-moral-case-for-fossil-fuels/

    Politics

    Domestic

    Tom Coburn's 2014 Waste Book (medium):

    http://www.clubforgrowth.org/uncategorized/senator-coburn-releases-wastebook-2014-washington-doesnt-want-read/

    International War Against Radical Islam

    Disclosure: The author is long UPS, CL, PG, MSFT, NUE, RS.

    Oct 24 9:00 AM | Link | Comment!
  • The Morning Call--Are Lower Oil Prices Good Or Bad?

    The Market

    Technical

    The indices (DJIA 16461, S&P 1927) backed off of a very overbought condition yesterday. The DJIA remained within a short term downtrend (15732-16823), an intermediate term trading range (15132-17158) and a long term uptrend (5148-18484). It ended back below its 200 day moving average.

    The S&P retreated back below the upper boundary of its new short term downtrend (1804-1933), negating Tuesday's break. It remained within an intermediate term trading range (1740-2019) and a long term uptrend (771-2020) but above its 200 day moving average.

    Volume fell; breadth deteriorated. The VIX rose 11%, finishing within a short term uptrend and an intermediate term downtrend. It closed back above its 200 day moving average.

    The long Treasury was up, but not enough to close back above the lower boundary of its very short term uptrend, re-setting the trend to a trading range. It remained within a short term uptrend, an intermediate term trading range and above its 200 day moving average.

    http://gavekal.blogspot.com/2014/10/is-bond-market-volatility-signaling.html

    GLD was off slightly, ending back above the upper boundary of its newly re-set trading range for the second day, re-setting back to a very short term uptrend. It remained within short and intermediate term downtrends, below its 200 day moving average but above its 50 day moving average.

    http://scottgrannis.blogspot.com/2014/10/how-china-could-explain-decline-in-gold.html

    Bottom line: the S&P couldn't hold above the upper boundary of it short term downtrend. It seems likely that it will challenge this boundary again in the near future; but for the moment, the furious rally off last week's low has been stymied. In truth, the market was so overbought, a sell off was hardly surprising.

    That said, I have noted several times that rallies in down markets can be quite vicious---the key assumption, of course, being that we are in a down market. Admittedly, that is and will remain a very iffy call until the Averages' intermediate term trading ranges roll over to downtrends.

    For the moment, I will stick with the observation that there are a number of factors favoring both sides of the issue of Market direction. I can afford to be a bit Pollyannaish about it because valuations are so high that I certainly would not be a buyer if the Market resumes its uptrend nor would I be a buyer in a sell off unless it is of an order of magnitude that we haven't seen in five years.

    I would use any rise in prices to Sell stocks that are near or at their Sell Half Range or whose underlying company's fundamentals have deteriorated.

    Fundamental

    Headlines

    There were two US economic releases yesterday: weekly mortgage applications were up but the more important purchase applications were down; and September CPI was a tad hotter than expected though ex food and energy, it was in line. Neither is noteworthy or newsworthy.

    Overseas, the news was a bit more disappointing: the Bank of England left interest rates unchanged (the only item that could be viewed as a plus); Russia and Ukraine failed to reach an agreement on winter gas pricing (who woulda thunk?); a report out of Europe said that eleven banks from six countries failed the ECB stress test; and the ECB mumbled another denial that it was going to commence purchasing corporate debt in the near future. Apparently, some genius did the math (medium and a must read):

    http://www.zerohedge.com/news/2014-10-22/someone-didnt-do-math-ecbs-corporate-bond-purchasing-trial-balloon

    David Stockman on the recent QE comments from the US and EU (medium):

    http://www.zerohedge.com/news/2014-10-22/wall-street-one-sick-puppy-thanks-even-sicker-central-banks

    Finally, the Japanese trade deficit was the worst in six months (medium):

    http://www.zerohedge.com/news/2014-10-21/how-japanese-hyperinflation-starts-1-chart

    Discouraging but it reinforces my concern regarding international economic weakness impacting the US. But no one else seemed to care. The hangover from Tuesday's euphoric rise on the promise of QEforever was enough to keep momentum to the upside in yesterday's early trading until the oil price got hammered and Canada experienced (what preliminarily appears to have been) a terrorist attack.

    With respect to the family of the young Canadian soldier that lost his life, I think that the combination of the Market being hugely overbought along with the oil price decline were the drivers of yesterday's sell off. In the case oil, while lower prices are undoubtedly a boon to energy consumers, it is also perceived as a manifestation of the aforementioned 'international economic weakness impacting the US', i.e. weak demand for energy. I am not ready to concede that point (slowdown in the US economy) yet---though the evidence is mounting that it is indeed the case.

    The takeaway here, I think, seems to be that investors are not spooked by lousy foreign economic reports, their frequency and magnitude notwithstanding. But rather they are holding on for dear life to the prospect that the US will escape a global economic slowdown unscathed and only when beaten over the head with startlingly poor domestic stats are they prepared to consider the probability that the same fate awaits the US.

    ***let's see how they react to this overnight news: China, Japan and Germany reported better than expected September Markit flash PMI's; the French Markit flash PMI was down as was the October Chinese manufacturing index (five month low). Elsewhere the rocket scientists at the IMF recommended that Japan go ahead with its second tax hike---you know, because the first worked out so well.

    Bottom line: the global economy continues to deteriorate. To be clear, I don't have a problem with other investors making the data prove that this will lead to a US slowdown; indeed, that is the exact process we are going through right now with our own forecast. But I have a problem ignoring the odds of a US slowdown at a time when US stocks are priced for perfection.

    My bottom line is that for current prices to continue 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.

    The latest from Lance Roberts (medium):

    http://streettalklive.com/index.php/blog.html?id=2458

    Use valuations for expected returns not market timing (short):

    http://thereformedbroker.com/2014/10/21/larry-swedroe-use-valuations-for-expected-returns-not-market-timing/

    Update on this earnings season's profit and revenue 'beat' rate (short):

    http://www.bespokeinvest.com/thinkbig/2014/10/22/eps-strong-revenues-weak.html

    Investing for Survival

    Protecting your bond portfolio:

    http://pragcap.com/five-ways-to-keep-out-of-the-bond-liquidity-trap

    Company Highlights

    Fastenal sells and delivers industrial and construction supplies (threaded fasteners, tools and equipment, cutting tools and abrasives, components and accessories for hydraulics, pneumatics, plumbing and HVAC, material handling products and janitorial, welding, safety and electrical supplies) through both wholesale and retail channels in the US, Singapore, Canada, Mexico, China, the Netherlands and Puerto Rico. The company has grown its profits and dividends rapidly over the last 10 years (19% and 40% respectively) while earning a 16-25%+ return on equity. FAST's growth is sensitive to economic downturn; however longer term, the company should continue to produce excellent results as a result of:

    (1) expansion of its product line,

    (2) installation of a more efficient distribution system,

    (3) effective cost controls,

    Negatives:

    1. revenues are sensitive to economic conditions,

    (2) rising raw material and fuel costs.

    FAST is rated A+ by Value Line, has no debt and its stock yields 2.2%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    FAST 2.2% 13% 59% 10

    Ind Ave 1.5 14 37 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    FAST 0% 26% 1 14% A+

    Ind Ave 27 31 NA 8 NA

    Chart

    Note: FAST stock made good initial progress off its March 2009 low, quickly surpassing the downtrend off its September 2008 high (straight red line) and the November 2008 trading high (green line). Long term, the stock is in an uptrend (blue lines). Intermediate term, it is in a trading range (purple lines). The wiggly red line is the 200 day moving average. The Aggressive Growth Portfolio owns a 50% in FAST, having Sold Half in early 2012. The upper boundary of its Buy Value Range is $39; the lower boundary of its Sell Half Range is $67.

    (click to enlarge)

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

    10/14

    News on Stocks in Our Portfolios

    T. Rowe Price misses by $0.03, revenue in-line

    • T. Rowe Price (NASDAQ:TROW): Q3 EPS of $1.12 misses by $0.03.
    • Revenue of $1.02B (+15.3% Y/Y) in-line.

    Caterpillar beats by $0.36, beats on revenue

    • Caterpillar (NYSE:CAT): Q3 EPS of $1.72 beats by $0.36.
    • Revenue of $13.6B (+1.3% Y/Y) beats by $410M.

    Lorillard EPS in-line

    • Lorillard (NYSE:LO): Q3 EPS of $0.90 in-line.
    • Revenue of $1.83B (flat Y/Y)

    Occidental Petroleum beats by $0.01, misses on revenue

    • Occidental Petroleum (NYSE:OXY): Q3 EPS of $1.58 beats by $0.01.
    • Revenue of $6B (-7.0% Y/Y) misses by $110M.

    C. R. Bard beats by $0.05, beats on revenue

    • C. R. Bard (NYSE:BCR): Q3 EPS of $2.15 beats by $0.05.
    • Revenue of $830M (+9.5% Y/Y) beats by $11.12M.

    AT&T misses by $0.01, misses on revenue

    • AT&T (NYSE:T): Q3 EPS of $0.63 misses by $0.01.
    • Revenue of $33B (+2.6% Y/Y) misses by $240M.

    Economics

    This Week's Data

    Weekly jobless claims rose 17,000 versus expectations of a 21,000 increase.

    http://www.calculatedriskblog.com/2014/10/weekly-initial-unemployment-claims_23.html

    The September Chicago Fed National Activity Index came in at .47 versus August's reading of -.25.

    Other

    Central bankers admit that QE leads to income inequality (medium):

    http://www.zerohedge.com/news/2014-10-22/central-banker-admits-central-bank-policy-leads-wealth-inequality

    Politics

    Domestic

    Worry about your blood pressure, not Ebola (medium):

    http://www.bloombergview.com/articles/2014-10-22/stop-fearing-the-wrong-things

    More of your tax dollars wisely spent (medium):

    http://www.zerohedge.com/news/2014-10-22/76-billion-reasons-why-us-war-drugs-afghanistan-failed-1-chart

    International War Against Radical Islam

    Disclosure: The author is long FAST, TROW, CAT, MMM, LO, OXY, BCR, T.

    Oct 23 9:08 AM | Link | Comment!
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