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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 (revised) 0-+2%

    Inflation (revised) 1.0-2.0

    Corporate Profits (revised) -5-+5%

    Current Market Forecast

    Dow Jones Industrial Average

    Current Trend (revised):

    Short Term Uptrend 17220-20025

    Intermediate Term Uptrend 17378-22506

    Long Term Uptrend 5369-19175

    2014 Year End Fair Value 11800-12000

    2015 Year End Fair Value 12200-12400

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Uptrend 2021-3000

    Intermediate Term Uptrend 1826-2593

    Long Term Uptrend 797-2138

    2014 Year End Fair Value 1470-1490

    2015 Year End Fair Value 1515-1535

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 51%

    High Yield Portfolio 52%

    Aggressive Growth Portfolio 53%

    Economics/Politics

    The economy is a neutral for Your Money. The preponderance of data this week was negative though two primary indicators were pluses: positives---April new home sales and building permits, April leading economic indicators and April CPI ex food and energy; negatives---weekly mortgage and purchase applications, May homebuilder confidence, April existing home sales, month to date retail sales, weekly jobless claims, the April Chicago national activity index, the May Markit flash manufacturing index and the May Philly Fed and Kansas City manufacturing indices; neutral---none.

    Clearly volume wise this was a rough week. To be sure, the new home sales and leading economic indicators were very important positives. But new home sales were more than offset by the headline existing home sales (which are ten times the magnitude of new home sales). Realtors are countering that the disappointing number was a function of low supply versus low demand. Bear in mind that they are just talking their book. In fact, in the same existing home sales press release, inventories (i.e. supply) were listed as climbing in April. So I am counting the new versus existing home sales as a wash. In short, we are at sixteen out of seventeen weeks of lousy data and counting.

    There was a bevy of Fed related news all of which I covered in Morning Calls and discuss briefly below. In sum though it was confusing in part because Fed seems to be trying to weasel the economic data to look better than it is. I continue to wonder if the Fed's motive is to keep the door open for a rate hike sooner later than later. If that occurs as you know, I don't think the economic impact will be that great. That said, since the economy appears to be weakening, a rate hike won't exactly be constructive.

    Our forecast:

    'a much below average secular rate of recovery, exacerbated by a declining cyclical pattern of growth, 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 hesitant 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. Oil production in this country continues to grow which is a significant geopolitical plus. However, we have yet to see the 'unmitigated' positive attributed to lower oil prices by the pundits. Not surprisingly, with oil prices up, this same crowd is trumpeting the pluses that rising prices will have on capital spending. If they keep trying, the law of averages says that they will eventually be right. But who will listen?

    The negatives:

    (1) a vulnerable global banking system. This week:

    [a] UBS got its wrist slapped for currency manipulation.

    [b] five banks including Citi, JP Morgan and Bank of America plead guilty to currency manipulation---but no one goes to jail.

    http://www.nytimes.com/2015/05/21/business/dealbook/5-big-banks-to-pay-billions-and-plead-guilty-in-currency-and-interest-rate-cases.html?_r=1&curator=thereformedbroker&utm_source=thereformedbroker

    Unfortunately, this reverses the hopeful signs we saw last week that the regulators may be attempting to impose justice on the too big to fail banks. For those banks to plead guilty [which is a first] and no one be held accountable is unconscionable.

    SEC commissioner chides agency for not enforcing the law (medium and must read):

    http://www.zerohedge.com/news/2015-05-22/sec-commissioner-furious-sec-has-made-mockery-recidivist-criminal-behavior-banks

    '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.'

    (2) fiscal policy.

    The US love affair with debt (medium):

    http://www.cnbc.com/id/102699109

    Which is mathematically impossible to pay off (medium):

    http://www.zerohedge.com/news/2015-05-22/it-mathematically-impossible-pay-all-our-debt

    (3) 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.

    This week witnessed more confusion out of the Fed. First, there were two articles published: one by the San Francisco Fed arguing that the seasonal adjustment factors in recent economic data releases should have been doubled in which case the economy would look normal. Later in the week, the Bureau of Economic Analysis agreed and suggested that there will be indeed be some seasonal adjustments to the seasonal adjustments. However, the caveat in this exercise is that whatever increase is applied to the first quarter seasonal adjustment may be taken from the subsequent quarters. In short, the overall trend wouldn't change, it would just be less volatile. [So far, no one is suggesting that the already poor second quarter numbers need another seasonal adjustment. But then the second quarter is over yet.]

    In the second article, the NY Fed which has been tweaking its econometric model said that the economic outlook is great [although the spread of possible outcomes is so wide as to be meaningless].

    Add that to the convoluted narrative in Wednesday's release of the most recent FOMC minutes: the Fed [a] thinks that the first quarter economic weakness was transitory, but it is worried about the potential impact of the strong dollar, economic weakness in growth in China and the outcome of the Greek bailout negotiations, [b] has little support for a rate hike in June; but contends that any decision will be data dependent and, therefore, it is not ruling out an increase in June and finally the coup de grace, [c] is concerned about the effect of a rate hike on the markets, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds---all a result of Fed/regulatory policy.

    Finally, Yellen spoke on Friday but didn't add much to the narrative. She did say that she expects a rate hike in 2015, though provided no guidance on timing. Judging by the Market's reaction, investors continue to believe that it will be later rather than sooner---perhaps at their own peril.

    http://www.calculatedriskblog.com/2015/05/yellen-expect-rate-hike-in-2015-several.html

    I am very unclear what this all means; and I am not sure the Fed even knows. It is full of on the one hand/on the other hand, wishy washy, afraid to make a firm statement comments, which I can only assume were deliberate and, I think, the best evidence there is that in fact the Fed is either clueless or realizes what it has done and is scared s**tless.

    I do have one scenario that links this all together: the Fed knows that QE has not only not worked but has created problems that will only get worse the longer QE lasts. Therefore, the time has arrived to bite the bullet which it does under the guise of projecting a stronger economy than there is evidence to support. Then when the consequences occur (which will be largely Market related), it can point to all those studies showing that the economy is OK and blame the Market reaction on high frequency traders, broker dealers and bond funds. Bear in mind this is just the cynical thoughts of an elderly market participant.

    The Fed was not the only central banking making the news this week: [a] the Banks of England and Japan both reiterated their undying devotion of QE, and [b] the ECB said that it would 'front load' its QE. So whether or not, the Fed starts to taper, the QE crowd is still going to have plenty of sources for cheap money.

    Finally, in a speech Draghi re-emphasized that the ECB could not pull the EU economy out of a ditch all by itself. Fiscal [budget and regulatory] reforms were essential to returning to historical growth rates. Good for him. Every government in the world should take note, not the least of which is our own. I think it doubtful that any economy can return to its former self until consumer and business confidence returns and that won't happen until the shackles have been removed.

    http://www.zerohedge.com/news/2015-05-21/ecbs-willful-ignorance-leaking-central-bank-says-austerity-compliments-qe

    (4) geopolitical risks: this week:

    [a] ISIS took Ramadi but perhaps worse is the delusional spin the administration is putting on its ISIS strategy. http://www.powerlineblog.com/archives/2015/05/delusional-white-house-calls-isis-strategy-a-success.php

    [b] the Iranian nuke negotiations seem right on track as the Ayatollah said in a speech that there would be no surprise inspections and no inspections of certain 'facilities'. The spin will undoubtedly be that he is just saying that for {Iranian} public consumption; and that is not really what will be in the agreement. Rather than make a sarcastic, cynical statement, I will wait till we see the agreement; if we see it.

    [c] and last but certainly not least, in a speech Obama proclaimed that one of the great security risks to the US is climate change. Cue the sarcastic statement.

    (5) economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. The key datapoints this week were

    [a] upbeat prints of Japanese first quarter GDP and May composite PMI. Hopefully, this is a signal that perhaps another major economy is starting to come out of the doldrums. As you know, I have been a bit cautious about accepting these numbers at face value; however, there no reason at present to question their validity.

    [b] the EU PMI and German business confidence were disappointing. Not enough to deep six the prospect of a latent economic improvement but sufficient to the leave the question open.

    [c] the really bad international economic news this week was the Chinese composite PMI; not only because it was the third negative PMI report in a row but also because it was just another in a steady stream of poor data from all sectors of the economy.

    Nevertheless with both Japan and the EU showing some signs of life, our 'muddle through' scenario, which has been gasping for air of late, may end up being right on.

    In addition,

    The Greek/Troika bailout discussions continued---and seemed to be going nowhere until yesterday when the leaders of Greece, France and Germany met. While there was no agreement, 'significant progress' was said to have been made. And not a moment too soon; because Greece has notified the IMF that it would not be able to make the June 6 E1.5 billion payment and the ECB met to discuss raising the discounts applied to Greek bank assets used as collateral for loans. Maybe this latest meeting falls in historical euro pattern of pulling victory from the jaws of defeat at the last possible second; if so, it runs counter to every other official statement made this week.

    My bottom line here hasn't changed: I don't know how this ends, I don't know what that means for the markets but I do believe that there will be unintended consequences; and since those are by definition unknowable, this situation demands some caution.

    'Muddling through' remains the assumption for the global economy in our Economic Model with the proviso that if a Greek default/exit occurs, all bets are off. This remains the biggest risk to forecast.

    Bottom line: the US economic news maintained its downward path, the promise for first quarter upward revisions notwithstanding. Until we start getting concrete evidence that the economy is not slipping further, the risk remains that I may have to revise our forecast down again.

    The international data didn't improve the odds. While Japan may be showing some signs of life, EU data was all negative and China was terrible. Finally, the Greek/Troika negotiations are nearing zero hour with no apparent resolution in sight. An agreement may still happen; but the odds are falling and the unintended consequences by definition, unknown.

    The Fed is keeping things interesting (1) seeming to suggest from several sources that the economy is not as bad as many think---we are just getting bad numbers and (2) admitting that the risks associated with any rate hike are a product largely of its own policies. I am as confused as ever as to what these guys will do next; though I am more sure that whatever they do it will have more impact on the Markets than it has on the economy.

    This week's data:

    (1) housing: weekly mortgage and purchase applications declined; the May NAHB confidence index was below expectations; April housing starts and building permits were very strong; May existing homes sales were a disappointment,

    (2) consumer: month to date retail chain store sales slowed; weekly jobless claims rose more than anticipated

    (3) industry: the April Chicago national activity index fell versus forecasts of an advance; the May Markit flash manufacturing index was below consensus; the May Philadelphia and Kansas City Fed manufacturing indices were below expectations,

    (4) macroeconomic: April leading economic indicators were up more than estimates; April CPI was, in line; ex food and energy, it was above forecast.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 18232, S&P 2126) turned in a flattish week. Both closed above their 100 day moving average but they were out of sync on their all-time highs, which is to say that the S&P finished above that level while the Dow ended below.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17220-20025, 2021-2593), intermediate term (17378-23506, 1826-2593 and long term (5369-19175, 797-2138).

    Volume fell on Friday; breadth also declined. The VIX dropped all week, finishing below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks. In addition, it is again nearing the lower boundaries of its short and long term trading ranges. The closer it gets, the more attractive it becomes as portfolio insurance.

    http://www.advisorperspectives.com/commentaries/20150521-gavekal-capital-longer-term-trends-have-reasserted-itself-in-may

    The long Treasury had a bit more volatile week than stocks; though the results were the same---basically flat. It remained below its 100 day moving average, the upper boundary of a short term downtrend and near the lower boundary of its short term downtrend. So overall the momentum continues to the downside.

    The divergence in performance between the stock and bond markets (the stock market rising on weak economic numbers/easy Fed while the bond market falling presumably on better growth and higher inflation) was clearly muted this week. My guess is that most investors have made their bets based on available data and thus are biding their time awaiting the next defining event.

    In the meantime, this week gold, oil and the dollar reversed their recent trends which adds to the tension posed by the conflicting scenarios embodied in the pin action of the equity and fixed income markets.

    I have no idea how all these factors resolve themselves. But till they do, I think patience is needed.

    As I noted above, GLD traded back below its 100 day moving average and the neckline of its head and shoulders pattern. Given its erratic price movement over the last year, I am not sure that there is a message in GLD; and if there is one, it is probably labeled 'confused'.

    Bottom line: the Dow hasn't made a new high in three months which itself was only fractionally higher than the prior high; on the other hand, the S&P did make a new high but just barely and on anemic volume.

    Clearly, there is some uncertainty among investors. The question which I posed early in the week is, is this 'a consolidation before a challenge of the upper boundaries of their (the Averages) long term uptrend or are the buyers blowing their wad trying unsuccessfully to break materially higher.'?

    I feel almost certain that, having come this far, the indices will at least make an old school try at challenging those upper boundaries. That said, I also believe that challenges will be unsuccessful---which, from a strictly technical viewpoint, makes the short term risk/reward in the Market right now unattractive.

    Longer term, the trends are solidly up and will be so until the short term uptrends, at the very least, are negated.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (18232) finished this week about 51.0% above Fair Value (12073) while the S&P (2126) closed 41.8% overvalued (1499). 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 poor US and international economic stats confirm the economic assumptions in our Valuation Model. It does seem that recovery is taking hold in Europe, the latest PMI number notwithstanding. In addition, the Japanese economy is showing signs of life. Unfortunately, China is still struggling and the US ain't so hot itself. All that said, as I have explained numerous times that won't impact the numbers in our Valuation Model, but it will almost certainly force changes in Street Models which will likely cause heartburn for equity prices.

    QE continues to be the policy du jour (England, Japan, ECB) globally; although the two recent Fed studies along with opaque FOMC minutes and Friday's Yellen speech may be giving a subtle message that interest rate hikes are not that far away. Certainly, that notion is being supported by the bond market.

    We should also be concerned about the growing number of voices pointing to the lack of liquidity in the bond markets (lack of supply, the downsizing of bank trading) which gained credence this week from none other than the FOMC minutes. In sum, rate increases may be closer than once thought; irrespective of the timing, even the Fed is worried about the lack of liquidity in the markets should that tightening process be interpreted negatively by investors. And if it is worried, maybe 50% in cash is not enough.

    Another great article by David Stockman on the Fed and the market (medium and a must read):

    http://davidstockmanscontracorner.com/wall-street-r-i-p-the-bubble-is-dying-at-the-zero-bound/

    The Middle East just keeps getting more complex. ISIS captured Ramadi (Iraq) this week and now controls sizeable territory in Syria and Iraq. Meanwhile, Iran's Supreme Leader says 'no way, Melvin' to any inspections of its nuclear facilities. But don't worry about it because our president says His Middle East strategy is working. In fact, it is working so well His next target in assuring US security is, drumroll, climate change. If that works as well as the rest of His foreign policy, better go buy a gas mask. That, of course, has nothing to do with the Market---unless, that is, the bad guys capture, disable or disrupt the flow of oil.

    Friday's joint statement from the Greeks, French and Germans ('significant progress') aside, the cold hard facts are that Greece has an E1.5 trillion IMF payment due June 5. Granted that there is a grace period following the nonpayment; but the euros are still cutting it pretty close if they are going to step back from the cliff. My bottom line is that I have no idea how this resolves itself but if a default/Grexit occurs that are apt to be unintended consequences (e.g. this week's statements out of the Portuguese government) that are disruptive to the Market.

    Or maybe this: UK analyzing a Brexit (medium)

    http://www.zerohedge.com/news/2015-05-22/bank-england-accidentally-e-mails-top-secret-brexit-plan-newspaper

    'As I noted last week, I have no clue how to quantify the aforementioned geopolitical risks' impact on our Models even if I could place decent odds of their outcome because: (1) the outcomes are mostly binary, i.e. Greece either exists the EU or doesn't and (2) they all most likely incorporate potential unintended consequences, which by definition are unknowable. Better to just say these are potential risks with conceivably significant costs and then wait to see if we 'muddle through' or have to deal with those costs. The important investment takeaway, I believe, is to be sure that your portfolio had at least some protection in the downside.'

    Bottom line: the assumptions in our Economic Model are unchanged but still in danger of being revised down again. If they are anywhere near correct, they will almost assuredly result in changes in Street models that will have to take their consensus Fair Value down.

    The assumptions in our Valuation Model have not changed either; though there are scenarios listed above that could lower Fair Value. That said, our Model's current calculated Fair Values are so far below current valuation that any downward revisions by the Street will only bring their estimates more in line with our own.

    http://www.zerohedge.com/news/2015-05-22/todays-investors-ignorance-not-bliss-it-oblivion

    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.

    DJIA S&P

    Current 2015 Year End Fair Value* 12300 1525

    Fair Value as of 5/31/15 12073 1499

    Close this week 18232 2126

    Over Valuation vs. 5/31 Close

    5% overvalued 12676 1573

    10% overvalued 13280 1648

    15% overvalued 13883 1723

    20% overvalued 14487 1798

    25% overvalued 15091 1873

    30% overvalued 15694 1948

    35% overvalued 16298 2023

    40% overvalued 16902 2098

    45%overvalued 17505 2173

    50%overvalued 18109 2248

    55% overvalued 18713 2323

    Under Valuation vs. 5/31 Close

    5% undervalued 11434 1420

    10%undervalued 10832 1345 15%undervalued 10230 1270

    * 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.

    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 47 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.

    May 23 10:22 AM | Link | Comment!
  • The Morning Call--Another Week Of Lousy Data

    The Morning Call

    5/22/15

    The Market

    Technical

    The indices (DJIA 18285, S&P 2130) did little yesterday---the Dow ending flat and the S&P up 5 points. Both closed above their 100 day moving average; but again the Dow finished below its all-time high while the S&P remained above its comparable level.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17220-20020, 2021-3000), intermediate term (17365-22493, 1823-2591 and long term (5369-19175, 797-2138).

    Volume rose slightly; breadth was a little better. The VIX fell 6%, closing below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks. The further it drops, the more attractive it is as portfolio insurance.

    The long Treasury was strong but still remained below its 100 day moving average, the upper boundary of a very short term downtrend and near the lower boundary of a short term downtrend. I will also note that the charts of almost all the bond indices and ETF's that I watch are just as sick as TLT.

    GLD was down and finished below its 100 day moving average and the neck line of the head and shoulders pattern.

    Oil rose slightly but still closed below the upper boundary of its recent short term trading range; while the dollar was also up a tad, leaving it above the lower boundary of its recently broken short term uptrend.

    Bottom line: yesterday's pin action was a non-event; so my thoughts are the same: 'Their (the indices) pin action of the last couple of days could be interpreted in two ways: a consolidation before a challenge of the upper boundaries of their long term uptrend or the buyers blowing their wad trying unsuccessfully to break materially higher. As I said yesterday, having come this far, I can't believe that the indices won't attempt an assault on the upper boundaries of their long term uptrends. On the other hand, I continue to believe they will be unable to successfully challenge to any meaningful extent. So the risk/reward is not favorable on a technical basis. I think that argues for caution.'

    The long Treasury continues to act poorly, which is not a surprise given the confusion over Fed policy as expressed in the FOMC minutes and the uncertainty over economic progress created by recent Fed bank statements.

    http://www.advisorperspectives.com/commentaries/20150521-gavekal-capital-smart-money-most-committed-to-falling-rates-since-the-last-peak-in-long-bond-yields

    Fundamental

    Headlines

    It was a huge day for US economic data. Unfortunately, almost all of the numbers were disappointing: weekly jobless claims, the April Chicago Fed national activity index, the May Markit flash manufacturing index, the May Philadelphia and Kansas City Fed manufacturing indices and April existing home sales. The one positive was the April leading economic indicators. One, note that all except weekly jobless claims were second quarter stats; so any revisions in first quarter seasonal adjustments are not in play. Two, the lousy existing home sales are something of an offset to the prior reported new home sales (in fact, in order of magnitude they are about ten times larger).

    Lance Roberts on housing (medium and a must read):

    http://www.zerohedge.com/news/2015-05-21/housing-recovery-real-or-memorex

    The international economic data weren't much better. The May Markit composite PMI's for the EU and China were disappointing. Indeed, China's number was the third decline in as many months. The good news was that Japan's comparable stat was upbeat. That is the second good datapoint in a row for Japan, so its economy may have finally hit bottom.

    ***overnight, Bank of Japan keeps QEInfinity in place; April German business confidence fell; Draghi warns that QE can't do it all and that fiscal reforms are essential to returning the EU to historical growth rates.

    While there were no news items on the Greek/Troika negotiations, that in itself was bad news since the timeline for a resolution is very short; and every day that goes by with no progress brings a default or Grexit closer to a reality.

    The latest on the Greek/Troika negotiations (medium):

    http://www.nakedcapitalism.com/2015/05/are-the-imf-and-the-eu-at-loggerheads-over-greece.html

    ***overnight, the Greek, French and German leaders met and adjourned with no agreement but said that 'significant progress' had been made.

    Bottom line: after Tuesday's positive new home sales and Wednesday's San Francisco and New York Fed's attempts to put some lipstick our economic pig, yesterday's download of crappy data re-introduced us to reality. Whatever the outcome of any first quarter economic data revisions, those numbers were an indication that the second quarter is going to be lousy---unless, of course, the bureaucrats just keep adjusting the seasonal adjustments to meet their dreamweaver forecasts.

    Speaking of dreamweavers, the Japanese reported a positive May PMI---which follows Wednesday's improved GDP figure. Like Europe, we can only hope that this is a sign of a better Japanese economy. Restraining my enthusiasm is their government's propensity to fudge the numbers to fit the forecast. However, my cynicism at this point should be taken with a grain of salt. In truth, there is nothing at present to cast doubt on the validity of these numbers

    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.

    Ready for a Market re-set? (medium):

    http://www.marketwatch.com/story/investors-need-to-face-the-possibility-of-a-great-reset-2015-05-20?siteid=rss&rss=1

    Earnings and the S&P (short):

    http://skrisiloff.tumblr.com/post/119462928940/you-should-probably-take-a-look-at-whats-happened

    More on valuation (short):

    http://www.ritholtz.com/blog/2015/05/stovall-inflation-expensive/

    Investing for Survival

    12 things I learned from David Tepper: #1

    1. "We have this saying: The worst things get, the better they get. When things are bad, they go up."

    This is David Tepper's version of Warren Buffett's view that the time to be greedy is when others are fearful. The principal cause of significantly mispriced assets is when Mr. Market is fearful. If you can be brave and aggressive at such times perhaps you have one of the attributes of a successful distressed asset investor. The problem is that vastly more people think they can be brave and aggressive at times like this than actually can do so. While Warren Buffett and David Tepper view the same phenomenon (fear) as an investing opportunity, the way they capitalize on the opportunity is very different. Both Tepper and Buffett know that Mr. Market is bi-polar, but they operate in different ways (e.g., operate in different time scales, with different circles of competence; different systems; different temperaments).

    Most everyone should buy a diversified portfolio of low-fee/no load indexed investments. The fact that a very small number of people like David Tepper exist does not change that fact. Some fund managers find it easier to give advice by pretending that people like David Tepper don't exist since it makes their narrative simpler and their job easier. Academics are often hired to deliver a simple message which basically says: "It is impossible to beat the market. It can't be done." This approach is attractive since it means that no client must be told that they are lacking the skills or temperament to succeed as an active investor. A message delivered to a client that essentially says "it is impossible to beat the market" goes down a lot smoother than: "it is impossible for you and most everyone to beat the market." Many clients benefit from hearing this message since otherwise they would try to beat the market and inevitably underperform. The motivation of the fund saying "you can't beat the market, period" is arguably not improper. It benefits most all people to say this.

    The reality is that investors like David Tepper do exist. But the bad news is: 1) the small number of people like him most likely won't take you on as a limited partner and 2) you are very unlikely to be able to do what investors like David Tepper, Seth Klarman or Howard Marks can do on your own.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The May Markit flash manufacturing index came in at 53.8 versus expectations of 54.6.

    The May Philadelphia Fed manufacturing index was reported at 6.7 versus estimates of 8.0.

    http://www.advisorperspectives.com/dshort/updates/Philly-Fed-ADS-Index.php

    The May Kansas City Fed manufacturing index came in at -13 versus an anticipated drop on 2.

    April existing home sales fell 3.3% versus a flat consensus.

    http://www.calculatedriskblog.com/2015/05/existing-home-sales-in-april-504.html

    April leading economic indicators rose 0.7% versus forecasts of up 0.3%.

    April CPI was reported at +0.1%, in line; ex food and energy, it was +0.3% versus expectations of +0.1%.

    Other

    Risk aversion is the problem (medium):

    http://scottgrannis.blogspot.com/2015/05/claims-keep-falling-but-risk-aversion.html

    Update on the state of student loans (medium):

    http://www.zerohedge.com/news/2015-05-21/governments-message-heavily-indebted-students-dont-pay-us-back

    Politics

    Domestic

    International

    Soros on China and Europe (medium):

    http://www.zerohedge.com/news/2015-05-21/george-soros-warns-no-exaggeration-china-us-threshold-world-war-3

    May 22 9:03 AM | Link | Comment!
  • The Morning Call--Is The Fed Masking A Rate Hike?

    The Market

    Technical

    The indices (DJIA 18285, S&P 2125) had another dull barely down day. Both closed above their 100 day moving average; but the Dow finished back below its all-time high while the S&P remained above its comparable level.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17214-20014, 2021-3000), intermediate term (17365-22493, 1823-2593 and long term (5369-19175, 797-2135).

    Volume fell; breadth was better. The VIX edged lower, ending below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks. I continue to think that at current price levels, it is attractive as portfolio insurance.

    Investors failing to hedge (medium):

    http://www.marketwatch.com/story/a-stock-market-top-is-likely-near-as-investors-fail-to-hedge-2015-05-19?link=MW_popular

    Traderfeed looks at breadth (short):

    http://traderfeed.blogspot.com/2015/05/assessing-demand-and-supply-in-stock.html

    Update on sentiment (short):

    https://www.bespokepremium.com/think-big-blog/bullish-sentiment-drops-for-fifth-straight-week/

    The long Treasury was up fractionally, closing below its 100 day moving average, the upper boundary of a very short term downtrend and near the lower boundary of a short term downtrend.

    GLD was up slightly but remained below its 100 day moving average and the neck line of the head and shoulders pattern.

    Oil rose slightly but still closed below the upper boundary of its recent short term trading range; while the dollar was also up a tad, leaving it above the lower boundary of its recently broken short term uptrend.

    Bottom line: the Averages traded in a narrow range for most of the day, though the Dow closed back below its all-time high---a slight negative. Their pin action of the last couple of days could be interpreted in two ways: a consolidation before a challenge of the upper boundaries of their long term uptrend or the buyers blowing their wad trying unsuccessfully to break materially higher. As I said yesterday, having come this far, I can't believe that the indices won't attempt an assault on the upper boundaries of their long term uptrends. On the other hand, I continue to believe they will be unable to successfully challenge to any meaningful extent. So the risk/reward is not favorable on a technical basis. I think that argues for caution.

    The long Treasury's recent pin action continues to suggest either inflation or a re-evaluation by investors of the sustainability and/or efficacy of QE. Both clearly run counter to the message to the stock market. Plus the volatility in gold, oil and the dollar only add their own version of a confused message. I have no clue what long rates are going to do; but I worry that about the 'why' of what they will do.

    The latest from Stock Traders' Almanac (short):

    http://jeffhirsch.tumblr.com/post/119468913253/nasdaq-lags-typical-pre-election-by-over-10

    Fundamental

    Headlines

    There was one secondary economic data release yesterday: weekly mortgage and purchase applications were down. Probably no one cared given Tuesday's housing starts number and everyone seemed to be awaiting the release of the minutes of the most recent FOMC meeting.

    To summarize what has become the pattern of Fed communications recently---confusing: the FOMC (1) thinks that the first quarter economic weakness was transitory, (2) but it is worried about the potential impact of the strong dollar, economic weakness in growth in China and the outcome of the Greek bailout negotiations, (3) gave little support for a rate hike in June, (4) but said that any decision will be data dependent and so it is not ruling out an increase in June, (5) is concerned about the effect of a rate hike on the markets, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds---all of which are a result of Fed and/or other government agency regulatory policy.

    More (medium):

    http://www.zerohedge.com/news/2015-05-20/fomc-minutes-show-fed-fears-post-hike-volatility-dollar-drag-doesnt-rule-out-june-ra

    And what Fed whisperer Hilsenrath says that they said (medium):

    http://www.zerohedge.com/news/2015-05-20/hilsenrath-confirms-hawkish-fed-sees-q1-weakness-blip-june-liftoff-possible

    And what Goldman says that the Fed model says (medium):

    http://www.zerohedge.com/news/2015-05-21/feds-computer-model-us-economy-sees-little-slack-and-big-clue-gartman

    And what Martin Feldstein thinks (medium and must read):

    http://www.zerohedge.com/news/2015-05-20/even-harvard-economists-admit-fed-policy-has-created-dangerous-risks

    The Fed and bubbles (short):

    http://www.bloomberg.com/news/articles/2015-05-18/bubble-blowing-to-continue-so-long-as-yellen-isn-t-raising-rates

    Mudding the waters even more, the Bureau of Economic Analysis is parroting the San Francisco Fed's 'first quarter seasonal adjustment factors are all screwed up' thesis, suggesting that there will be indeed be some seasonal adjustments to the seasonal adjustments. However, the caveat in this exercise is that whatever increase is applied to the first quarter seasonal adjustment may be taken from the subsequent quarters. In short, the overall trend wouldn't change, it would just be less volatile.

    http://www.zerohedge.com/news/2015-05-20/stocks-slump-after-liesman-reports-gdp-be-double-seasonally-adjusting-upward

    On the international scene, first quarter Japanese GDP was reported up much more than anticipated. That is the first good bit of economic news out of that country in a long time (though remember that they have been fibbing a lot lately). In addition, the Bank of England kept key interest rates at record lows, adding a small boost to the QEInfinity scenario.

    ***overnight, the May EU composite flash manufacturing index was below forecasts, Japan's was above and China's was negative for the third month in a row.

    The bad news is that a Greek official said that his country would be unable to make the June 5 IMF debt payment and the ECB met to consider raising the discount it places on the collateral Greek banks use for loans. Just to make matters worse, Moody's warned of Greek deposit 'freeze' (medium):

    http://www.zerohedge.com/news/2015-05-20/gloves-come-moodys-warns-greek-deposit-freeze-schabule-wont-rule-out-default

    Bottom line:

    (1) the FOMC minutes---as usual you need linguistics expert to decipher the message, assuming that the Fed even knows or is willing to admit what it really believes. With the BEA apparently ready to adjust first quarter seasonal factors, the optimists can once again cease ignoring the economic data. The question is, after all this jerking around with first quarter data, what happens if the second quarter isn't materially better---which you will recall the Atlanta Fed has already forecast.

    The most stunning part of those minutes was the Fed's acknowledgement that its primary reasons for its concern with raising interest rates are largely the result of its own policies. I am just not sure why the sudden baring of its soul: [a] admitting that it can't increase rates is its own fault or [b] apologizing in advance for when it does. Color me confused.

    What the Fed hath wrought (medium):

    http://www.zerohedge.com/news/2015-05-20/fed-has-created-clockwork-orange-market

    (2) the improvement in the Japanese GDP figure. The key now is, like our own housing numbers, follow through.

    (3) Greece is one day closer to default and intensity of its food fight with the Troika only escalates. I have said before that the euros are masters of pulling back from the brink; but so far, there is no evidence of that happening. I remain cautious about the impact of the final outcome.

    This is a pretty good assessment of the alternative outcomes (medium):

    http://www.zerohedge.com/news/2015-05-21/democracy-under-fire-troika-looks-force-greek-political-reshuffle

    And then there were two: Portugal vows no more austerity (medium):

    http://www.zerohedge.com/news/2015-05-20/portugals-left-wing-forces-threaten-troika-revolt

    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.

    Is Dr. Copper sending a message? (short):

    http://gavekal.blogspot.com/2015/05/dr-copper-is-down-not-out.html

    When what's working no longer works (medium):

    http://www.minyanville.com/business-news/markets/articles/SPX-DJIA-gold-central-bank-interest/5/20/2015/id/56062

    Final earnings and sales 'beat' rate for the first quarter (short):

    https://www.bespokepremium.com/think-big-blog/q1-earnings-season-over-sector-winners-and-losers/

    Company Highlight

    Tiffany & Co is an internationally renowned retailer, designer and manufacturer of fine jewelry, silverware, china, crystal and gift items. The company has grown profits and dividends at an 11-22% rate over the last 10 years earning a 14-19% return on equity. While revenues and profits are impacted by economic activity, TIF has weathered difficult times well and should sustain an above average growth rate as a result of:

    (1) increased marketing to modernize the brand,

    (2) increased penetration in international markets,

    (3) a growing customer base resulting from opening a line of new smaller stores with lower priced, higher margin products,

    (4) declining precious metals prices.

    Negatives:

    (1) earnings from its foreign operations are exposed to currency fluctuations,

    (2) fashion obsolescence,

    (3) its customers are sensitive to macroeconomic events.

    TIF is rated A+ by Value Line, carries a 23% debt to equity ratio and its stock yields 1.8%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    TIF 1.8% 9 35% 10

    Ind Ave 1.8 12* 32 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    TIF 23 18% 2 13% A+

    Ind Ave 28 17 NA 6 NA.

    *many retailers do not pay a dividend.

    Chart

    Note: TIF stock made good progress off its March 2009 low, quickly surpassing the downtrend off its October 2007 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 100 day moving average. The Dividend Growth Portfolio owns a 50% position through a fairly circuitous route. In 2009, it Bought a full position in TIF. However, in mid-2011, the company had a serious earnings hiccup and the holding was Sold. In mid-2012, after the news was digested and the outlook became a bit more visible, a one half position was repurchased.

    (click to enlarge)

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

    5/15

    Investing for Survival

    12 things I learned from Morgan Housel: Part 9

    9. "It can be difficult to tell the difference between luck and skill in investing."

    Investing involves both skill and luck. Sorting out how much of a given result is skill versus luck is neither easy or always possible. The very best books on this topic have been written by Michael Mauboussin, including The Success Equation. Howard Marks also has useful view on the difference between luck and skill and investing: "Success in investing has two aspects. The first is skill, which requires you to be technically proficient. Technical skills include the ability to find mispriced securities (based on capabilities in modeling, financial statement analysis, competitive strategy analysis, and valuation all while sidestepping behavioral biases) and a good framework for portfolio construction. The second aspect is the game in which you choose to compete. You want to find games where your skill is better than the other players. Your absolute skill is not what matters; it's your relative skill." Warren Buffet describes the object of the process simply: "Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect but that's what it's all about."

    News on Stocks in Our Portfolios

    Donaldson beats by $0.01, misses on revenue

    · Donaldson (NYSE:DCI): FQ3 EPS of $0.36 beats by $0.01.

    · Revenue of $568.01M (-9.0% Y/Y) misses by $1.23M.

    Economics

    This Week's Data

    Weekly jobless claims rose 10,000 versus expectations of up 6,000.

    The April Chicago Fed national activity index came in at -.15 versus estimates of +.10.

    Other

    I normally look with skepticism on any 'paper' coming out of bureaucracies, like the IMF; and, hence, I should with this one also. But the thesis it puts forth (the declining marginal value of more financial products) is intriguing and seems to reflect economic history since the 1990's. This is a good read and worth thinking about, whether you agree or not. (medium):

    http://www.nakedcapitalism.com/2015/05/imf-paper-finds-that-too-much-finance-is-bad-for-growth.html

    This summary of a recent Chinese government economic outlook is a bit confusing when compared to its also recently announced QE; either that or the Chinese are just knowing making the same mistake as the rest of the world's central bankers (medium):

    http://www.advisorperspectives.com/commentaries/20150520-loomis-sayles-china-is-choking-on-its-own-debt

    April architectural billings (short):

    http://www.calculatedriskblog.com/2015/05/aia-architecture-billings-index.html

    Five banks including Citi, JP Morgan and Bank of America plead guilty to currency manipulation---but no one goes to jail (medium):

    http://www.bloomberg.com/news/articles/2015-05-20/once-unthinkable-criminal-pleas-by-u-s-banks-get-investor-meh-

    Politics

    Domestic

    International War Against Radical Islam

    May 21 9:25 AM | Link | Comment!
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