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Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 46 years of investment... More
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Investing for Survival
  • The Morning Call--Free Money Is As Intoxicating As Ever

    The Market

    Technical

    Clearly the bulls are alive and well. The indices (DJIA 16614, S&P 1941) soared yesterday. The DJIA remained within a short term downtrend (15754-16834), an intermediate term trading range (15132-17158) and a long term uptrend (5148-18484). It did end above its 200 day moving average but below its 50 day moving average.

    The S&P blew through its 200 day moving average and the resistance level marked by the lower boundary of its former short term trading range---a clear sign of buying strength. It also finished above the upper boundary of its new short term downtrend (1805-1937); a close above 1937 through Thursday will re-set the short term trend back to a trading range. It remained within an intermediate term trading range (1740-2019) and a long term uptrend (771-2020).

    Volume rose slightly; breadth improved. The VIX plunged 13%, but finished within a short term uptrend and an intermediate term downtrend. It closed back below its 200 day moving average but remains above its 50 day moving average.

    http://shortsideoflong.com/2014/10/part-2-short-term-inflection-point/

    The long Treasury declined, closing back below the lower boundary of its very short term uptrend. If it ends there today, the trend will re-set to a trading range. It remained within a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    http://scottgrannis.blogspot.com/2014/10/reading-bond-market-tea-leaves.html

    GLD rallied again and ended above the upper boundary of a newly re-set very short term trading range. A close above this level today will re-set the trend back to up. It remained within short and intermediate term downtrends and right on its 50 day moving average.

    Bottom line: the S&P trashed those two aforementioned resistance levels, clearly a plus for the bulls. Any follow through to break the recently re-set short term downtrend will go a long way to wipe out last week's negative sentiment. Some of those numerous pesky divergences are also correcting---though to be clear they are still negative, just not as negative as before. On the other hand, stocks went from way oversold to way overbought in two days---not atypical of rallies in down markets.

    But in the final analysis, the fundamentals haven't changed and equities are still outrageously priced. So our strategy remains to do nothing. 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

    Yesterday's economic news was mixed to upbeat. In the US, weekly retail sales were mixed but September existing home sales advanced nicely. Overseas, the Chinese third quarter GDP came in ahead of expectations though it was lower than the second quarter report.

    ***overnight, the Bank of England left interest rates unchanged; Russia and Ukraine failed to reach an agreement on winter gas pricing (surprise, surprise); a report out of Europe said that eleven banks from six countries failed the ECB stress test; and this:

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

    The big news of the day was quote from an unnamed ECB official that said that the ECB would commence purchasing corporate debt in the near future. The thought of more QE was more simply than investors could stand; so they pushed stocks up, up and away.

    Somewhat confusing to me was that another quote later in the day, which raised major questions about the veracity of the original comment, was completely ignored in the mad 'risk on' scramble (***reiterated overnight).

    We will have to see how this plays out; but a firm repudiation for a high ECB official may not be all that well received.

    Bottom line: the dream that more QE will keep the chase for performance alive and well for yet another month or two clearly remains as intoxicating as ever. While I thought last week that the Market had finally called 'bullshit' on central bank money printing, clearly I was wrong. That said, nothing about the end results of this tragic experiment has changed. The European economy is weak and getting weaker. Japan's economy is a wreck. The growth rate of the Chinese economy is slowing. These problems are largely a result of not bad monetary but poor fiscal policies; and there are no signs that those will be corrected.

    To be sure, hope springs eternal in the US. The polls are telling us that the GOP is going to sweep the coming elections; and conventional wisdom would have us believe that the GOP is more fiscally responsible than the dems. Regrettably, that is a fiction judged on GOP actions in the last two decades. Furthermore, Obama still has the use of a veto; and given His unwillingness to even work with democrats, I don't see any kind of compromise on fiscal reform even assuming that the republicans try. Yes, a stalemate may keep the restraints on spending---and that is better than a sharp stick in the eye. But fiscal reform here involves more than just spending. It includes taxes and the regulatory environment.

    Finally, the geopolitical hurdles in Ukraine and Iraq/Syria are unresolved. And the S&P closed last night a mere 3.8% off its all-time/overpriced high.

    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.

    More unintended consequences of Fed policy (short):

    http://pragcap.com/the-unintended-consequences-of-fed-policy

    Uncharted waters (medium):

    http://www.zerohedge.com/news/2014-10-21/uncharted-waters

    Investing for Survival from Morgan Housel

    One Sentence Financial Rules (41-61)

    41. Imagine how much stuff you'd have to make up if you were forced to talk 24/7. Remember this when watching financial news on TV.

    42. There is, and always will be, more money to be made providing investment advice than receiving it.

    43. Assume the worst, hope for the best, accept reality.

    44. Save for your own retirement; assume Social Security and private pensions won't be around (even though they probably will).

    45. Annuities: A product mixing the complexity of high finance with the sales tactics of used-car salesman has an entirely predictable outcome.

    46. The correlation between confidence and future regret is incredibly high.

    47. During the last 100 years, there have been more 10% market pullbacks than Christmases. Everyone knows Christmas will come; think of volatility the same way.

    48. Don't attempt to keep up with the Joneses without realizing the Joneses aren't any happier than you are.

    49. Predictions, opinions, and forecasts should be discounted by the number of times the person making them is on TV each week.

    50. Not taking advantage of an employer match on your 401(k) is no different than declining a raise.

    51. Don't let Washington sway your investment decisions. Congress has been a dysfunctional swamp of disappointment since 1789, and stocks have done well ever since.

    52. To quote Larry Summers: "A good rule of thumb for many things in life holds that things take longer to happen than you think they will, and then happen faster than you thought they could."

    53. Another Larry Summers gem: "THERE ARE IDIOTS. Look around."

    54. "Invest in what you know" is dangerously simplified.

    55. Quit day trading, and donate your money to charity instead. Same financial result for you, and a better outcome for society.

    56. Most people's biggest expense is interest, which comes from living beyond your means, and buying things they think will impress others, which comes from insecurity. Avoid these two and you'll grow richer than most of your peers.

    57. Reaching for yield to increase your income is often like sticking your hands in a fire to warm them up -- good in theory, disastrous in practice.

    58. Your devotion to a political party or economic philosophy is directly proportional to your tendency to think irrationally about how politics affects your investments.

    59. Most people need a financial advisor, but everyone needs a financial counselor, or someone to talk them off the ledge before making a dumb decision.

    60. There's a strong negative correlation between flaunting money and being rich.

    61. Investors were probably better informed 20 years ago when there was 90% less financial news.

    News on Stocks in Our Portfolios

    Boeing beats by $0.16, beats on revenue

    • Boeing (NYSE:BA): Q3 EPS of $2.14 beats by $0.16.
    • Revenue of $23.8B (+7.5% Y/Y) beats by $780M.

    General Dynamics beats by $0.14, beats on revenue

    • General Dynamics (NYSE:GD): Q3 EPS of $2.05 beats by $0.14.
    • Revenue of $7.75B (+0.1% Y/Y) beats by $170M.

    Canadian National Railway misses by C$0.01, misses on revenue

    • Canadian National Railway (NYSE:CNI): Q3 EPS of C$1.04 misses by C$0.01.
    • Revenue of C$3.12B (+15.6% Y/Y) misses by C$30M.

    Illinois Tool Works beats by $0.05, beats on revenue

    • Illinois Tool Works (NYSE:ITW): Q3 EPS of $1.28 beats by $0.05.
    • Revenue of $3.7B (+3.6% Y/Y) beats by $20M.

    McDonald's beats by $0.13, misses on revenue

    • McDonald's (NYSE:MCD): Q3 EPS of $1.51 beats by $0.13.
      • Revenue of $6.98B (-4.6% Y/Y) misses by $210M.

    Economics

    This Week's Data

    The International Council of Shopping Centers reported weekly sales of major retailers down 0.3% versus the prior week bur up 2.1% on a year over year basis; Redbook Research reported month to date retail chain store sales up 0.1% versus the comparable period a month ago and up 4.1% versus the similar timeframe last year.

    September existing home sales rose 2.4% versus expectations of an increase of 1.0%.

    http://www.calculatedriskblog.com/2014/10/existing-home-sales-in-september-517.html

    Weekly mortgage applications rose 11.6% but purchase applications fell 5.0%.

    http://www.calculatedriskblog.com/2014/10/mba-mortgage-applications-increase-in_22.html

    September CPI was reported up 0.1% versus estimates of flat; ex food and energy, it was up 0.1%, in line.

    Other

    Politics

    Domestic

    International

    More on the geopolitics of oil (medium):

    http://www.zerohedge.com/news/2014-10-21/saudis-policy-downplaying-oil-prices-will-backfire-them

    Disclosure: The author is long BA, GD, ITW, MCD, CNI.

    Oct 22 8:59 AM | Link | Comment!
  • The Morning Call---Watch S&P 1904/1906

    The Market

    Technical

    The indices (DJIA 16399, S&P 1904) performance yesterday was bit schizophrenic (IBM's disappointing number held the Dow to a small gain while the S&P soared). The DJIA closed within a short term downtrend (15782-16857), an intermediate term trading range (15132-17158) and a long term uptrend (5148-18484). It also ended below its 200 day moving average.

    The S&P finished within a short term downtrend (1808-1938), an intermediate term trading range (1740-2019) and a long term uptrend (771-2020). It closed right on the lower boundary of its former short term trading range and slightly below its 200 day moving average---both of which are resistance points. How the S&P handles these levels will give a good idea of Market direction.

    Volume fell; breadth was mixed. The VIX declined, remaining within a short term uptrend, an intermediate term downtrend and above its 200 day moving average.

    The long Treasury rebounded back above the lower boundary of its very short term uptrend, negating the Friday break. It remained within a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    http://www.zerohedge.com/news/2014-10-20/crocodile-jaws-spring-open-again-preparing-bite

    GLD rallied but ended below the lower boundary of its very short term uptrend for a second day, confirming Friday's break. It remained within short and intermediate term downtrends and below its 50 day moving average.

    Bottom line: the key today is how the S&P deals with those two resistance levels. If it can break back above those levels, then this round of lower prices could be over. If not, then we are likely in for more downside.

    Our strategy remains to do nothing. 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.

    Update on sentiment (short):

    http://www.bespokeinvest.com/thinkbig/2014/10/20/investors-not-running-scared.html

    Fundamental

    Headlines

    There was no US or foreign economic data released yesterday.

    ***overnight, Chinese GDP was reported up 7.3% versus expectations of up 7.2% but below second quarter results of +7.5%; the ECB announced that it is considering expanding its QE to include corporate bonds.

    China:

    http://www.zerohedge.com/news/2014-10-20/do-you-believe-chinese-miracles-gdp-industrial-production-beat-retail-sales-miss

    ECB:

    http://www.zerohedge.com/news/2014-10-21/closer-look-why-futures-bounced-30-points-lows-todays-central-bank-btfd-bailout

    The only bit of news that I saw was a release that stated that Russia and Ukraine were close to an agreement on the price of gas this winter. Of course, there have been dozens of releases announcing agreements of one sort or the other between these two antagonists for the last six months and virtually all of them have come to naught. This time it may be different but I am not holding my breathe.

    Bottom line: 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 Doug Kass (medium):

    http://www.thestreet.com/story/12919003/1/look-down-jump-of-a-lifetime-not-for-the-faint-of-heart-best-of-kass.html

    The latest from John Hussman (medium):

    http://advisorperspectives.com/commentaries/hussman_102014.php

    After the correction, stocks are still overvalued (short):

    http://gavekal.blogspot.com/2014/10/stock-valuations-remain-near-record.html

    Capital, debt and the stock market (medium):

    http://www.nakedcapitalism.com/2014/10/michael-hudson-stock-markets-volatile.html

    Investing for Survival

    12 lessons from Jeff Gundlach (medium):

    http://25iq.com/2014/10/04/a-dozen-things-ive-learned-from-jeffrey-gundlach-about-investing/

    Company Highlights

    Hormel Foods is an international manufacturer and marketer of consumer branded meat and food products which are sold fresh, frozen, cured, smoked, cooked and canned (Hormel, Always Tender, Cure 81, SPAM, Dinty Moore, Jennie-O, Mary Kitchen, Little Sizzlers, Chi-Chi's, Skippy and Kid's Kitchen). HRL has grown profits and dividends at an 11-12% annual rate for the past 10 years earning a 15% return on equity. Despite rising feed costs, the company should continue to grow as a result of:

    (1) diversified product portfolio,

    (2) aggressive new advertising campaign,

    (3) acquisitions, especially in the high margin ethnic food category,

    (4) aggressive cost reductions.

    Negatives:

    (1) highly competitive industry,

    (2) its cost of goods sold are largely commodities; therefore, volatile prices can impact margins,

    (3) its international exposure subjects it to currency fluctuations and foreign regulations.

    Hormel is rated A by Value Line, has a 7% debt to equity ratio and its stock yields approximately 1.8%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    HRL 1.8% 11% 34% 10

    Ind Ave 2.4 8 36 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    HRL 7% 16% 1 7% A

    Ind Ave 37 13 NA 7 NA

    Chart

    Note: HRL stock made great progress off its December 2008 low, quickly surpassing the downtrend off its April 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 an uptrend (purple lines). The wiggly red line is the 200 day moving average. The Dividend Growth Portfolio owns a 75% position in HRL---it Sold Half in early 2013 and the stock has continued to advance. The upper boundary of its Buy Value Range is $22; the lower boundary of its Sell Half Range is $41.

    (click to enlarge)

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

    10/14

    News on Stocks in Our Portfolios

    Coca-Cola EPS in-line, misses on revenue

    • Coca-Cola (NYSE:KO): Q3 EPS of $0.53 in-line.
    • Revenue of $11.98B (-1.2% Y/Y) misses by $140M.

    Kimberly-Clark beats by $0.07, beats on revenue

    • Kimberly-Clark (NYSE:KMB): Q3 EPS of $1.61 beats by $0.07.
      • Revenue of $5.44B (+3.4% Y/Y) beats by $80M.

    United Technologies beats by $0.01, beats on revenue

    • United Technologies (NYSE:UTX): Q3 EPS of $1.82 beats by $0.01.
    • Revenue of $16.2B (+4.8% Y/Y) beats by $40M.

    Genuine Parts EPS in-line, beats on revenue

    • Genuine Parts (NYSE:GPC): Q3 EPS of $1.24 in-line.
    • Revenue of $3.99B (+8.1% Y/Y) beats by $60M.

    Economics

    This Week's Data

    Other

    Deflation in Europe (medium):

    http://www.telegraph.co.uk/finance/economics/11158948/This-is-the-most-important-chart-in-the-world-right-now.html

    What is the global turbulence telling us (medium)?

    http://blogs.ft.com/gavyndavies/2014/10/19/what-is-global-market-turbulence-telling-us/

    Politics

    Domestic

    International War Against Radical Islam

    The latest from Iraq/Syria (medium):

    http://www.zerohedge.com/news/2014-10-20/caliph-wilderness-mirrors

    Disclosure: The author is long HRL, KO, KMB, UTX, GPC.

    Oct 21 8:55 AM | Link | Comment!
  • Monday Morning Chartology

    A classmate died on Friday. The funeral is today and I have 6 hours on the road to get there and back. I suspect tomorrow's Morning Call will be woefully short of commentary.

    The Market

    Technical

    Monday Morning Chartology

    After a volatile week, the S&P finished within a short term downtrend and an intermediate term trading range. Note that despite the powerful rally on Friday, it remains below its 200 day moving average and the lower boundary of its former short term trading range---which was support and now become resistance. One of the technical keys this week will be how the S&P manages these levels (1904-1906).

    (click to enlarge)

    Last week witnessed the long Treasury assaulting the upper boundary of its intermediate term trading range and failing; then retreating sufficiently to break below the lower boundary of its very short term uptrend. A close below that boundary today will confirm the break. Even if this occurs, it is too early to get beared up on TLT.

    (click to enlarge)

    Up until Friday, GLD was doing a good job rallying off the lower boundary of its long term trading range. Then on Friday it broke below the lower boundary of that very short term uptrend. A close below that boundary today will confirm the break and re-set the very short term trend to a trading range. Meanwhile, GLD remained well within its short and intermediate term downtrends and below its 200 day moving average.

    (click to enlarge)

    The VIX was down 12% on Friday. It finished back below the upper boundary of its intermediate term downtrend, negating that break. However, it remained within its short term uptrend and above its 200 day moving average.

    (click to enlarge)

    Fundamental

    Investing for Survival

    Don't carry a lousy Market home with you at night (short):

    http://thereformedbroker.com/2014/10/10/muddy-road/

    News on Stocks in Our Portfolios

    V.F. Corporation misses by $0.01, misses on revenue

    • V.F. Corporation (NYSE:VFC): Q3 EPS of $1.08 misses by $0.01.
    • Revenue of $3.52B (+6.8% Y/Y) misses by $50M.

    Economics

    This Week's Data

    Other

    Politics

    Domestic

    International War Against Radical Islam

    A bit long, but this is an excellent analysis of the US policy alternatives in the Middle East:

    http://www.nakedcapitalism.com/2014/10/peter-van-buren-seven-worst-case-scenarios-battle-islamic-state.html

    Apparently, ISIS now has an air force (short):

    http://www.zerohedge.com/news/2014-10-17/isis-airforce-takes-trained-iraqi-officers

    Disclosure: The author is long VFC.

    Oct 20 9:02 AM | Link | Comment!
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