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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---Is The Dollar The Answer?

    The Market

    Technical

    The indices (DJIA 17031, S&P 1984) had another mixed day (Dow up, S&P down; but the Russell and NASDAQ were weak). The S&P remained in uptrends across all timeframes; short term (1944-2145), intermediate term (1915-2715) and long term (762-2014); it also closed above its 50 day moving average. The Dow finished within its short term trading range (16331-17158), its intermediate term trading range (15132-17158), its long term uptrend (5101-18464) and above its 50 day moving average.

    Volume fell; breadth improved slightly. The VIX rose, closing above its 50 day moving average (a mild negative). However, it remains within short and intermediate term downtrends. As long as that is the case, the assumption is that stocks will continue on the upside.

    The long Treasury was up fractionally, finishing within short and intermediate term trading ranges and below its 50 day moving average. However, TLT positive performance was not reflective of the pin action in other fixed income sectors which continue to get beaten up.

    GLD increased but still closed below the lower boundary of its short term trading range for the second day. If it remains there thru the close today, the short term trend will re-set to down. It is already in an intermediate term downtrend and is trading below its 50 day moving average. Not much good to say about GLD.

    Bottom line: the Averages traded quietly yesterday. I assume largely as a function of investors wanting to stay on the sidelines awaiting the FOMC meeting and the Scottish independence vote. That said, there was plenty of bad news around (US industrial production along with lousy numbers out of China and the EU over the weekend). So there was plenty of excuses to go down. That the Averages closed basically flat suggests that there is still plenty of support for stocks. That keeps my technical assumption intact: the Dow will ultimately successfully challenge the upper boundaries of its short and intermediate term trading ranges and then along with the S&P attack the upper boundaries of their long term uptrends.

    That said, bonds are acting sick, ditto oil and gold, ditto emerging market stocks; and US small caps seem to be joining this crowd. With all these markets rolling over, one has to wonder when stocks in general will follow suit.

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

    For the bulls (short):

    http://thereformedbroker.com/chart-o-the-day-this-is-the-retest/

    Weekly technical update from Andrew Thrasher (medium):

    http://www.athrasher.com/weekly-technical-market-outlook-9152014/

    Fundamental

    Headlines

    US economic news yesterday was mixed: the NY Fed manufacturing index was a gangbusters number; on the other hand, August industrial production was very disappointing. Given that the latter is a primary indicator and the former a secondary one, the weight of the news was on the negative side.

    Overseas, Chinese industrial production also came in below estimates.

    ***overnight, August Chinese foreign direct investments (i.e. capital inflows) fell 14%.

    That said, investors' attention was and will remain on the outcome of the FOMC meeting and the Scottish independence vote. I covered these subjects last week; but in brief, (1) the focus on the FOMC meeting will be on a rumored change in language which would suggest a rise in interest rates earlier than previously expected and (2) investors are concerned that a Scottish secession could lead to problems in both the Scottish and English economies, in the Scottish banks and potentially precipitate similar movements by other independence groups in Europe.

    Bottom line: while the major indices are performing well, the hiccups in the bond, oil, gold and emerging markets look like warning signs on top of the already growing number of internal divergences within the Averages themselves. As you know, I think that valuations have been in nose bleed territory for the last year. On the other hand, there remains a relentless bid under the Averages; and for better or worse, that is the dominating factor pricing stocks.

    The dollar may explain all of the above (medium and a must read):

    http://www.advisorperspectives.com/dshort/guest/Chris-Puplava-140915-Currencies-Collide-Part-2.php

    As I opined last week, I believe that a major asset re-pricing is coming; our Portfolios are positioned for that occurrence; but I have no idea when it happens.

    My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

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

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

    It is a cautionary note not to chase this rally.

    How often do stocks and bonds decline at the same time (short)?

    http://awealthofcommonsense.com/often-stocks-bonds-decline-time/

    The illusion of permanent liquidity (medium):

    http://www.advisorperspectives.com/dshort/guest/Lance-Roberts-140915-Liquidity-Illusion.php

    Investing for Survival from Lance Roberts

    http://www.advisorperspectives.com/dshort/guest/Lance-Roberts-140909-Seven-Deadly-Sins.php

    Company Highlights

    C.R. Bard designs, manufactures, packages and distributes medical device products in four markets: vascular (angioplasty catheters and stents, grafts and blood oxygenation), urology (catheters, urine collection systems and incontinence aids), oncology (gastroenterological, bladder, prostate tests) and surgical specialties (hernia repair, orthopedic and laparoscopic products). The company produces a 20%+ return on equity and has grown earnings at approximately 14% for the past 10 years. Dividend growth has been slower but should pick up in the next 2 to 3 years.

    As you can tell by its product mix, Bard is well situated to benefit from an aging population and should be able to maintain above average profit and dividend growth because:

    (1) the company has a complete line of products of cost effective, high margin products that generally first or second in market share and are primarily single use,

    (2) settlement of the Gore litigation,

    (3) expansion into emerging markets,

    (5) divestiture of its Electrophysiology division,

    (6) a share buyback program

    Negatives:

    (1) an intensively competitive industry,

    (2) implementation of the Medical Device Tax,

    (3) it is in a highly regulated industry.

    BCR's stock has been a stellar performer in our Portfolio having traded well past our Sell Half Price and is a great example of why we only sell half of a well performing position as long as the company continues to meet all our financial hurdles. While the current yield on the stock is only .6%, it yields 6% on our cost--again another great example of why we want to own the stocks of companies who consistently raise their dividend. The company is rated A++ by Value Line and has a 45% debt to equity ratio.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    BCR .6% 5% 10% 10

    Ind Ave 1.5 10* 26 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    BCR 45% 27% 1 20% A+

    Ind Ave 25 15 NA 14 NA

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

    Chart

    Note: BCR stock made great 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 an uptrend (purple lines). Short term, it is in an uptrend (brown line). The wiggly red line is the 50 day moving average. The Dividend Growth Portfolio owns a full position in BCR (having Sold Half in 2006). The upper boundary of its Buy Value Range is $129; the lower boundary of its Sell Half Range is $190.

    (click to enlarge)

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

    9/14

    News on Stocks in Our Portfolios

    FactSet Research Systems beats by $0.01, beats on revenue

    • FactSet Research Systems (NYSE:FDS): FQ4 EPS of $1.31 beats by $0.01.
    • Revenue of $238.7M (+8.8% Y/Y) beats by $1.8M.

    Economics

    This Week's Data

    August industrial production fell 0.1% versus expectations of a 0.3% increase; in addition, the July number were revised down. Capacity Utilization came in at 78.8 versus estimates of 79.3.

    http://www.calculatedriskblog.com/2014/09/fed-industrial-production-decreased-01.html

    August PPI was flat; in line. PPI, ex food and energy was up 0.1%, also in line.

    Other

    The global impact of a strong dollar (medium):

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11093618/Global-banks-retreat-as-the-US-and-China-tighten-in-lockstep.html

    UK hints at issuing yuan denominated bonds (medium):

    http://www.zerohedge.com/news/2014-09-15/uk-hints-next-reserve-currency-issue-chinese-yuan-denominated-bond

    Politics

    Domestic

    Some good news in healthcare (short):

    http://www.coyoteblog.com/coyote_blog/2014/09/healthcare-deductibles-rising-why-this-is-good-news.html

    International

    EU buying ISIS oil (short):

    http://www.zerohedge.com/news/2014-09-15/petrodollar-panic-eu-officials-admit-buying-oil-isis

    US ignores human rights offenses in Saudi Arabia. I repeat, these guys are not our friends (medium):

    http://www.zerohedge.com/news/2014-09-15/record-beheadings-and-mass-arrest-christians-%E2%80%93-isis-or-saudi-arabia

    It appears that Putin pretty much has what he wants in Ukraine (medium):

    http://www.zerohedge.com/news/2014-09-15/ukraine-presidents-days-numbered-after-broad-accusations-betraying-national-interest

    But it is never over till it's over (medium):

    http://www.zerohedge.com/news/2014-09-16/over-1000-us-nato-troops-begin-military-exercises-ukraine

    Disclosure: The author is long BCR, FDS.

    Sep 16 9:09 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    Even though the S&P had a rough week, uptrends remain well in tact across all timeframes. So there is no reason to question the current uptrend. Further, the Market is in oversold territory; hence a rally is a reasonable expectation. On the other hand, the FOMC meeting as well as the Scottish vote on independence occur this week. Their outcome will likely heavily influence this week's pin action.

    (click to enlarge)

    The long Treasury confirmed the break below the lower boundary of its short term uptrend. It will re-set to a trading range. We now wait until we get a bounce to set the actual lower boundary---I have drawn in two potential candidates (brown lines). TLT also broke below its 50 day moving average. It remains within an intermediate term trading range.

    http://www.advisorperspectives.com/dshort/guest/Chris-Kimble-140913-Junk-Bond-Update.php

    (click to enlarge)

    GLD finished below the lower boundary of its short term trading range on Friday. If it remains there through the close on Tuesday, the short term trend will re-set to down. It ended within its intermediate term downtrend and below its 50 day moving average. Both GLD and TLT seem to be telling us that interest rates are going up.

    (click to enlarge)

    The VIX continues to be of very little help in assessing Market direction.

    (click to enlarge)

    The value of sentiment indicators (short):

    http://www.bloombergview.com/articles/2014-09-12/buying-stocks-based-on-how-other-people-feel

    Fundamental

    Investing for Survival

    Sometimes the smartest thing to do is nothing:

    http://brianportnoy.tumblr.com/post/96977193424/investing-is-a-game-of-inches-nfl-edition

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The September New York Fed manufacturing index was reported at 27.54 versus expectations of 15.9.

    Other

    The latest on Chinese shadow banking losses (medium):

    http://www.reuters.com/article/2014/09/12/us-china-banking-default-idUSKBN0H70BT20140912

    Why the price of oil is dropping (short):

    http://www.zerohedge.com/news/2014-09-12/oil-price-plunge-its-global-economy-stupid

    Italian and Spanish government debt hit record highs (short):

    http://www.zerohedge.com/news/2014-09-12/harsh-austerity-sends-italian-spanish-debt-record-highs

    The problem with Abenomics (medium):

    http://www.zerohedge.com/news/2014-09-14/why-collapse-abenomics-important-its-large-scale-failure-keynesian-stimulus-real-tim

    Politics

    Domestic

    International War Against Radical Islam

    Sep 15 8:49 AM | Link | Comment!
  • The Morning Call---Bonds Continue To Tumble; 'Buy The Dippers' Continue To Buy

    I leave this morning for my annual college pledge class reunion. Nothing tomorrow; back on Monday

    The Market

    Technical

    The indices (DJIA 17049, S&P 1997) had a mixed day (Dow down, S&P up). The S&P remained in uptrends across all timeframes; short term (1941-2142), intermediate term (1904-2704) and long term (762-2014); it also closed above its 50 day moving average. The Dow finished within its short term trading range (16331-17158), its intermediate term trading range (15132-17158), its long term uptrend (5101-18464) and above its 50 day moving average.

    Volume fell; breadth improved. The VIX declined, closing within its short and intermediate term downtrends and below its 50 day moving average.

    The long Treasury was off, finishing below the lower boundary of its short term uptrend for a second day. A close below that trend line today will confirm the break and re-set the TLT short term trend to a trading range. It remained within an intermediate term trading range and above its 50 day moving average.

    GLD fell (again). Intraday, it touched the lower boundary of its short term trading range but bounced off that level. It closed within an intermediate term downtrend and below its 50 day moving average.

    Bottom line: the Averages had a roller coaster day---down in the morning with the 'buy the dippers' showing up in the afternoon and pushing prices roughly back to even. As long as this phenomena continues, it seems reasonable to assume that the Dow will ultimately successfully challenge the upper boundaries of its short and intermediate term trading ranges and then along with the S&P attack the upper boundaries of their long term uptrends.

    Almost all segments of both foreign and domestic bond markets continue to get whacked---a notable exception being US muni bonds. The consensus remains that fear of an earlier than expected move by the Fed to higher interest rates is the driving force. I have no basis for arguing with that thesis. I will just repeat that it feels like something else is stirring beneath the surface; and I have no clue what it is. But it makes me nervous.

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

    Stocks are approaching their sweet spot in the Presidential cycle (short):

    http://blog.stocktradersalmanac.com/post/Four-Year-Cycle-Sweet-Spot-Just-Ahead-SPY-DIA-QQQ

    Fundamental

    Headlines

    Two datapoints were released in the US yesterday: weekly jobless claims were higher than anticipated while the August budget deficit was less than forecast. That jobless number was disappointing but not enough to suggest questioning our outlook.

    That aside, investors continued to focus on:

    1. the Fed meeting next week [***in yesterday's Morning Call, I stated that it was next month. Clearly an error] and the prospects that it will change the language on the timing of an interest rate increase, moving it closer than originally thought. Consensus considers this a necessary move and appears sanguine about its impact on the Markets.

    As you know, I have believed that the tightening process should have begun long before now. However, I am a bit surprised by the relative calm with which it is now being received. Certainly, the end of QEI and QEII were traumatic for the Markets. On the other hand, this subject is being beat to death every day and I am sure that will continue until we read the statement following the FOMC meeting---so there is no surprise here and hence every reason to assume that an earlier rise in interest rates is being well discounted in security prices.

    Admittedly, it is a bit confusing watching bonds get whacked while stocks draw a bid every time there is a down tick. The simplest explanation for this is that the US economy is starting to grow faster---hence, higher interest rates and faster profit growth. But I don't see how that is possible with the rest of the world sinking into recession. As I said above, it seems like something else is going on beneath the surface; I am just not smart enough to know what it is.

    The real problem with higher interest rates (short):

    http://www.zerohedge.com/news/2014-09-11/why-us-interest-rates-can-never-rise-1-chilling-cbo-chart

    1. the EU voted/approved the next round of sanctions on Russia; and Russia wasted no time in responding. Notice how Putin equated the sanctions to a rejection of a peaceful settlement in Ukraine.

    http://www.zerohedge.com/news/2014-09-11/russia-responds-latest-european-sanctions-you-leave-us-no-choice

    Not that any of this matters because the separatists have continued their fight despite the 'cease fire' and have now reached the Crimean border (short):

    http://www.zerohedge.com/news/2014-09-11/ukraine-admits-resurgent-separatists-extend-control-all-way-sea-azov

    1. more hand wringing over the potential impact of a Scottish secession---not just on the Scot and UK economies but also the influence in could have on other secessionist movements in Europe.

    George Soros on the Scottish secession vote (medium):

    http://www.zerohedge.com/news/2014-09-11/george-soros-warns-worst-possible-time-scottish-independence

    1. last and certainly least, Obama's new policy against ISIS. This subject spawned a lot less attention than I would have expected, especially from long time opponents of the regime. But I think that everyone is so over this Guy that they are simply too tired of repeating the same old themes [out of touch, inexperience, lack of concern, naïve, indecisive, etc., etc.], have relegated Him to an early lame duck status and His policies to temporary status quo that will be changed when a new regime takes over.

    David Stockman on Obama's new strategy (medium):

    http://www.zerohedge.com/news/2014-09-11/barack-we-hardly-knew-ye

    The UK and Germany on Obama's new strategy (short):

    http://www.zerohedge.com/news/2014-09-11/obamas-broad-coalition-cracks-uk-germany-wont-support-airstrikes-syria

    Russia on Obama's new strategy (short):

    http://www.zerohedge.com/news/2014-09-11/russia-warns-obamas-two-faced-strategy-syria-will-lead-huge-escalation-middle-east-a

    Bottom line: after early morning weakness, the buyers were back yesterday. This relentless bid under the Market makes it easy to believe that stocks are going higher notwithstanding current geopolitical events, what is transpiring in the global economy, the weakness in the bond markets or current valuations.

    I have a bad feeling about what the bond guys may be discounting; but then, it is nothing specific. So there is nothing on which to hang my concerns other than the same old themes which have been and are presently being ignored. Our Portfolios are prepared for a period of asset re-pricing. Someday it will come; I just don't know when.

    My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

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

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

    It is a cautionary note not to chase this rally.

    This is the first of a two part series on the role that currency valuations are playing in the current market pin action. It is a must read and suggests that stocks are likely to move higher (medium):

    http://www.advisorperspectives.com/dshort/guest/Chris-Puplava-140911-Currencies-Collide-Part-1.php

    Thoughts on Investing from Capital Spectator

    Asset Allocation And The Negative Selection Factor

    Some investors labor under the delusion that the realm of asset allocation and its influences don't apply to their portfolios. At a recent conference, for instance, I found myself in a casual conversation with a fairly wealthy individual who told me that asset allocation was to be avoided at all costs. He talked a good game, but he didn't realize that he could no more escape decisions on asset allocation than he could walk the earth and avoid gravity.

    Consider an investor who picks stocks, one at a time, looking for so-called beaten-down shares that appear to be trading at a discount to book value or some other accounting metric. Let's also assume that the investor invests exclusively in this strategy and holds no other assets. To some eyes, it appears that asset allocation is null and void for this portfolio. But first impressions can be deceiving, and that's true here.

    In fact, holding a portfolio of hand-picked value stocks, each selected with great care, is still an asset allocation choice. An extreme one, but an asset allocation choice nonetheless. Although this investor may think that this strategy has nothing to do with asset allocation, the truth is that he's making a decision to emphasize--in the extreme--a particular equity beta with a specific alpha overlay. Embedded in that choice is a decision to avoid everything else. Assuming that the first decision is the only choice of relevance, and that the second decision has no influence on end results, is to ignore reality.

    Every portfolio strategy is driven by what it holds, and what it avoids. Imagine a world with just two assets, A and B. Let's say that asset A earned 5% per year over a 10-year period while asset B's price remained unchanged over that span. The benchmark for this world, a 50/50 mix of the two assets, earned 2.5%. But if you held one or the other asset in isolation, your return would be 5% or 0%, depending on which asset you picked. Here's the key point, and one that's too often ignored: your return in holding one or the other asset would have changed considerably relative to the 50/50 benchmark because of two factors, not one. That is, earning 5% in this example is a function of choosing to hold the higher-performing asset and sidestepping asset B and its zero return. There's no other way to earn 5% except as a matter of making two decisions, not one.

    The negative-selection factor (NSF) isn't always so stark in terms of outcomes. For a broadly diversified portfolio, NSF's influence may be virtually nil. If your strategy holds all but one of the major asset classes, for instance, NSF isn't likely to be a major influence on risk and return. By contrast, if you hold just one asset class, the NSF influence is potentially huge. Many investors don' think in these terms, focusing instead on what they own and ignoring what they don't. But depending on how a portfolio is structured, the assets avoided may be a substantial influence on the strategy's results. In some cases, what you don't own may be more important than what you own in terms of the end results.

    Asset allocation, in short, applies to every portfolio, no matter how extreme. The implication: you should have compelling reasons for holding a given set of asset classes, but the rule is no less crucial when it comes to avoiding asset classes. Short sellers understand this subtle but crucial point, but it's usually overlooked otherwise.

    Recognized or not, negative influences matter in money management, sometimes a lot. Combine that with the fact that few investors have strong views (if any) about what they don't own and it's clear that this combination can be quite powerful. But in a world where NSF can be a critical driver of results, ignoring this aspect of risk and return can have large and unintended consequences, and not necessarily in your favor.

    No wonder, then, that holding all the major asset classes as a strategy tends to perform competitively against a broad set of actively managed asset allocation strategies. Yes, it's difficult to develop and maintain views on each of the major asset classes, much less their subsets. Even if you managed to stay up-to-date on each asset class, it's still hard to make reliable, high-quality forecasts on a regular basis across such a diverse realm.

    Given all this, it's fair to say that a broadly defined set of asset classes is (still) likely to generate average-to-above-average results through time compared with all the world's attempts at doing better. That doesn't sound like much... until you consider the likely outcome from most investors who try to second guess Mr. Market's asset allocation.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The August US budget deficit was $128.7 billion versus expectations of $130.0 billion.

    August retail sales rose 0.6%, in line; ex autos and gas, they were up 0.5% versus estimates of up 0.4%; July sales were revised up across the board.

    Other

    Quote of the day---the role of the Fed (short):

    http://cafehayek.com/2014/09/quotation-of-the-day-1107.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

    The failures of the Fed (medium):

    http://www.nakedcapitalism.com/2014/09/fed-fails-um-irony.html

    Bloomberg's comfort index (chart):

    http://www.zerohedge.com/news/2014-09-11/how-you-know-time-more-qe-has-come

    Dream weaving at the Bank of Japan (short):

    http://www.zerohedge.com/news/2014-09-11/dollar-yen-pumps-then-dumps-kuroda-punks-algos

    Politics

    Domestic

    International War Against Radical Islam

    Sep 12 9:24 AM | Link | Comment!
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