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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
My company:
Strategic Stock Investments
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Investing for Survival
  • 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!
  • The Morning Call & Subscriber Alert---Bonds Are Still The Story

    The Market

    Technical

    The indices (DJIA 17068, S&P 1995) rebounded yesterday. 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 rose, though it is still at anemic levels; breadth improved. The VIX fell, closing back below its 50 day moving average---a slight plus for stocks. It remained in short and intermediate term downtrends.

    http://www.bespokeinvest.com/thinkbig/2014/9/10/average-stock-declines-from-52-week-highs.html

    The long Treasury declined, finishing below the lower boundary of its short term uptrend. Under our time and distance discipline, if it trades under that trend line through the close on Friday, TLT will confirm the break and re-set to a trading range. It remained within its intermediate term trading range and above its 50 day moving average.

    So TLT appears to be joining other technically weak segments of the fixed income market.

    http://www.crossingwallstreet.com/archives/2014/09/1-2-and-3-year-treasuries.html

    A look at the charts of the two year and five year notes (short):

    http://www.advisorperspectives.com/dshort/guest/Chris-Kimble-140910-Treasury-Yield-Update.php

    This pin action makes no sense if investors are worried about (1) global recession or (2) a significant geopolitical event [Russia/Ukraine or ISIS]. Poor performance of gold backs that up. What would drive both gold and bond prices down (yields up)?

    Fears of a Fed interest rate hike seems like the most logical explanation; and indeed the media/pundits debated all day long about a potential change in Fed language (i.e. moving forward the timing of an interest rate hike) at its meeting in October.

    Could be; although my thinking was that the sluggish economic data flow from the rest of the world would give the Fed pause because of the potential spill over effect on the US economy. Don't get me wrong. If the Fed starts raising interest rates sooner than expected, I am good with that. I just wouldn't expect it given Yellen's dovish proclivities.

    In any case, the pin action in the bond market is causing some confusion, calling into question the global QE forever thesis among the stock guys. I don't know how this works out; and that has the yellow Market light flashing.

    http://www.zerohedge.com/news/2014-09-10/why-rates-will-stay-low-or-what-happens-when-you-cry-recovery-5-years-row

    As I noted above, GLD was down (again). It is very near the lower boundary of its short term trading range, is well within an intermediate term downtrend and is below its 50 day moving average.

    Bottom line: the Averages bounced back yesterday from a modestly oversold condition, showing us that the bid under the Market remains firm. Despite a growing number of divergences, the facts that the Averages remain out of sync and the Dow has been unable to successfully challenge the upper boundaries of its short and intermediate term trading ranges, this momentum seems strong enough to push the DJIA through the upper boundaries of its short and intermediate term trading ranges. The only thing that could prevent that from happening being that the bond market is indeed starting to discount something untoward that the rest of us just aren't seeing.

    That aside, it seems likely that the indices will attack the upper boundaries of their long term uptrends but with even odds at best that this challenge will be successful.

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

    Fundamental

    Headlines

    Yesterday's US economic data were slightly negative: weekly mortgage and purchase applications were down and wholesale inventories fell. The bright spot being that wholesale sales increased. Not great news but nothing damaging to our forecast.

    As I noted above, there was a lively discussion in the media about a potential change in Fed language (policy) viz a viz tightening at the upcoming FOMC meeting in October. What spawned the debate were comments by CNBC economist Steve Leisman. I have never considered him a great Fed policy forecaster; so I am not sure how much credence to afford it. Certainly the bond market acted there was a high probability that this might occur. For the moment, I am on the sidelines on this issue.

    The rest of the news flow consisted of more hand wringing over the Russia/EU/Ukraine conflict/sanctions and the possible Scottish secession from the UK. Here is the latest:

    More on the potential consequences of Scottish secession (medium):

    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100028065/credit-suisse-warns-of-grave-deflationary-shock-for-scotland/

    And (medium):

    http://www.minyanville.com/business-news/politics-and-regulation/articles/social-mood-weak-social-mood-vote/9/10/2014/id/55721

    `Russian retaliation to EU sanctions begins (medium):

    http://www.zerohedge.com/news/2014-09-10/russian-retaliation-begins-gazprom-limiting-eu-gas-cuts-poland-supplies-20-past-two-

    Plus:

    http://www.zerohedge.com/news/2014-09-10/putin-head-military-industrial-commission-sees-nuclear-deterrence-top-task

    ***overnight, Chinese PPI and CPI came in below expectations.

    Bottom line: the buyers were back yesterday as they have been for the last four years; so my scenario of the Dow re-setting its short and intermediate term trends to up and both indices challenging the upper boundaries of their long term uptrends appears to be on track. That said, I am confused about the current pin action in the bond market; and I think that it could be portending a potentially negative exogenous event---the operative word being 'confused'.

    Of course, our Portfolios are set for a sell off. So being confused is not the same thing as being worried about the integrity of our Portfolios' principle.

    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.

    What is happening with Dr. Copper? (medium):

    http://www.advisorperspectives.com/dshort/guest/Shedlock-140910-World-Growth.php

    Subscriber Alert

    As part of our ongoing research process, our holdings in the oil industry were reviewed this week. Two of our holdings: (1) Murphy Oil (NYSE:MUR) in the Dividend Growth Portfolio and (2) Holly Frontier (NYSE:FTO) in the Aggressive Growth Portfolio failed to meet the minimum fundamental criteria for inclusion in their respective Universes. Accordingly, both companies are being Removed from those Universes and both stocks will be Sold at the Market open.

    In addition, our ETF Portfolio will Sell roughly 10% of its long bond position.

    Investing for Survival

    Great 11 minute video with Howard Marks discussing market risk.

    http://www.ritholtz.com/blog/2014/09/howard-marks-explains-risk-assessment-market-strategy/

    Company Highlights

    VF Corporation is the world's largest apparel maker and distributor. It is a leader in jeanswear, sportswear, imagewear and workwear. Its brands include Lee, Wrangler, Jansport, Nautica, The North Face, Vans, Napaplin, Timberland, Kipling and Reef. The company has grown its profits and dividend at a 12-13% rate over the last 10 years earning a 15-20% return on equity. It has raised its dividend every year for the last 20 years. Despite tough conditions in many of its product categories in 2009, management negotiated this period with barely a hiccup and set the company on a course to continue to grow earnings by:

    (1) the strength of VFC's brand management strategy provides a competitive advantage with regard to distribution as well as benefiting it tough economic periods,

    (2) its long history of manufacturing and engineering expertise produces cost and service benefits,

    (3) margin expansion,

    (4) international expansion.

    Negatives:

    (1)its large international business exposes it to the vagaries of foreign laws and regulations as well as currency fluctuations,

    (2)intense competition,

    (3)a customer base that remains sensitive to economic conditions.

    VFC is rated A by Value Line, has a 20% debt to equity ratio and its stock yields 1.7%. Its strong cash flow should allow for increasing its dividend, stock buy backs and acquisitions.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    VFC 1.7% 16% 33% 10

    Ind Ave 1.2 10 24 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    VFC 20% 22% 1 12% A

    Ind Ave 31 16 NA 9 NA

    Chart

    Note: VFC stock made great progress off its November 2008 low, quickly surpassing the downtrend off the July 2007 high (straight red line) and the November 2008 trading high (green line). Long term, it is in an uptrend (blue lines). Intermediate term it is an uptrend (purple lines). Short term it is in a trading range (brown line). The wiggly red line is the 50 day moving average. The Dividend Growth and High Yield Portfolios own 50% positions in VFC, having Sold Half in early 2012. The upper boundary of its Buy Value Range is $18; the lower boundary of its Sell Half Range is $44.

    (click to enlarge)

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

    9/14

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    July wholesale inventories rose 0.1% versus expectations of +0.5%; the good news was that wholesale sales increased 0.7%.

    Weekly jobless claims rose 11,000 versus estimates of a 2,000 decline.

    Other

    Income growth over the last four years (short):

    http://www.thereformedbroker.com/2014/09/10/chart-o-the-day-the-simplest-yet-most-important-fact/

    The Bank of Japan is now buying Japanese government bonds at negative yields (short):

    http://www.zerohedge.com/news/2014-09-09/historic-first-bank-japan-monetizes-debt-negative-rates

    A lesson the US could learn from Japan (medium):

    http://news.investors.com/ibd-editorials-brain-trust/090914-716668-japans-keynesian-stimulus-has-failed-to-revive-growth-for-30-years.htm

    Politics

    Domestic

    International

    Disclosure: The author is long VFC, MUR, HFC.

    Sep 11 8:52 AM | Link | Comment!
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