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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

    The Closing Bell

    1/24/15

    Statistical Summary

    Current Economic Forecast

    2013

    Real Growth in Gross Domestic Product: +1.0-+2.0

    Inflation (revised): 1.5-2.5

    Growth in Corporate Profits: 0-7%

    2014 estimates

    Real Growth in Gross Domestic Product +1.5-+2.5

    Inflation (revised) 1.5-2.5

    Corporate Profits 5-10%

    2015 estimates

    Real Growth in Gross Domestic Product +2.0-+3.0

    Inflation (revised) 1.5-2.5

    Corporate Profits 5-10%

    Current Market Forecast

    Dow Jones Industrial Average

    Current Trend (revised):

    Short Term Uptrend 16450-19222

    Intermediate Term Uptrend 16479-21634

    Long Term Uptrend 5369-18960

    2014 Year End Fair Value 11800-12000

    2015 Year End Fair Value 12200-12400

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Uptrend 1909-2290

    Intermediate Term Uptrend 1734-2448

    Long Term Uptrend 783-2083

    2014 Year End Fair Value 1470-1490

    2015 Year End Fair Value 1515-1535

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 49%

    High Yield Portfolio 54%

    Aggressive Growth Portfolio 51%

    Economics/Politics

    The economy is a modest positive for Your Money. The US economic data this week was sparse but weighed to the plus side: positives---weekly mortgage applications, December housing starts and existing home sales, December leading economic indicators, weekly retail sales and weekly jobless claims; negatives---weekly (home) purchase applications, December building permits and the January flash manufacturing PMI; neutral---none.

    The overall volume of positive indicators supports our forecast; although I don't see anything earthshaking in these numbers. To be sure, the housing data is significant but, in total, it contained both good and bad news. The only standout stat was the leading economic indicators which is a big plus. On the other hand, the disappointing earnings or guidance announcements continued though they did moderate a tad. Of course, it is early in the earnings season, so this trend could be easily reversed. But it is still a phenomena that hasn't occurred in seven years. Could it be a microeconomic precursor to negative macroeconomic data? It could but, as I said, it is too early to know. Nonetheless, it is enough to keep the flashing yellow light going after last week's discouraging retail sales and industrial production numbers.

    The other big news came from overseas, to wit, Draghi finally delivering on the promise of an EU QE. He was joined in his QE quest by the central banks of Canada, Denmark, Turkey and China. Not that these efforts will accomplish any more, economically speaking, than the US or Japanese versions. Regrettably, now that QE is all encompassing, it may set up a mad dash of competitive devaluations, which is not likely to end well. Nevertheless, the hope (which always springs eternal) among investors is that it will keep asset bubble party going.

    While there was other discouraging developments oversea (see below), nothing has yet impacted US macroeconomic data. Hence for the moment, our outlook remains the same but with a bit less conviction (flashing yellow light) and the primary risk (the spillover of a global economic slowdown) remains just so.

    Our forecast:

    'a below average secular rate of recovery resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with an impaired balance sheet, and a business community unwilling to hire and invest because the aforementioned, the weakening in the global economic outlook, along with...... the historic inability of the Fed to properly time the reversal of a vastly over expansive monetary policy.'

    The pluses:

    (1) our improving energy picture. To date, there is no solid evidence about whether lower oil prices are good or bad for the overall economy. All we really have is the narrative from both sides of the argument. True, some microeconomic problems are quite visible---declining revenues, lower employment, declining capex---within the oil and oil service industries. But there is nothing indicating an impact that will alter the direction or growth rate of the economy.

    As you know, my concern is the magnitude of subprime debt from the oil industry on bank balance sheets and the likelihood of a default. Here too there is nothing substantial; just speculation about the potential danger.

    Speaking of which, this from Goldman (medium):

    http://www.zerohedge.com/news/2015-01-23/these-shale-companies-will-file-bankruptcy-first-goldmans-best-and-worst-shale-matri

    So until we can definitely say that lower oil prices are bad for the economy overall, I am leaving this factor as a positive. However, I am not going to stop worrying about the negative case, in particular, the extent of bank lending to the subprime sector of the oil industry.

    The negatives:

    (1) a vulnerable global banking system. The only potentially negative occurrence this week was the default of a major Chinese real estate developer. There is no direct evidence that this could be disruptive to the Chinese banking system; although, the Bank of China did make a large infusion into the financial system on Wednesday.

    Another conceivable headache could be awaiting us as the Greek elections take place tomorrow. The party currently leading in the polls has made a whole host of unsettling campaign promises not the least of which is to withdraw from the EU and refuse to honor Greek debts. Of course, the operative words are 'campaign promises'; and we know that there is an enormous gap between what politicians promise and what they do. Nonetheless, if the new group plays hardball, it could have a troublesome effect on those entities holding Greek debt/liabilities [like the 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 big [?] news here was Obama's state of the union address and all the new policy initiatives that He announced. Of course, the whole thing was DOA and hence lacks any significance except that it once again shows Obama as an ideologue and not a politician willing to compromise.

    (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.

    Well, we got a snoot full of QE this week, as the ECB along with Denmark, Turkey and Canada joined the stampede to easier money and China injected funds into its banking system.

    On the surface, my eight year old grandson knows that QE has done nothing to stimulate either inflation or growth in any country that has tried it. However, the theory is, at least for the growth part, that more money will stimulate increased bank lending and depreciate [more supply = lower prices] of the country's currency making its products cheaper versus the competition. The problem, of course, is that when everyone does it, it doesn't work. And right now it appears that everybody's doin' it, doin' it, doin' it.

    http://www.zerohedge.com/news/2015-01-22/euro-crashes-12-year-lows-and-now-us-commerce-secretary-starts-grumble-about-strong-

    But back to the ECB QE for the moment, I am on record that Draghi really couldn't match the size of US or Japanese efforts [though the results, i.e. nothing, were a given]. Clearly, he is trying or, at least, says that he is trying to equal their programs; although we are still a little short of details. Nonetheless, we should know more in the coming days; and if Draghi is not fading us and Germany goes along, then I am going to be wrong on this call. I will, however, stand by my statement that it is likely to be no more effective than the US or Japanese versions.

    David Stockman on ECB QE (medium):

    http://www.zerohedge.com/news/2015-01-22/now-begins-greatest-heist-bernanke-bailed-out-wall-street-september-2008

    (3) geopolitical risks. Violence in Ukraine erupted again this week with all parties pointing fingers while the shooting continued. In addition, ISIS rebels have overthrown the government of Yemen---the importance being that the US has a huge drone program resident in Yemen. The point here being that both situations contain potentially explosive elements that could suddenly have negative global geopolitical implications.

    Update from Ukraine (medium):

    http://www.nakedcapitalism.com/2015/01/poroshenko-makes-battle-donetsk-airport-precondition-new-50-billion-bailout-ukrainians-repelled-battle-davos.html

    Putin's position (medium):

    http://www.bloomberg.com/news/2015-01-22/putin-said-to-shrink-inner-circle-as-ukraine-hawks-trump-tycoons.html

    (4) economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. There was little economic data from the rest of the world this week though the IMF did downgrade its outlook for global growth in 2015 and 2016.

    More important, (1) the continuing decline in oil prices keeps alive worries regarding their ultimate impact on the global economy; though I reiterate nothing has happened to date to give flesh to any of those concerns and (2) the Greek election on Sunday brings the potential for a Greek withdrawal from the EU and defaulting on their debts to the center of the table. However, I don't have a clue regarding the potential ripple effects. That said, it is a risk that can't be ignored.

    My point in all this is that the aggregate risks incorporated in a faltering global economy I believe is the biggest threat to our own economic health.

    Bottom line: there was too little US economic news this week to have much bearing on our forecast. However, I think that the continuing trend of disappointing corporate earnings reports should be viewed as a potential threat to our outlook---potential being the operative word. The good news is that there is still nothing to suggest that any negative fallout from a slowing world economy is at our door.

    The QE dreamweavers received more good news this week from the ECB, Canada, Denmark and Turkey. Ignoring for the moment the fact that there is little evidence to substantiate QE as a workable policy, with virtually all the global central banks, large and small, now pursuing the same easy money/currency devaluation initiatives, the question is how are they going to accomplish anything positive relative to other nations? They are not, I think. What they will do though is keep the speculators, hedge funds and carry traders well supplied with cash to keep the current asset bubble expanding.

    The key event to which to pay attention is now the Greek elections and the economic/political fallout that could occur as a result. I have no idea what that will be but it almost certainly contains the risk of disrupting the EU banking system.

    This week's data:

    (1) housing: the National Association of Homebuilders' January index was flat; weekly mortgage applications rose but purchase applications fell; December housing starts increased, but permits were down; December existing home sales were up, in line.

    (2) consumer: weekly retail sales were up; weekly jobless claims fell,

    (3) industry: the January flash manufacturing PMI was slightly below expectations,

    (4) macroeconomic: the December leading economic indicators were ahead of estimates.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 17672, S&P 2051) had another highly volatile week, destroying that pennant formation that I had been watching but still closing within uptrends across all timeframes: short term (16450-19222, 1909-2290), intermediate term (16479-21634, 1734-2448) and long term (5369-18860, 783-2083). For the moment, the only resistance/support levels that I am watching other than the boundaries of the aforementioned uptrends is the former all time highs (17986/2080) (resistance) and the mid December low (17288/1970) (support).

    Volume was down on Friday; breadth deteriorated. The VIX advanced slightly, but confirmed the break of its very short term uptrend. It also bounced off its 50 day moving average and remained within its short term trading range and intermediate term downtrend.

    The long Treasury bounced back above the lower boundary of its very short term uptrend, negating Thursday's break. It finished within the remaining uptrends across all timeframes and well over its 50 day moving average. If last Thursday was the best that we are going to get by way of consolidation, then TLT clearly retains a very strong underlying bid.

    In a stab at much needed consolidation, GLD was off slightly but remained within its very short term uptrend, above the upper boundary of its short term uptrend, within the intermediate term trading range and above its 50 day moving average. If this decline remains above the lower boundary of its short term uptrend, then any bounce will likely prompt buying by our Portfolios.

    http://www.zerohedge.com/news/2015-01-23/what-gold-does-currency-crisis-euro-edition

    Bottom line: the Market's new found volatility continued this week. It has been wild and woolly enough that it makes sense of widen our perspective particularly the distance element of our discipline. So my focus is on the boundaries of the indices' uptrends as well as the former high and mid-December low.

    GLD is behaving very much like a bottom has been made. I want to wait for the first downturn to see how that consolidation plays out. If it holds trend boundaries, then it will be time to Buy.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (17672) finished this week about 48.1% above Fair Value (11933) while the S&P (2051) closed 38.3% overvalued (1483). 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.

    As a result of this week's data/events, the overall investment picture remains cloudy. While the reported economic data provided little guidance, we have to assume that the US economy continues its sluggishly improvement. The lousy earnings reports from last week got a respite mid-week then continued with a vengeance on Friday with disappointments from UPS and Kimberly Clark. I remain hesitant to extrapolate this trend. Clearly, we are still in the beginning stage of this earnings season; so anything can happen. But I am worried that the inauspicious beginning of this season may portend headwinds arising from (1) global economic weakness and (2) the near universal acceptance of currency devaluation [QE] and the negative impact that will likely have on the foreign profits of US companies.

    Overseas, there was little economic information, though the IMF did lower its global economic growth expectations for 2015 and 2016. However, there was no shortage of international developments. QE led the list. Not just the long anticipated ECB QE; but a land rush of other central banks climbing on the QE bandwagon: Canada, Denmark, Turkey and to a lesser extent China.

    My problem is that I have yet to hear one of the dreamweavers point to one example of QE success in creating jobs and economic growth as a rationale for their action. Rather, these steps seem aimed at competitive devaluations which unfortunately only work when you are the only one doing it. Now that virtually everyone is doing it, it looks the mirror image of the 1920's Smoot Hawley tariffs which were enacted to accomplish the same objective---beggar thy neighbor. I have no clue how this plays out; but when everyone is trying to punch their neighbor in the mouth, I can't imagine the outcome being all that good.

    As if that weren't enough, (1) oil prices continue to fall---another trade related result of a weapon [overproduction] being wielded by Saudi Arabia, (2) the US backed government in Yemen [a major US drone base] has been overthrown by an Iranian sponsored rebel group, (3) the Greeks vote on Sunday for a new government. Ahead in the polls is a party that has threatened to exit the EU and default on its debt. While some of that may be political rhetoric, it still poses potential problems to the EU financial system and (4) the Russians and Ukrainians are at it again. Like so much of the above, no one can project how this situation ultimately gets resolved. But we do know that the cutting off of oil to Europe is among the possible outcomes. Of course as I observe every week, so far none of these negatives have showed up in the numbers---and may never. But the risks are still there.

    However, even if none of these prospective negatives materialize, valuations are still stretched to extremes and the risk/reward equation at current prices levels makes no sense.

    Bottom line: the assumptions in our Economic Model haven't changed though the yellow light is flashing. In addition, the risk to our global 'muddle through' scenario is greater than ever as a result of the continuing decline in oil prices, disruptions in the global monetary system and a potential Greek exit from the EU.

    The assumptions in our Valuation Model have not changed either. I remain confident in the Fair Values calculated---meaning that stocks are overvalued. As a result, our Portfolios maintain their above average cash position. Any move to higher levels would encourage more trimming of their equity positions.

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

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

    DJIA S&P

    Current 2015 Year End Fair Value* 12300 1525

    Fair Value as of 1/31/15 11933 1483

    Close this week 17672 2051

    Over Valuation vs. 1/31 Close

    5% overvalued 12529 1557

    10% overvalued 13126 1631

    15% overvalued 13722 1705

    20% overvalued 14319 1779

    25% overvalued 14916 1853

    30% overvalued 15512 1927

    35% overvalued 16109 2002

    40% overvalued 16706 2076

    45%overvalued 17302 2150

    50%overvalued 17899 2224

    Under Valuation vs. 1/31 Close

    5% undervalued 11336 1408

    10%undervalued 10739 1334 15%undervalued 10143 1260

    * Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term cyclical influences. The model is now accounting for somewhat below average secular growth for the next 3 to 5 years with somewhat higher inflation.

    The Portfolios and Buy Lists are up to date.

    Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.

    Jan 24 11:03 AM | Link | Comment!
  • The Morning Call--The QE Crowd Gets Another Fix

    The Market

    Technical

    Another day of high volatility. Yesterday, the indices (DJIA 17813, S&P 2063) soared, closing within uptrends across all timeframes: short term (16450-19222, 1907-2888), intermediate term (16472-21627, 1734-2448) and long term (5369-18860, 783-2083).

    In the last week's trading, the pin action has destroyed those developing pennant formations, penetrating both boundaries. So I am scratching them as Market guideposts. Aside from the boundaries of the major trends, the only other resistance/support levels are the all-time closing highs (17986, 2080) on the upside and the mid December lows (17288, 1970) on the downside.

    Volume was up; breadth improved. The VIX plunged 13%, ending below the lower boundary of its very short term uptrend (a finish below this trend today will confirm the break), within a short term trading range, an intermediate term downtrend and right on its 50 day moving average. While supportive of yesterday's stock market moon shot, its trading was much less decisive than that of the overall market.

    The long Treasury took another hit, closing below the lower boundary of its very short term uptrend (a finish below this boundary today will confirm the break) but within uptrends across all other timeframes and above its 50 day moving average. The much needed consolidation of TLT seems to have begun. More consolidation.

    GLD rose again, closing in a very short term uptrend, a short term uptrend and an intermediate term trading range and above its 50 day moving average. I continue to await some consolidation before starting to nibble.

    Bottom line: the powerful intraday volatility continues. As I noted yesterday, such erratic behavior argues that I dismiss most of the interday movements as offering little technical guidance. So right now, the focus is on the uptrends as well as the most recent discernable support (the mid December lows) and resistance (the former all-time closing highs) levels.

    Both the TLT and GLD have been on a sizz and need consolidation---which the long Treasury is now getting. A similar move in GLD will likely precipitate some buying in our Portfolios.

    Bull and bear market durations (short):

    http://www.ritholtz.com/blog/2015/01/bull-and-bear-market-durations/

    Fundamental

    Headlines

    The dearth of US economic stats continued with only a single datapoint reported yesterday---weekly jobless claims which fell more than anticipated. Again nothing.

    Of course, the big news was the new ECB QE which was structurally in line with the rumors that I reported on Wednesday but of a somewhat larger size. It seems likely that Draghi or one of his lackeys leaked the E50 billion a month figure knowing that E60 billion would be an upside surprise and make the QE lemmings wee wee in their pants---and he nailed it. Since a 1.5% move up in the Averages says all we need to know about how positively investors interpreted the new ECB QE, I include the below as a counterpoint"

    This from Peter Boockvar---finally the details (short):

    http://www.ritholtz.com/blog/2015/01/finally-the-details/

    And from the Reformed Broker---so what? (medium):

    http://thereformedbroker.com/2015/01/22/worlds-most-reluctant-stimulus-program-gets-underway/

    Beyond the 'QE hasn't worked for anyone else' argument, here are some specific problems that might impact the efficacy of ECB QE (medium):

    http://www.zerohedge.com/news/2015-01-22/here-are-negatives-todays-ecb-qe-announcement

    Investor implications of ECB QE (medium):

    http://www.merkinvestments.com/insights/2015/2015-01-21.php

    And like our own QE, the new ECB QE will likely provide cover for no fiscal reform---which is what is really needed (medium):

    http://www.zerohedge.com/news/2015-01-22/what-reforms-hours-after-ecbs-qe-announcement-french-government-fails-reach-job-crea

    ***overnight, the December Chinese manufacturing PMI was up more than expected.

    Bottom line: we now have the most long promised economic plan in world history and the investment universe once again reacted with euphoria (no 'sell the news' it). I heard no one on CNBC discuss the fact that QE hasn't worked in the US or Japan. I didn't hear any analyst say that the most visible response to ECB QE will be a weak euro (strong dollar) and that will hurt foreign profits of US companies (1) something we don't need more of, given the recent string of lousy earnings reports and (2) in particular if investors insist on giddily marking up US equity valuations.

    I repeat my conclusion from yesterday's Morning Call: 'However, even if we get the best outcome that we can hope for---meaning Europe avoiding a recession and just muddling through at a lesser growth rate than the US---that is the assumption plugged into our Models. In short, we have the best case scenario in our Valuation Model and stocks are still extremely overvalued.'

    EU equity valuations (short):

    http://www.zerohedge.com/news/2015-01-22/here-driver-behind-european-stock-surge-hint-not-earnings

    Deflation is a problem for all central banks (medium):

    http://streettalklive.com/index.php/blog.html?id=2577

    Thoughts on Investing from Larry Swedroe

    It's well documented in the academic research on stock returns that value stocks have outperformed growth stocks. And we see the higher returns to value stocks in almost all countries. And not only has value outperformed growth, but the persistence of its outperformance has been greater than the persistence of stocks outperforming bonds.

    When implementing a value strategy, many different metrics can be used. Among the most common are price-to-earnings, price-to-sales, price-to-book value, price-to-dividends and price-to-cash flow. All the various approaches produce results showing that value stocks have had higher returns than growth stocks. And the various measures produce similar results, with the weakest results coming from the use of the dividend-to-price ratio.

    Given the similarity in results, the price-to-book ratio has been used the most because book value is more stable over time than the other metrics. That helps keep portfolio turnover down, which in turn keeps trading costs down and tax efficiency higher.

    Recently, some passively managed funds have moved away from the single-screen metric, as their research indicates that using multiple screens produces better results. Bridgeway and Vericimetry are two examples of fund families that have adopted this approach. In addition, the funds based on the RAFI indexes also use multiple screens (sales, earnings, dividends and book value).

    In other words, the search for the best metric to use when implementing a value strategy continues.

    To help us out, let's look at what the authors of the 2012 study "Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years," found. They covered the 40-year period 1971-2010 examined the returns to a variety of value metrics:

    · Earnings to Market Capitalization (E/M)

    · Earnings before interest and taxes and depreciation and amortization to total enterprise value (EBITDA/TEV). (Total enterprise value is defined as market capitalization + short-term debt + long-term debt + preferred stock value - cash and short-term investments.)

    · Free cash flow to total enterprise value (FCF/TEV)

    · Gross profits to total enterprise value (GP/TEV)

    · Book to market (B/M)

    · Forward earnings estimates to market capitalization (FE/M)

    Following is a brief summary of their findings:

    · Alternative valuation metrics such as EBITDA/TEV, GP/TEV and FCF/TEV provide economically and statistically significant alphas; that is, returns after adjusting for exposure to the risks of stocks overall-small and value alike.

    · EBITDA/TEV is the best valuation metric to use as an investment strategy relative to other valuation metrics. The returns to an annually rebalanced equal-weight portfolio of high EBITDA/TEV stocks earned 17.7 percent a year. They also produced a three-factor alpha of 2.9 percent.

    · Cheap E/M stocks (value stocks) earned 15.2 percent a year, but showed no evidence of alpha after controlling for market, size and value exposures.

    · The academic favorite, book-to-market (B/M), tells a similar story as E/M, and earns 15.0 percent for the cheapest stocks, but with no alpha (not surprising, as value as measured by B/M is one of the factors).

    · FE/M is the worst-performing metric by a wide margin.

    · When they analyzed the spread in returns between the cheapest and most expensive stocks, EBITDA/TEV is the most effective measure. The lowest-quintile returns based on EBITDA/TEV return 8.0 percent a year versus the 17.7 percent for the cheapest stocks. Using E/M, the spread is 5.8 percent-9.4 percent for the expensive quintile and 15.2 percent for the cheap quintile.

    · There is weak evidence that FCF/TEV can identify overvalued stocks, as the -2.0 percent alpha on the most expensive FCF/TEV quintile shows.

    · There is little evidence that a particular value strategy outperforms other metrics during economic contractions and expansions.

    The authors also examined the hypothesis offered by proponents of long-term valuation metrics that "normalizing" earnings decreases the noise of the valuation signal and therefore increases the predictive power of the metric. Shiller's PE10 (averages earnings over 10 years) is a commonly used metric. They found little evidence that normalizing the numerator for a valuation metric has any ability to predict higher portfolio returns. If anything, the evidence suggests that the one-year valuation measure is superior to normalized metrics.

    The authors concluded: "The evidence suggests that EBITDA/TEV has historically been the best-performing valuation metric based on a variety of analyses."

    It will be interesting to see if the latest research gets incorporated into investment strategies.

    News on Stocks in Our Portfolios

    ·
    Rockwell Collins misses by $0.02, beats on revenue

    o Rockwell Collins (NYSE:COL): FQ1 EPS of $1.10 misses by $0.02.

    o Revenue of $1.23B (+17.1% Y/Y) beats by $10M.

    |7:34 AM

    Kimberly-Clark misses by $0.02, misses on revenue

    o Kimberly-Clark (NYSE:KMB): Q4 EPS of $1.35 misses by $0.02.

    o Revenue of $4.83B (-1.4% Y/Y) misses by $80M.

    Economics

    This Week's Data

    Other

    More on global income inequality (short):

    http://pragcap.com/more-on-falling-global-income-inequality

    Politics

    Domestic

    International

    Yemen's US backed government resigns (short):

    http://www.zerohedge.com/news/2015-01-22/yemens-us-backed-government-president-resigns

    Ukrainian forces abandon Donetsk airport (short):

    http://www.zerohedge.com/news/2015-01-22/its-just-tactical-withdrawal-ukraine-forces-abandon-contested-donetsk-airport

    Disclosure: The author is long COL, KMB.

    Jan 23 9:08 AM | Link | Comment!
  • The Morning Call---Draghi Finally Delivers

    The Market

    Technical

    The huge intraday swings continue; but still the indices (DJIA 17515, S&P 2022), closed up only modestly and remained within uptrends across all timeframes: short term (16443-19215, 1905-2886), intermediate term (16464-21619, 1732-2446) and long term (5369-18860, 783-2083).

    The Averages finished back above the lower boundary of those pennant formations, suggesting that last Wednesday/Thursday's plunge was a false flag. In addition, the S&P closed right on the upper boundary of its pennant pattern. If that barrier is successfully breached it makes moot the question over whether the lower boundary was effectively broken.

    Volume fell; breadth improved. The VIX was down, remaining within a very short term uptrend, a short term trading range, an intermediate term downtrend and above its 50 day moving average.

    The long Treasury took a hit, ending on the lower boundary of its a very short term uptrend, back below the upper boundary of its short term uptrend above the upper boundary of its intermediate term uptrends, within its long term uptrend and above its 50 day moving average. The much needed consolidation of TLT seems to have begun. http://blog.stocktradersalmanac.com/post/Bonds-Are-the-Most-Overvalued-Asset-Class-SPY-TLT

    GLD rose again, closing in a very short term uptrend, a short term uptrend and above the upper boundary of its intermediate term downtrend for the fourth day. Under our time and distance discipline, the intermediate term trend re-sets to a trading range. This chart looks more and more like a bottom. However, while it certainly appears that a bottom has been made, the winning streak GLD has been long enough with sufficient magnitude that some consolidation seems almost inevitable. When that occurs, our Portfolios will likely start to nibble.

    Bottom line: this volatility is giving me a headache. Last year's relative stability made trend tracking reasonably easy. However, if the Market is entering into a period of wider swings, it may take a longer time or greater distance parameters in our discipline to confirm a trend 'break'. At the moment, the most important observation is that the indices are in uptrends across all timeframes. Until one of these trends is successfully violated, the current volatility makes confident assertions about the very short term trend difficult and of limited technical significance.

    On the other hand, GLD has busted trends in two timeframes, making it likely that a change in direction in gold has occurred. However, I want to see some consolidation and a test of the newly re-set trends before re-establishing a position.

    Fundamental

    Headlines

    Yesterday's US economic news was mixed: weekly mortgage applications were up but purchase applications were down, December housing starts were up but building permits were down and weekly retail sales were up. I don't think these stats do anything to alter our forecast.

    Though falling lumber prices can't be a great sign for housing (short):

    http://www.zerohedge.com/news/2015-01-21/most-economically-correlated-commodity-flashing-red

    There was a lot of media time and space dedicated to Obama's state of the union address. However given its lack of import on future policy, it deserves to be ignored---which I will.

    We also made it through a day without a negative earnings report/guidance from a major player. Noise or a change in trend?

    Once again though investor attention was focused overseas and in particular on today's ECB meeting and its widely anticipated QE announcement. In fact, during the day, the WSJ reported that the new program would entail the ECB buying E50 billion in bonds each month over the next two years. That pumped up Market enthusiasm; though it seems likely that the response to the QE news would be in yesterday's pin action not today's.

    http://blog.yardeni.com/2015/01/will-qe-work-for-ecb-excerpt.html

    ***Draghi just announced the ECB's new program that involves the purchase of E60 billion of investment grade debt per month through September 2016 and it left interest rates unchanged. So on the surface, this appears to be a larger asset purchase program than rumored yesterday. However, the purchase program includes two other programs already in existence, so the net new purchases will be less than E60 billion.

    Former BIS chief discusses ECB QE (medium and a must read):

    http://www.telegraph.co.uk/finance/economics/11358316/Central-bank-prophet-fears-QE-warfare-pushing-world-financial-system-out-of-control.html

    Elsewhere:

    (1) the Bank of Canada climbed on the QE wagon (short):

    http://www.zerohedge.com/news/2015-01-21/are-central-bankers-losing-plot

    (2) the Bank of Japan announced that it would hold off expanding QE further, even though it reduced its inflation outlook. Since the primary goal of the Japanese QE was to get inflation up, it leaves me scratching my head---unless the Japanese have finally figured out that QE was doing zero, zilch, nada to raise inflation or more importantly the country's level of economic activity. Now that is a scary thought,

    (3) and the Greek election draws ever closer,

    http://www.zerohedge.com/news/2015-01-21/greece-numbers

    ECB turns a cold shoulder to Greece (4 minute video):

    http://www.nakedcapitalism.com/2015/01/ecb-cold-shoulders-greece-qe.html

    The Greek bail out programs are not working and here is why (medium):

    http://www.zerohedge.com/news/2015-01-21/greeces-bailout-programs-are-not-working

    ***overnight in other news China injects $8 billion into its banking system.

    http://www.zerohedge.com/news/2015-01-21/kaisa-default-contagion-chinas-245bn-corporate-bond-market-too-complacent

    Bottom line: we now have the new Draghi plan though not all the details. In any case, he has at last put his money where his mouth has been. That said, the question is, will it work? Based the US and Japan's experience, it seems not bloody likely. However, even if we get the best outcome that we can hope for---meaning Europe avoiding a recession and just muddling through at a lesser growth rate than the US---that is the assumption plugged into our Models. In short, we have the best case scenario in our Valuation Model and stocks are still extremely overvalued.

    Asset allocation among top money managers (medium):

    http://news.morningstar.com/articlenet/article.aspx?id=680586&pgid=rss

    Investing for Survival

    Leverage can kill (short):

    http://pragcap.com/leverage-can-kill

    ETF Highlight

    Nuveen Premium Income Muni 2 seeks current income exempt from regular federal income tax. The secondary investment objective is the enhancement of portfolio value.

    The fund invests approximately 93% of its assets in bonds and may be considered for investors seeking a Municipal - National strategy. NPM has returned an annual rate of 6.10% since inception. More recently, the fund has generated a total return of 7.25% in the last five years, 4.32% in the last three years, and 19.18% in the last year. In the last five years, it has outperformed 58% of its peers. It has also outpaced 40% of its competitors on a three year basis and 90% of them over the last year for the period ending 11/30/2014. On a year to date basis, NPM has returned 16.90%. Downside risk has been below average.

    This fund has a three year standard deviation of 10.3% and has had a low level of volatility in its monthly performance over the last 36 months. As NPM is a closed end fund, it has no front end or back end load. The ETF Portfolio owns a full position in NPM.

    (click to enlarge)

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    Weekly jobless claims fell 10,000 versus expectation of down 16,000.

    Other

    Bank lending surges (medium):

    http://scottgrannis.blogspot.com/2015/01/bank-lending-surges-another-sign-of.html

    Politics

    Domestic

    Gross disparities in achievement (short):

    http://www.aei.org/publication/quotation-day-gross-disparities-achievement-ability-create-wealth/

    International

    Three cheers for democratic senator Robert Menendez (2 minute video and a must watch):

    http://www.powerlineblog.com/archives/2015/01/what-bob-menendez-said.php

    The latest from Ukraine (medium):

    http://www.zerohedge.com/news/2015-01-21/russia-slams-usnato-attempts-draw-it-military-conflict-ukraine

    Disclosure: The author is long NPM.

    Jan 22 9:13 AM | Link | Comment!
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