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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
My blog:
Investing for Survival
  • Subscriber Alert

    Subscriber Alert

    7/28/15

    The stock price of Oracle (ORCL-$38) has traded below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Aggressive Growth Buy List. It is above its Stop Loss Price. Hence, the Aggressive Growth Portfolio will continue to Hold ORCL.

    The stock price of Praxair (PX $111) has traded below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth Buy List. It is above its Stop Loss Price. Hence, the Dividend Growth Portfolio will continue to Hold PX.

    Jul 27 5:27 PM | Link | Comment!
  • The Closing Bell---Broken Boundaries

    Number two granddaughter and number three grandson arrive today for a week. That means Six Flags, the aquarium, putt putt golf, etc. No Morning Calls next week; though clearly with the Market in its present precarious state, I will be paying close attention. Any actions will be reported via Subscriber Alerts.

    Statistical Summary

    Current Economic Forecast

    2014

    Real Growth in Gross Domestic Product +2.6

    Inflation (revised) +0.1%

    Corporate Profits +3.7%

    2015 estimates

    Real Growth in Gross Domestic Product (revised) 0-+2%

    Inflation (revised) 1.0-2.0

    Corporate Profits (revised) -5-+5%

    Current Market Forecast

    Dow Jones Industrial Average

    Current Trend (revised):

    Short Term Uptrend 17652-20574

    Intermediate Term Uptrend 17855-23995

    Long Term Uptrend 5369-19241

    2014 Year End Fair Value 11800-12000

    2015 Year End Fair Value 12200-12400

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Uptrend 2083-3062

    Intermediate Term Uptrend 1872-2638

    Long Term Uptrend 797-2145

    2014 Year End Fair Value 1470-1490

    2015 Year End Fair Value 1515-1535

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 53%

    High Yield Portfolio 54%

    Aggressive Growth Portfolio 53%

    Economics/Politics

    The economy provides no upward bias to equity valuations. The dataflow this week was paltry but mostly upbeat: above estimates: June existing home sales, June leading economic indicators, weekly mortgage and purchase applications, weekly jobless claims, the July Kansas City Fed manufacturing index and the Chicago National activity Index; below estimates: month to date retail chain store sales, June new home sales; in line with estimates: the July Markit flash manufacturing index.

    There were several important indicators (existing [+] and new home [-] sales, leading economic indicators [+]) which were weighed to the plus side. So overall, total as well as primary indicators this week were positive. However, there were several anecdotal reports that were not so upbeat: Caterpillar's global sales (not good anywhere) and the National Retail Federation estimate of 2015 retail sales (lower). These taint the more encouraging dataflow, diminishing the degree of its positiveness (is that a word?) Therefore, my conclusion from last week remains the same: the recent trend towards stabilization continues but that doesn't mean that growth is accelerating---it just means that it has stopped decelerating. Our forecast remains:

    a much below average secular rate of recovery, exacerbated by a declining cyclical pattern of growth resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with conflicting profit incentives and a business community hesitant to hire and invest because the aforementioned, the weakening in the global economic outlook, along with the historic inability of the Fed to properly time the reversal of a vastly over expansive monetary policy.

    The pluses:

    (1) our improving energy picture. Oil production in this country continues to grow which is a significant geopolitical plus. However, we never saw the 'unmitigated' positive forecast by the pundits when oil prices initially cratered. Last week marked the beginning of a second round of whackage---and still no 'unmitigated' positive.

    http://www.zerohedge.com/news/2015-07-22/far-worse-1986-oil-downturn-has-no-parallel-recorded-history-morgan-stanley-says

    The negatives:

    (1) a vulnerable global banking system. Once again JP Morgan is at the top of the bankster fraud hit parade. This week's episode entails the bank's agreement to pay $388 million to settle a suit by investors who claim it misled them on the safety of mortgage backed securities that it sold them.

    That said, there was also two huge pieces of good news this week:

    [a] the Fed finalized the capital surcharges for the too big to fail banks, creating an additional $200 billion cushion,

    [b] this week, Wall Street will begin complying with the 'Volcker rule' banning taxpayer insured banks from making bets with their own money {i.e. prop trading desks}.

    Clearly both of these measures will be very helpful in mitigating my concerns and preventing the implosion in financial institutions experienced in 2007.

    My concern here is that: [a] investors ultimately lose confidence in our financial institutions 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 from either subprime debt problems in the student loan or auto markets or turmoil in the EU financial system resulting from a Greek default or exit from the EU.

    (2) fiscal policy. No news this week on the national level. We did get more from Puerto Rico: [a] the island's credit was downgraded by the major rating services and [b] UBS announced that it was no longer accepting PR bonds as collateral. Not a positive for our muni bond ETF's in our ETF Portfolio.

    (3) the potential negative impact of central bank money printing: The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn't been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.

    This week, consensus seemed to build [based on the pin action in gold, the dollar and bonds] for a September Fed rate hike. May be. But the inflation data doesn't suggest it nor does the US/global macroeconomic data [i.e. all weak]. While a rate increase doesn't make economic sense, as I suggested last week, Yellen et al may want to do it just to prove that they know how.

    Who do you believe, commodities or the Fed (medium and a must read):

    http://streettalklive.com/index.php/blog.html?id=2813

    Not that it matters, because the Fed is already too late in the timing of its transition to tighter monetary policy. Unfortunately, all those QE inspired reserves still sit on the bank balance sheet and all that debt still sits on the Fed's balance sheet---waiting for investors to recognize the futility of the QEInfinity and the harm that it has done to the US economy via the mispricing and misallocation of assets.

    http://www.zerohedge.com/news/2015-07-23/no-longer-confined-lunatic-fringe-socgen-admits-markets-are-completely-manipulated

    The same applies to global asset mispricing and misallocation (medium):

    http://www.zerohedge.com/news/2015-07-23/central-banks-have-shot-their-wad-why-casino-rude-awakening-part-i

    You know my bottom line: sooner or later, the price will be paid for asset mispricing and misallocation. The longer it takes and the greater the magnitude of QE, the more the pain.

    (4) geopolitical risks: little occurred of consequence this week other than the now raging debate over whether the Iran deal is good or bad. Again, leaving aside the long term political and foreign policy issues, an approval of the treaty would have several short term positive economic impacts: [a] oil prices are likely to decline further as a result of Iran being able to export its production, and [b] relief from current trade sanctions are likely to lift Iranian economic activity which will benefit global growth.

    Liar, liar pants on fire (medium):

    http://www.powerlineblog.com/archives/2015/07/john-kerry-on-the-iran-deal-a-litany-of-lies.php

    Counterpoint from the former head of Israeli internal security (medium):

    http://forward.com/opinion/312158/this-man-explains-why-iran-deal-is-good-for-israel/

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

    [a] the Greek struggle to meet the terms set out by the Troika in order to receive bailout funds. So far, they have done so; this week approving a second bill complying additional Troika mandated reforms. There are still those that believe that Greece will ultimately be unable or unwilling to fulfill the terms necessary to remain within the EU. However for the moment, the potential threat of default has been taken off the table.

    This is a very pessimistic assessment of not just the Greek, but the entire EU, economic situation. I would not accept it in full; but it does come from the source that was reasonably accurate in the latest act of the Greek tragedy (medium):

    http://www.nakedcapitalism.com/2015/07/mathew-d-rose-the-crisis-in-europe-has-only-just-begun.html

    [b] in China, markets has remained stable and at recovery levels---which, I guess, answers the question that I posed two weeks ago: who is stronger, a totalitarian government or the free market? Like Greece, it has removed immediate concerns about the consequences of a Market crash.

    http://marginalrevolution.com/marginalrevolution/2015/07/china-fact-of-the-day-32.html

    And, how much impact did all that money China spent really have?

    http://www.zerohedge.com/news/2015-07-23/china-spends-10-gdp-all-bark-no-bite-stock-bailout

    However, two important issues remain. Short term, if the Market turmoil was reflective of a rapidly decelerating Chinese economy, then the resulting consequences will be much less susceptible to the whims of imperial edit simply because of the magnitude of China's trade with the rest of the world. Not that the government can't or won't lie about their own import/export numbers; but they can't control what China's trading partners report. What I am driving at here is that if, in fact, China's economy is slowing that will impact global growth. And seemingly to put a finer point on this issue, several disappointing stats were reported this week [see below].

    http://www.zerohedge.com/news/2015-07-23/china-electricity-consumption-grows-slowest-pace-30-years

    The second but longer term issue is, does the Chinese government's short term victory over stock market pricing spell the end to that country's economic liberalization. If so, its consequences for the long term economic growth in China is likely to be negative and of long duration.

    http://www.marketwatch.com/story/the-true-cost-of-chinas-multibillion-dollar-market-intervention-2015-07-23?dist=beforebell

    In other economic news, Chinese business sentiment plunged 14%; Italian and British retail sales declined while those in Canada rose. Both the Chinese and EU June Markit flash manufacturing PMI's were disappointing.

    In sum, our global economic 'muddling through' assumption has improved somewhat from two weeks ago. I am still concerned that conditions in either Greece or China (but especially China) could suddenly worsen and again threaten our Economic Model.

    Bottom line: the US economy continues to recover from the doldrums of the first five and half months of the year, putting the threat of recession even further behind us. On the other hand, this improvement has not been robust enough to assume a return to the recovery rate of this cycle much less to the average secular rate of the past several decades.

    The international data, in particular that out of China, did little to demonstrate any kind of pick up in global economic growth. Indeed if anything, the Chinese stats suggest that the Chinese stock market, pre-government interference, could well have been signaling impending trouble in one of our biggest trading partners.

    This week's data:

    (1) housing: June existing home sales were strong; June new home sales were awful; weekly mortgage and purchase applications were up,

    (2) consumer: month to date retail chain store sales growth declined from the prior week; weekly jobless claims fell more than anticipated,

    (3) industry: the June Chicago National Activity Index came in better than forecast; the July Kansas City Fed manufacturing index remained in negative territory but improved slightly,

    (4) macroeconomic: June leading economic indicators were well ahead of estimates; the July Markit flash manufacturing PMI was in line.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 17569, S&P 2079) fell this week, falling on a number of earnings disappointments and more weak economic data out of China. In the process,

    (1) the Dow [a] fell below its 100 day moving average and was there long enough to re-set that MA from support to resistance, [b] dropped below its 200 day moving average; if it remains there through the close on Wednesday, that MA will re-set from support to resistance, [c] declined below the lower boundary of its intermediate term uptrend; if it remains below that boundary through the close on Tuesday, the intermediate term trend will re-set from up to a trading range and [d] fell below the lower boundary of its short term trading range; if it remains there through the close on Tuesday, the short term trend will re-set from up to a trading range.

    (2) the S&P [a] dropped below its 100 day moving average; if it remains there through the close on Wednesday, it will re-set from support to resistance, [b] declined below the lower boundary of its short term uptrend; if it remains there through the close on Tuesday, it will re-set from up to a trading range.

    Longer term, the indices are, for the moment, within their uptrends across all timeframes: short term (17652-20574, 2083-3062), intermediate term (17856-23995, 1872-2638) and long term (5369-19241, 797-2145).

    Volume rose; breadth was negative. The VIX was up 9%, but is still below its 100 day moving average and remains within a short term trading range, an intermediate term downtrend and a long term downtrend. So far, it is not confirming the pin action of the Averages.

    The long Treasury was up, but still closed below its 100 day moving average and within its short term downtrend. However, it has established a very short term uptrend.

    Surprise, surprise, GLD was actually up, though it remained below its 100 day moving average and within short, intermediate and long term downtrends.

    http://www.zerohedge.com/news/2015-07-24/has-never-happened-gold

    And this from Jim Grant (medium):

    http://www.zerohedge.com/news/2015-07-24/jim-grant-gold-mr-market-having-sale-vexing-wonderful-opportunity

    Oil was down, finishing below its 100 day moving average and below the lower boundaries of its [a] short term trading range; if it closes below that boundary on Tuesday, the short term trend will re-set from a trading range to a downtrend, [b] intermediate term trading range; if it remains below that boundary through the close on Wednesday, the intermediate term trend will re-set from a trading range to a downtrend.

    The dollar lifted, remaining above [a] its 100 day moving average, [b] the lower boundaries of its short and intermediate term trading ranges and [c] the lower boundary of a very short term uptrend.

    Bottom line: clearly, following Thursday and Friday's negative pin action, the indices are now challenging numerous support levels. As I noted in Friday's Morning Call, a break of these trend levels would sustain the notion that the Market is in a topping process. However, that is getting way ahead of events. It will take a good deal more whackage to complete the successful challenge of those trends. So for now, best to stay patient and focus just on the follow through of the assaults on those trends.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (17568) finished this week about 44.7% above Fair Value (12137) while the S&P (2079) closed 38.0% overvalued (1506). 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.

    The US economic data continues to support our forecast and hence the economic assumptions in our Valuation Model.

    Ignore the screams about a Market crash and just concentrate on the poor economic data (medium):

    http://www.zerohedge.com/news/2015-07-24/copper-china-and-world-trade-are-all-screaming-next-economic-crisis-here

    Overseas, the economic data has been nothing to cheer about, in particular, some very rough numbers out of China. That suggests that while the Chinese government's smack down of its equity market may have been a rousing success, it can do nothing to alter the impact of slowing economic activity on global/US growth.

    Still, the financial/market risks posed by the Greek political/economic situation clearly subsided last week. That is not to say that they have gone away; but there is at least a reasonable probability that nothing untoward is coming from that direction.

    Finally, with the downgrade of Puerto Rican debt, odds have likely increased of an outcome in the government's negotiations with creditors that incorporates principal loss. Whether this would include all PR public debt and how much spill over there might be to other US city, county and state municipal debt issues is not clear at this time. I am not so much worried about any fallout's impact on equity markets as I am about the potential effect on the muni market---to which our ETF Portfolio has exposure.

    Bottom line: the assumptions in our Economic Model are unchanged. If they are anywhere near correct, they will almost assuredly result in changes in Street models that will have to take their consensus Fair Value down for equities.

    The assumptions in our Valuation Model have not changed either; though at this moment, there appears to be more events (greater than expected decline in Chinese economic activity; miscalculations by one or more central banks that would upset markets) that could lower those assumptions than raise them. That said, our Model's current calculated Fair Values under the best assumptions are so far below current valuations that a simple process of mean reversion is all that is necessary to bring Market prices down significantly.

    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; but their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

    More on earnings estimates and 'beats' (short):

    http://blog.gavekalcapital.com/can-we-all-stop-being-so-surprised-by-company-earnings-surprises/

    DJIA S&P

    Current 2015 Year End Fair Value* 12300 1525

    Fair Value as of 7/31/15 12137 1506

    Close this week 17568 2079

    Over Valuation vs. 7/31 Close

    5% overvalued 12743 1581

    10% overvalued 13350 1656

    15% overvalued 13957 1731

    20% overvalued 14564 1807

    25% overvalued 15171 1882

    30% overvalued 15778 1957

    35% overvalued 16384 2027

    40% overvalued 16991 2108

    45%overvalued 17598 2183

    50%overvalued 18205 2259

    Under Valuation vs. 7/31 Close

    5% undervalued 11530 1430

    10%undervalued 10923 1355

    15%undervalued 10316 1280

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

    The Portfolios and Buy Lists are up to date.

    Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 47 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.

    Jul 25 11:11 AM | Link | Comment!
  • The Morning Call--Will Earnings Disappointments Continue?

    The Market

    Technical

    The indices (DJIA 17919, S&P 2119) were down yesterday, seemingly on disappointing earnings reports from two Market biggies (IBM, UTX)---which we got more of after the Market close (APPL, MSFT, CMG, YHOO, GPRO). The Dow traded back below its 100 day moving average, though the S&P still has a ways to go to confirm that break. So for now, a challenge of the all-time highs (18295/2135) has been postponed. I don't think that means that there won't be one; but clearly the Averages are at a level where upside progress has been a problem.

    Longer term, the indices are within their uptrends across all timeframes: short term (17611-20535, 2080-3059), intermediate term (17827-23968, 1869-2635) and long term (5369-19175, 797-2145).

    Volume rose; breadth remained mixed. The VIX (12.2) fell; a little unusual for a down Market day---a mirror image on Monday's action. I continue to believe that a price below 12.0 represents good value as portfolio insurance.

    http://www.advisorperspectives.com/commentaries/20150721-gavekal-capital-very-weak-strong-closes

    The long Treasury was up, but closed below its 100 day moving average and within its short term downtrend.

    Beware high yield ETF's (medium):

    http://www.zerohedge.com/news/2015-07-21/wall-street-prepares-reap-billions-another-main-street-wipe-out

    Update on the muni bond market (short):

    http://www.vaneck.com/muni-nation-blog/halftime-perspective-07-16-15/?curator=thereformedbroker&utm_source=thereformedbroker

    GLD fell again. It ended below its 100 day moving average and within short and long term trading ranges and an intermediate term downtrend.

    http://awealthofcommonsense.com/a-history-of-gold-returns/

    Gold warns again (medium):

    http://www.zerohedge.com/news/2015-07-21/gold-warns-again

    Oil was up, but finished below its 100 day moving average and near the lower boundary of its short term trading range. The dollar took a breather yesterday, ending above its 100 day moving average and within short and intermediate term trading ranges.

    Bottom line: those all-time highs remain an elusive target. As long as that remains the case, the thesis that the Market is in a topping formation continues to carry weight---and the more times that stocks can't muster a challenge, the stronger the argument. I am not suggesting that a top has been put in; but it is looking more likely. As always, follow through is key.

    Fundamental

    Headlines

    Yesterday was another slow day for economic reports. In the US, month to date retail chain store sales slowed from the prior week. Overseas, German June PPI fell 0.1%, in line, but hardly an indication of economic strength.

    ***overnight, Chinese business sentiment plunged 14%, falling into negative territory; Italian retail sales declined.

    The main headline was corporate earnings reports. IBM's and United Technologies' were below estimates and that was followed by more weaker than expected releases after the Market close. The question is, are the above numbers just a brief aberration or are we starting to get the disappointments that the bears have been looking for the last four quarters? I have been wrong too often in the last year to venture a guess at this point. But clearly, this something to which we need to pay attention.

    There was one news item out of Greece: the government submitted to parliament legislation enacting terms demanded by the Troika. The vote on the measure is before parliament today.

    http://www.zerohedge.com/news/2015-07-22/tsipras-fights-keep-greek-bailout-alive-amid-party-rebellion-full-vote-preview

    In addition, a steady stream of negative narratives continues:

    The problem of corruption in Greece (medium):

    http://www.nakedcapitalism.com/2015/07/why-debt-sustains-corruption-in-greece-and-vice-versa.html

    Citi on the need for a Greek debt 'haircut' (medium):

    http://www.zerohedge.com/news/2015-07-21/greece-needs-%E2%82%AC130-billion-debt-haircut-according-citigroup

    Bottom line: earnings reports held center stage yesterday and the viewing was not that inspiring. This is the first really lousy day in this earnings season and it may be the worst in the last couple of quarters. However, it was one day of stats, certainly nothing to get beared up over. There will need to be a number of days like that before anything like a trend appears.

    That said, this is the kind of news that could get investors thinking about valuations---which in my opinion are stretched. Hence, the risk/reward equation at the moment is heavily weighed to the downside.

    I continue to 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.

    David Stockman on valuations (medium):

    http://www.zerohedge.com/news/2015-07-21/take-cover-wall-street-breaking-out-bubblies

    Ed Yardeni on valuations (short):

    http://blog.yardeni.com/2015/07/buffetts-ratio-is-bearish-excerpt.html

    Investing for Survival

    12 things I learned from David Tepper: #4

    4. "We invest in a lot of bonds and preferred (stock), which we can convert to equity. It not as risky as people make it out to be."

    When you make an investment in distressed debt your ownership interest can (under certain circumstances) convert into equity ownership, which gives you certain control rights that can be helpful in generating the return you desire. People who understand areas like bankruptcy and finance can do things like determine what is likely to be the "fulcrum security" which will convert into sufficient equity to exert some measure of control when the business restructures via a plan of reorganization. This sort of activity combines investing with the profession of distressed investing/bankruptcy. Distressed investing is not an activity where amateurs and people learning on-the-job experience a positive result. That David Tepper can do it does not mean that you can do it.

    News on Stocks in Our Portfolios

    Illinois Tool Works beats by $0.02, misses on revenue

    · Illinois Tool Works (NYSE:ITW): Q2 EPS of $1.30 beats by $0.02.

    · Revenue of $3.43B (-7.8% Y/Y) misses by $20M.

    Coca-Cola beats by $0.03, beats on revenue

    · Coca-Cola (NYSE:KO): Q2 EPS of $0.63 beats by $0.03.

    · Revenue of $12.16B (-3.3% Y/Y) beats by $100M.

    Boeing beats by $0.25, beats on revenue

    · Boeing (NYSE:BA): Q2 EPS of $1.62 beats by $0.25.

    · Revenue of $24.54B (+11.3% Y/Y) beats by $320M.

    Microsoft beats by $0.06, beats on revenue

    · Microsoft (NASDAQ:MSFT): FQ4 EPS of $0.62 beats by $0.06.

    · Revenue of $22.18B (-5.1% Y/Y) beats by $120M.

    Economics

    This Week's Data

    Month to date retail chain store sales slowed from the prior week.

    Weekly mortgage applications rose 0.1% while purchase applications were up 1.0%.

    Other

    Update on big four economic indicators (and industrial production):

    http://www.advisorperspectives.com/dshort/updates/Big-Four-Economic-Indicators-IP.php

    Politics

    Domestic

    International War Against Radical Islam

    The latest from Iran (short):

    http://www.zerohedge.com/news/2015-07-21/john-kerry-very-disturbed-iran-vow-defy-american-policies

    Jul 22 9:07 AM | Link | Comment!
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