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

    The Market

    Technical

    The indices (DJIA 18285, S&P 2125) had another dull barely down day. Both closed above their 100 day moving average; but the Dow finished back below its all-time high while the S&P remained above its comparable level.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17214-20014, 2021-3000), intermediate term (17365-22493, 1823-2593 and long term (5369-19175, 797-2135).

    Volume fell; breadth was better. The VIX edged lower, ending below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks. I continue to think that at current price levels, it is attractive as portfolio insurance.

    Investors failing to hedge (medium):

    http://www.marketwatch.com/story/a-stock-market-top-is-likely-near-as-investors-fail-to-hedge-2015-05-19?link=MW_popular

    Traderfeed looks at breadth (short):

    http://traderfeed.blogspot.com/2015/05/assessing-demand-and-supply-in-stock.html

    Update on sentiment (short):

    https://www.bespokepremium.com/think-big-blog/bullish-sentiment-drops-for-fifth-straight-week/

    The long Treasury was up fractionally, closing below its 100 day moving average, the upper boundary of a very short term downtrend and near the lower boundary of a short term downtrend.

    GLD was up slightly but remained below its 100 day moving average and the neck line of the head and shoulders pattern.

    Oil rose slightly but still closed below the upper boundary of its recent short term trading range; while the dollar was also up a tad, leaving it above the lower boundary of its recently broken short term uptrend.

    Bottom line: the Averages traded in a narrow range for most of the day, though the Dow closed back below its all-time high---a slight negative. Their pin action of the last couple of days could be interpreted in two ways: a consolidation before a challenge of the upper boundaries of their long term uptrend or the buyers blowing their wad trying unsuccessfully to break materially higher. As I said yesterday, having come this far, I can't believe that the indices won't attempt an assault on the upper boundaries of their long term uptrends. On the other hand, I continue to believe they will be unable to successfully challenge to any meaningful extent. So the risk/reward is not favorable on a technical basis. I think that argues for caution.

    The long Treasury's recent pin action continues to suggest either inflation or a re-evaluation by investors of the sustainability and/or efficacy of QE. Both clearly run counter to the message to the stock market. Plus the volatility in gold, oil and the dollar only add their own version of a confused message. I have no clue what long rates are going to do; but I worry that about the 'why' of what they will do.

    The latest from Stock Traders' Almanac (short):

    http://jeffhirsch.tumblr.com/post/119468913253/nasdaq-lags-typical-pre-election-by-over-10

    Fundamental

    Headlines

    There was one secondary economic data release yesterday: weekly mortgage and purchase applications were down. Probably no one cared given Tuesday's housing starts number and everyone seemed to be awaiting the release of the minutes of the most recent FOMC meeting.

    To summarize what has become the pattern of Fed communications recently---confusing: the FOMC (1) thinks that the first quarter economic weakness was transitory, (2) but it is worried about the potential impact of the strong dollar, economic weakness in growth in China and the outcome of the Greek bailout negotiations, (3) gave little support for a rate hike in June, (4) but said that any decision will be data dependent and so it is not ruling out an increase in June, (5) is concerned about the effect of a rate hike on the markets, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds---all of which are a result of Fed and/or other government agency regulatory policy.

    More (medium):

    http://www.zerohedge.com/news/2015-05-20/fomc-minutes-show-fed-fears-post-hike-volatility-dollar-drag-doesnt-rule-out-june-ra

    And what Fed whisperer Hilsenrath says that they said (medium):

    http://www.zerohedge.com/news/2015-05-20/hilsenrath-confirms-hawkish-fed-sees-q1-weakness-blip-june-liftoff-possible

    And what Goldman says that the Fed model says (medium):

    http://www.zerohedge.com/news/2015-05-21/feds-computer-model-us-economy-sees-little-slack-and-big-clue-gartman

    And what Martin Feldstein thinks (medium and must read):

    http://www.zerohedge.com/news/2015-05-20/even-harvard-economists-admit-fed-policy-has-created-dangerous-risks

    The Fed and bubbles (short):

    http://www.bloomberg.com/news/articles/2015-05-18/bubble-blowing-to-continue-so-long-as-yellen-isn-t-raising-rates

    Mudding the waters even more, the Bureau of Economic Analysis is parroting the San Francisco Fed's 'first quarter seasonal adjustment factors are all screwed up' thesis, suggesting that there will be indeed be some seasonal adjustments to the seasonal adjustments. However, the caveat in this exercise is that whatever increase is applied to the first quarter seasonal adjustment may be taken from the subsequent quarters. In short, the overall trend wouldn't change, it would just be less volatile.

    http://www.zerohedge.com/news/2015-05-20/stocks-slump-after-liesman-reports-gdp-be-double-seasonally-adjusting-upward

    On the international scene, first quarter Japanese GDP was reported up much more than anticipated. That is the first good bit of economic news out of that country in a long time (though remember that they have been fibbing a lot lately). In addition, the Bank of England kept key interest rates at record lows, adding a small boost to the QEInfinity scenario.

    ***overnight, the May EU composite flash manufacturing index was below forecasts, Japan's was above and China's was negative for the third month in a row.

    The bad news is that a Greek official said that his country would be unable to make the June 5 IMF debt payment and the ECB met to consider raising the discount it places on the collateral Greek banks use for loans. Just to make matters worse, Moody's warned of Greek deposit 'freeze' (medium):

    http://www.zerohedge.com/news/2015-05-20/gloves-come-moodys-warns-greek-deposit-freeze-schabule-wont-rule-out-default

    Bottom line:

    (1) the FOMC minutes---as usual you need linguistics expert to decipher the message, assuming that the Fed even knows or is willing to admit what it really believes. With the BEA apparently ready to adjust first quarter seasonal factors, the optimists can once again cease ignoring the economic data. The question is, after all this jerking around with first quarter data, what happens if the second quarter isn't materially better---which you will recall the Atlanta Fed has already forecast.

    The most stunning part of those minutes was the Fed's acknowledgement that its primary reasons for its concern with raising interest rates are largely the result of its own policies. I am just not sure why the sudden baring of its soul: [a] admitting that it can't increase rates is its own fault or [b] apologizing in advance for when it does. Color me confused.

    What the Fed hath wrought (medium):

    http://www.zerohedge.com/news/2015-05-20/fed-has-created-clockwork-orange-market

    (2) the improvement in the Japanese GDP figure. The key now is, like our own housing numbers, follow through.

    (3) Greece is one day closer to default and intensity of its food fight with the Troika only escalates. I have said before that the euros are masters of pulling back from the brink; but so far, there is no evidence of that happening. I remain cautious about the impact of the final outcome.

    This is a pretty good assessment of the alternative outcomes (medium):

    http://www.zerohedge.com/news/2015-05-21/democracy-under-fire-troika-looks-force-greek-political-reshuffle

    And then there were two: Portugal vows no more austerity (medium):

    http://www.zerohedge.com/news/2015-05-20/portugals-left-wing-forces-threaten-troika-revolt

    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.

    Is Dr. Copper sending a message? (short):

    http://gavekal.blogspot.com/2015/05/dr-copper-is-down-not-out.html

    When what's working no longer works (medium):

    http://www.minyanville.com/business-news/markets/articles/SPX-DJIA-gold-central-bank-interest/5/20/2015/id/56062

    Final earnings and sales 'beat' rate for the first quarter (short):

    https://www.bespokepremium.com/think-big-blog/q1-earnings-season-over-sector-winners-and-losers/

    Company Highlight

    Tiffany & Co is an internationally renowned retailer, designer and manufacturer of fine jewelry, silverware, china, crystal and gift items. The company has grown profits and dividends at an 11-22% rate over the last 10 years earning a 14-19% return on equity. While revenues and profits are impacted by economic activity, TIF has weathered difficult times well and should sustain an above average growth rate as a result of:

    (1) increased marketing to modernize the brand,

    (2) increased penetration in international markets,

    (3) a growing customer base resulting from opening a line of new smaller stores with lower priced, higher margin products,

    (4) declining precious metals prices.

    Negatives:

    (1) earnings from its foreign operations are exposed to currency fluctuations,

    (2) fashion obsolescence,

    (3) its customers are sensitive to macroeconomic events.

    TIF is rated A+ by Value Line, carries a 23% debt to equity ratio and its stock yields 1.8%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    TIF 1.8% 9 35% 10

    Ind Ave 1.8 12* 32 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    TIF 23 18% 2 13% A+

    Ind Ave 28 17 NA 6 NA.

    *many retailers do not pay a dividend.

    Chart

    Note: TIF stock made good progress off its March 2009 low, quickly surpassing the downtrend off its October 2007 high (straight red line) and the November 2008 trading high (green line). Long term the stock is in an uptrend (blue lines). Intermediate term it is in a trading range (purple lines). The wiggly red line is the 100 day moving average. The Dividend Growth Portfolio owns a 50% position through a fairly circuitous route. In 2009, it Bought a full position in TIF. However, in mid-2011, the company had a serious earnings hiccup and the holding was Sold. In mid-2012, after the news was digested and the outlook became a bit more visible, a one half position was repurchased.

    (click to enlarge)

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

    5/15

    Investing for Survival

    12 things I learned from Morgan Housel: Part 9

    9. "It can be difficult to tell the difference between luck and skill in investing."

    Investing involves both skill and luck. Sorting out how much of a given result is skill versus luck is neither easy or always possible. The very best books on this topic have been written by Michael Mauboussin, including The Success Equation. Howard Marks also has useful view on the difference between luck and skill and investing: "Success in investing has two aspects. The first is skill, which requires you to be technically proficient. Technical skills include the ability to find mispriced securities (based on capabilities in modeling, financial statement analysis, competitive strategy analysis, and valuation all while sidestepping behavioral biases) and a good framework for portfolio construction. The second aspect is the game in which you choose to compete. You want to find games where your skill is better than the other players. Your absolute skill is not what matters; it's your relative skill." Warren Buffet describes the object of the process simply: "Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect but that's what it's all about."

    News on Stocks in Our Portfolios

    Donaldson beats by $0.01, misses on revenue

    · Donaldson (NYSE:DCI): FQ3 EPS of $0.36 beats by $0.01.

    · Revenue of $568.01M (-9.0% Y/Y) misses by $1.23M.

    Economics

    This Week's Data

    Weekly jobless claims rose 10,000 versus expectations of up 6,000.

    The April Chicago Fed national activity index came in at -.15 versus estimates of +.10.

    Other

    I normally look with skepticism on any 'paper' coming out of bureaucracies, like the IMF; and, hence, I should with this one also. But the thesis it puts forth (the declining marginal value of more financial products) is intriguing and seems to reflect economic history since the 1990's. This is a good read and worth thinking about, whether you agree or not. (medium):

    http://www.nakedcapitalism.com/2015/05/imf-paper-finds-that-too-much-finance-is-bad-for-growth.html

    This summary of a recent Chinese government economic outlook is a bit confusing when compared to its also recently announced QE; either that or the Chinese are just knowing making the same mistake as the rest of the world's central bankers (medium):

    http://www.advisorperspectives.com/commentaries/20150520-loomis-sayles-china-is-choking-on-its-own-debt

    April architectural billings (short):

    http://www.calculatedriskblog.com/2015/05/aia-architecture-billings-index.html

    Five banks including Citi, JP Morgan and Bank of America plead guilty to currency manipulation---but no one goes to jail (medium):

    http://www.bloomberg.com/news/articles/2015-05-20/once-unthinkable-criminal-pleas-by-u-s-banks-get-investor-meh-

    Politics

    Domestic

    International War Against Radical Islam

    May 21 9:25 AM | Link | Comment!
  • The Morning Call: Housing: A Change In Trend Or An Outlier?

    The Morning Call

    5/20/15

    The Market

    Technical

    The indices (DJIA 18312, S&P 2127) were basically flat yesterday, with the Dow up and the S&P down. Both closed above their 100 day moving average and their all-time highs.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17201-20001, 2019-2998), intermediate term (17345-22473, 1823-2593 and long term (5369-19175, 797-2135).

    Volume rose slightly; breadth remained mixed for a third---not a sign of strong upward momentums. The VIX rose but still ended below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks. I continue to think that at current price levels, it is attractive as portfolio insurance.

    Those pesky divergences (short):

    http://jeffhirsch.tumblr.com/post/119391736073/dow-theory-asks-wheres-the-confirmation

    The long Treasury was down, finishing below its 100 day moving average and near the lower boundary of a short term downtrend.

    GLD got whacked and closed below its 100 day moving average and the neck line of the head and shoulders pattern. GLD continues to be unable to get out of its own way.

    Oil fell back below the upper boundary of its recent short term trading range; while the dollar soared back above the lower boundary of its recently broken short term uptrend.

    Bottom line: everyone appears to have taken a rest yesterday, weighing the tightening implications of those blowout housing start and building permits numbers against the ECB 'front end' loading of QE statement. The pin action in other markets reflected this uncertainty with bonds and the dollar seeming to point to the prospect for a stronger economy and higher rates while GLD and oil indicating just the opposite. In short, investors in these various asset classes continue to read the tea leaves differently. I think that argues for caution whichever one you might be interested in.

    That said, the indices are very close to challenging the upper boundaries of their long term uptrends. I can't imagine them coming this far and not attempting an assault. Nonetheless, I continue to believe they will be unable to successfully challenge to any meaningful extent. On the other hand, longer term, the trends are solidly up; so at the moment, there is little threat of a measurable sell off.

    The long Treasury's recent pin action continues to suggest either inflation or a re-evaluation by investors of the sustainability and/or efficacy of QE. Both clearly run counter to the message to the stock market. Plus the volatility in gold, oil and the dollar only add their own version of a confused message. I have no clue what long rates are going to do; but I worry that about the 'why' of what they will do.

    Update on Fed liquidity and the markets (medium):

    http://gavekal.blogspot.com/2015/05/monetary-movements-economic-mirage.html

    Valuations and the Fed model (short):

    http://blog.yardeni.com/2015/05/valuation-fed-model-excerpt.html

    The lament of another investor (i.e. like yours truly) that has been bearish on the Market (medium):

    http://humblestudentofthemarkets.blogspot.com/2015/05/why-i-am-bearish-and-what-would-change.html

    Fundamental

    Headlines

    Yesterday's US economic stats were mixed: month to date retail sales softened versus last week, but April housing sales and building permits were gangbusters numbers. Clearly the latter are by far the more important. It is the first really good stats we have gotten from a key economic indicator in months. Whether this is the sign that the economic slowdown has bottomed or is just an outlier will only be known in the future. I will repeat what I have said about other positive datapoints of late, we need some pluses just to keep from having to lower our economic growth estimates for a second time.

    Meanwhile, we got our second laughable Fed economic study in as many days. You have to wonder what is prompting all this upbeat propaganda. Surely not a coming rate hike. (medium):

    http://www.zerohedge.com/news/2015-05-19/what-feds-computer-model-predicts-about-future-us-economy

    Overseas, the UK and EU April CPI's came in above expectations---another sign of a stronger growth and keeping Europe as the bright spot in the international economic picture. In addition, an ECB executive said in a speech that the ECB intends to 'front load' its QE. That helped European stock markets, though I remain a skeptic on its ultimate impact on their economies.

    ***overnight, first quarter Japanese GDP was reported up much more than anticipated; the Bank of England kept key interest rates at record lows.

    The dark spot in Europe remains how the Greek bail out end game plays out. The latest bit of negative news coming out of Germany where Merkel is having a tough time selling a bailout in any form to her parliament. (medium):

    http://www.zerohedge.com/news/2015-05-19/merkel-faces-german-parliament-revolt-greece

    ***overnight, a Greek official said that his country would be unable to make the June 5 IMF debt payment. Meanwhile the ECB met to discuss raising the discount it places on the collateral Greek banks use for loans.

    Bottom line: yesterday's housing numbers offered some welcome relief from the barrage of poor economic data. Follow through, of course, is the key; without it, all we have is an isolated stat that could very well get revised down.

    The data and the likelihood of recession (medium):

    http://www.zerohedge.com/news/2015-05-19/recession-check-updating-indicators

    I am a bit taken back by the two recent Fed studies attempting to paint a smiley face on the economy. I am not sure anyone in the real world is believing it; the big question is do they? Because if they do, we could see higher rates sooner than many investors think---except, of course, for the bond guys.

    Yesterday's EU CPI numbers were encouraging (a sign of economic growth). Unlike the US data, they are part of an improving trend. Hopefully, this will continue; because as I noted in last week's Closing Bell, I am clinging to a 'muddle through' international economic scenario like it is the last bottle of Famous Grouse on earth.

    It won't be long now---until we know whether the euros can solve the Greek bail out without blowing something up. I remain cautious about the impact of the final outcome.

    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.

    Another look at valuations (medium):

    http://www.advisorperspectives.com/commentaries/20150519-cmg-capital-management-group-on-my-radar-valuations-and-forward-return

    Are art auctions a sign of the top (medium):

    http://www.minyanville.com/business-news/editors-pick/articles/peter-atwater-art-auctions-art-prices/5/18/2015/id/56059

    A thought experiment from a bull (medium):

    http://www.bloombergview.com/articles/2015-05-19/investors-underestimate-odds-of-virtuous-circle

    Strategists year end S&P target (short):

    http://tickersense.typepad.com/ticker_sense/2015/05/chief-strategists-sp-500-year-end-targets.html

    News on Stocks in Our Portfolios

    Hormel Foods beats by $0.04, misses on revenue

    · Hormel Foods (NYSE:HRL): FQ2 EPS of $0.67 beats by $0.04.

    · Revenue of $2.28B (+1.8% Y/Y) misses by $120M.

    Economics

    This Week's Data

    The growth in month to date retail chain stores sales slowed---1.8% versus last week's 2.1%.

    Weekly mortgage applications fell 1.5% while purchase applications were of 4.0%.

    Other

    More on China's new QE (medium):

    http://www.zerohedge.com/news/2015-05-19/china-officially-launches-critical-local-government-debt-swap-%E2%80%94-pboc-really-just-iss

    Politics

    Domestic

    Patrick Moynihan on the Clinton involvement in Haiti (medium):

    http://www.providencejournal.com/article/20150514/OPINION/150519620#150519620

    UBS gets slap on the wrist for rigging foreign exchange market (short):

    http://www.zerohedge.com/news/2015-05-20/ubs-gets-probation-rigging-5-trillion-day-fx-market

    International

    The convoluted policy mix of US, Germany, Russia and Ukraine (medium):

    http://www.nakedcapitalism.com/2015/05/john-helmer-how-angela-merkel-has-been-abandoned-by-john-kerry-victoria-nuland-and-vladimir-putin.html

    ISIS is winning in Iraq (medium):

    http://www.zerohedge.com/news/2015-05-19/iraq-isis-winning-and-united-states-losing

    May 20 9:06 AM | Link | Comment!
  • The Morning Call--The Last Act In A Greek Tragedy

    The Market

    Technical

    The indices (DJIA 18298, S&P 2129) climbed again yesterday. Both closed above their 100 day moving average and the S&P remained above its all-time high while the Dow managed to close right on its comparable level.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17194-19991, 2016-2995), intermediate term (17337-22465, 1823-2593 and long term (5369-19175, 797-2135).

    Volume fell; breadth remained mixed for a second day---which should be troublesome for the bulls. The VIX actually rose, a bit unusual on a Market up day. Nevertheless, it is still below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks. The lift may be, as I have suggested, a sign that at current price levels, it is attractive as portfolio insurance.

    Should you be worried about the declining Transports (medium)?

    http://humblestudentofthemarkets.blogspot.com/2015/05/how-worried-should-you-be-about-weak-dj.html

    The long Treasury was down over two points on volume, (1) reversing Friday's move up, (2) keeping it below its 100 day moving average and the upper boundary of a short term downtrend and (3) again highlighting its higher growth/higher inflation implications versus the lower growth/more QE implications of rising stock prices. I am not going to stop worrying about the seeming underlying differences between stock and bond investors' economic outlooks. I have no idea how all these factors resolve themselves. But till they do, I think patience is needed.

    GLD traded back down and settled right on the neck line of the head and shoulders pattern. That invalidates Friday's break out. That doesn't mean that GLD is rolling over; it does means that GLD's recent price action has made me cautious of any move by GLD in either direction.

    http://www.zerohedge.com/news/2015-05-18/david-stockman-we-are-entering-terminal-phase-global-financial-system

    Oil was down slightly yesterday, leaving it right on the upper boundary of its short term trading range and (2) the dollar was up but remained below its 100 day moving average and the lower boundary of its recently broken short term uptrend.

    http://www.zerohedge.com/news/2015-05-19/oil-prices-will-fall-lesson-gravity

    Bottom line: the bulls remain in control, having pushed the Averages above the recent trend line of lower highs and a short hair close to being above their all-time highs (S&P is above, the Dow right on this level). So they are step closer to assaulting the upper boundaries of their long term uptrends---which I continue to believe they will be unable to successfully challenge to any meaningful extent.

    That does not mean that if they can't push through those boundaries that they are headed a lot lower. Longer term, the trends are solidly up and will be so until the short term uptrends, at the very least, are negated.

    The long Treasury's recent pin action continues to suggest either inflation or a re-evaluation by investors of the sustainability and/or efficacy of QE. Both clearly run counter to the message to the stock market. Plus the volatility in gold, oil and the dollar only add their own version of a confused message. I have no clue what long rates are going to do; but I worry that about the 'why' of what they will do.

    A pretty good technical bull argument (short):

    http://www.marketwatch.com/story/the-screaming-buy-signal-of-gathering-bears-2015-05-15

    Fundamental

    Headlines

    Yesterday was a pretty dull day, economic stat wise. We did get one US number: the NAHB builders' confidence index was below expectations. No data from overseas.

    ***overnight, UK and EU April CPI came in above expectations; and an ECB executive said in a speech that the ECB intends to 'front load' its QE---sending another thrill through the legs of the stock boys.

    There were two articles on the domestic economy that I thought worthy of your attention. The first is from former Fed member Bob McTeer pointing out that it is getting harder to ignore the lousy economic data (medium):

    http://economyblog.ncpa.org/our-weakening-economy-is-getting-harder-to-ignor/

    The second is an almost laughable piece from the San Francisco Fed, pointing out that if first quarter data's seasonal adjustment factors had been doubled, the economy would have looked stronger (medium):

    http://www.zerohedge.com/news/2015-05-18/san-francisco-fed-just-gave-green-light-june-rate-hike

    The other newsworthy item is what has become a streaming narrative on the Greek bailout endgame, which is not looking positive (medium):

    http://www.nakedcapitalism.com/2015/05/european-commission-tables-proposal-on-greece-to-break-logjam.html

    ***overnight, Merkel having problems selling a bail out (medium):

    http://www.zerohedge.com/news/2015-05-19/merkel-faces-german-parliament-revolt-greece

    Bottom line: the two points above are:

    (1) more and more folks are noticing that the US economy is not doing well. Sooner or later that shows up in the economic and corporate profit growth forecasts which probably won't help valuations. How long the Market dreamweavers can ignore the E in P/E is the $64,000 question especially when long Treasury rates (the bogie for the discount factor in valuations) keep rising.

    Bank of America urges caution (short):

    http://www.zerohedge.com/news/2015-05-18/investors-are-trapped-twilight-zone-bofaml-warns-looming-crash-risks

    More on valuation (medium):

    http://www.bloomberg.com/news/articles/2015-05-18/nobel-winner-s-math-shows-s-p-500-unhinged-from-reality-or-not

    (2) the final act of the modern Greek tragedy is at hand. We can't rule out some convoluted 'kick the can down the road' solution. Gosh only knows that the euros are masters at that. On the other hand, reading the above link, positions seemed have harden to the point that some economic dislocation will take place. If so, then the question is, is it is fully discounted in the Market? Clearly it has been a news item long enough that it should have been. However, I continue to believe that there will be unanticipated consequences primarily because the exit from a major currency union hasn't happened before. That could cause heartburn.

    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.

    Latest from John Hussman (medium):

    http://www.advisorperspectives.com/commentaries/20150518-hussman-funds-the-new-era-is-an-old-story

    Company Highlight

    Emerson Electric designs and manufactures a broad range of electrical and electronic products and systems for commercial, industrial and consumer markets, including electronic process and measurement equipment, industrial automation equipment, climate control electronics, network power equipment and appliances and tools. As you can see, the company has a very well diversified product base and serves a broad range of both industrial and consumer markets. The company generates an attractive return on equity (19-25%) and has grown earnings and dividends at a 7-10% pace over the last 10 years. This high quality, well diversified company should continue to grow as a result of:

    (1) a well diversified product line that is offered to a broad range of industries and can deliver technology and product solutions globally,

    (2) the company's continuous investment in breakthrough technologies,

    (3) benefit from global infrastructure building,

    (4) an ongoing cost reduction program,

    (5) acquisitions .

    Negatives:

    (1) its large foreign exposure can lead to currency shocks, local economic challenges and potential delays due to product and shipment disruptions,

    (2) weakness in oil and gas markets,

    (3) restructuring costs.

    EMR is rated A++ by Value Line, has a 28% debt to equity ratio and its stock yields 3.3%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    EMR 3.3% 6% 48% 10

    Ind Ave 2.6 9 32 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    EMR 28% 25% 2 12 A++

    Ind Ave 24 15 NA 9 NA

    Chart

    Note: EMR stock made great progress off its March 2009 low, quickly surpassing the downtrend off its May 2008 high (straight red line) and the November 2008 trading high (green line). Long term the stock is in an uptrend (blue lines); intermediate term it is in a trading range (purple lines). Short term, it is a downtrend (brown line). The wiggly red line is the 100 day moving average. The Dividend Growth Portfolio owns a 90% position in EMR and the High Yield Portfolio owns a 75% position. The upper boundary of its Buy Value Range is $39; the lower boundary of its Sell Half Range is $83.

    (click to enlarge)

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

    5/15

    Investing for Survival

    12 things I learned from Morgan Housel: Part 8

    8. "Most financial problems are caused by debt."

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

    Debt causes many problems, the worst of which is that the magic of compounding is working against you instead of for you. Leverage can also create situations where underperformance takes you completely out of the investing process. Since "staying invested" is a key to financial success anything that takes you out of the process is a very bad thing. As Charlie Munger has said: "I've seen more people fail because of liquor and leverage - leverage being borrowed money." James Montier adds: "Leverage can't ever turn a bad investment good, but it can turn a good investment bad. When you are leveraged you can run into volatility that impairs your ability to stay in an investment which can result in "a permanent loss of capital."

    News on Stocks in Our Portfolios

    Home Depot beats by $0.01, beats on revenue

    · Home Depot (NYSE:HD): Q1 EPS of $1.16 beats by $0.01.

    · Revenue of $20.9B (+6.1% Y/Y) beats by $80M.

    Economics

    This Week's Data

    The May NAHB builders' confidence index was reported at 54.0 versus expectations of 56.0.

    http://www.calculatedriskblog.com/2015/05/nahb-builder-confidence-decreased-to-54.html

    April housing starts smoked estimates, riding 20.2% versus estimates of up 11%.

    Other

    Don't be so sure that the economy will return to 'normal' (medium):

    http://www.nytimes.com/2015/05/17/upshot/dont-be-so-sure-the-economy-will-return-to-normal.html?abt=0002&abg=1&curator=thereformedbroker&utm_source=thereformedbroker&_r=0

    Politics

    Domestic

    International War Against Radical Islam

    May 19 8:53 AM | Link | Comment!
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