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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 Closing Bell

    I am taking Thanksgiving Week off. Back on 12/1. I hope everyone has a great Holiday.

    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 16084-18830

    Intermediate Term Uptrend 16053-21053

    Long Term Uptrend 5159-18521

    2013 Year End Fair Value 11590-11610

    2014Year End Fair Value 11800-12000

    Standard & Poor's 500

    Current Trend (revised):

    Short Term Uptrend 1861-2215

    Intermediate Term Uptrend 1697-2413

    Long Term Uptrend 783-2062

    2013Year End Fair Value 1430-1450

    2014 Year End Fair Value 1470-1490

    Percentage Cash in Our Portfolios

    Dividend Growth Portfolio 47%

    High Yield Portfolio 53%

    Aggressive Growth Portfolio 49%

    Economics/Politics

    The economy is a modest positive for Your Money. This week's economic data was weighed to the plus side: positives---weekly mortgage and purchase applications, October new home permits and existing home sales, November homebuilders confidence, the NY, Kansas City and Philly Fed manufacturing indices and the October leading economic indicators; negatives---October housing starts, October industrial production, the November Markit PMI and October PPI and CPI; neutral---weekly retail sales and weekly jobless claims.

    Included in the above are a number primary indicators which are pretty evenly balanced. On the plus side: housing permits, existing home sales and leading economic indicators; on the negative: housing starts, industrial production and the Markit PMI. However, balanced is good news in our forecast. So the more numerous positive stats coupled with an even split among the primary indicators fits well into our current outlook and importantly, demonstrates that the US continues impervious to foreign economic difficulties.

    As you know, global recession is the biggest risk in our outlook and we got no relief this week on that front. The numbers were awful---all of which I will cover below. So in short, our outlook remains the same, 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. The US is awash in cheap, clean burning natural gas.... In addition to making home heating more affordable, low cost, abundant energy serves to draw those manufacturers back to the US who are facing rising foreign labor costs and relying on energy resources that carry negative political risks.

    'Unfortunately, this positive in our outlook may be getting to be 'too much of a good thing'. Whether because of new abundant supplies or falling demand, the price of oil has been getting hammered of late; and sooner or later this plus could become a minus.'

    'I have no idea where the crossover point is, but there is one in which the positive created by lower prices to consumer and industry is offset by losses in employment and weakening corporate financial structures resulting from decreased drilling activity (remember the energy industry has been a major contributor to job growth and cap ex spending).'

    http://www.zerohedge.com/news/2014-11-18/destroying-myth-lower-gas-prices-boost-consumption

    The negatives:

    1. a vulnerable global banking system. The banksters almost made it through a whole week without any new revelations of misdeeds. Unfortunately for them, the politicians have decided to take an interest in bank malfeasance---the senate will begin hearing on commodity price rigging by JP Morgan and Goldman Sachs. I doubt anything will come of this other than grandstanding face time for the pols. However, it helps keep the crimes and misdemeanors perpetrated on investors in public view and certainly won't be a plus for the big banks reputations.

    Later it was revealed that a NY Fed employee had shared confidential information with Goldman Sachs about one of its clients. It just goes on and on.

    http://www.nakedcapitalism.com/2014/11/new-york-fed-goldman-in-criminal-investigation-in-sharing-confidential-information.html

    Problems in the emerging market banking systems (medium):

    http://blogs.ft.com/beyond-brics/2014/11/20/em-corporate-hard-currency-debt-a-bank-run-in-the-making/

    '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.'

    http://www.voxeu.org/article/contagion-european-sovereign-debt-crisis

    1. fiscal policy. The elections turned out as expected; and Obama, true to form, ignored the results. Three issues were front and center this week: (1) Obamacare. The supposed architect of Obamacare just can't keep his mouth shut as new videos keep appearing in which he disses the American people and makes a mockery of our Socialist in Chief's transparency, (2) immigration. Obama changed US immigration policy by executive order on Thursday. Given the 'hot button' nature of this issue, this almost insures a rancorous next two years. Great entertainment for the six o'clock news, and assuring gridlock, which is fine for keeping spending under control, but worthless when it comes to budget, tax and regulatory reform that this country needs to pull it out of six years of subpar growth, (3) Keystone pipeline. The senate [Mary Landrieu] tried and failed passage. Forget that it brings the US even closer to energy independence, creates jobs and builds infrastructure [a favorite Obama theme], consensus is that Obama will veto this measure once it passes a new senate vote in January/February adding some heft to the high value entertainment, gridlock, and lack of reform scenario.

    http://www.coyoteblog.com/coyote_blog/2014/11/more-thoughts-on-immigration-why-i-think-the-tiberius-gracchus-analogy-is-particularly-apt.html

    1. 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.

    While the Fed has ended QE [though in the FOMC minutes released this week, it left the door open ever so slightly that it may chicken out on raising rates]:

    [a] Japan is just getting started [though this week, Abe called a snap election to confirm approval of this policy. What happens if he loses that bet? Just asking.]

    Japanese poll:

    http://www.zerohedge.com/news/2014-11-19/chart-world-should-be-watching-closest

    Thoughts on the Japanese economy (short):

    http://www.coyoteblog.com/coyote_blog/2014/11/thoughts-on-the-japanese-economy.html

    [b] Draghi, well let's just say that while he is having a rough time getting consensus among the central bankers on QE, he is having no problem jawboning it. Indeed, Friday he once again promised that the ECB is 'ready to expand' its asset purchase program. While investors are getting jiggy with it, it remains to be seen just how much he can do.

    http://www.zerohedge.com/news/2014-11-19/eurozones-qe-problem

    [c] on Friday, the Chinese central bank cut its benchmark interest rates which really had the stock guys tip toeing though the tulips

    This all leaves the financial markets with plenty of liquidity, keeping the hedge funds, carry traders and yield chasers supplied with fuel to continue pumping up asset prices.

    http://www.zerohedge.com/news/2014-11-21/deutsche-bank-people-are-talking-about-helicopter-money-and-debt-cancellation-being-

    Ignored, of course, is the uncomfortable fact that QE hasn't worked in the US [however, dearly the Fed may cling to it], hasn't worked in Japan [which is a complete basket case; so much so that Abe has called for new elections to confirm support for his version of QE], and it won't work in Europe because it won't address Europe's problems---too many bureaucrats, too much regulation, too much sovereign debt and an overleverage banking system.

    The danger, of course, is that (1) the central bankers can't wean themselves from QE, so global liquidity continues to expand, (2) their respective sovereign governments are unwilling to provide the real solutions to that which is inhibiting economic growth and (3) at some point an exogenous event occurs which stops the music.

    Of course, since all that liquidity has done nothing to spur economic growth, its absence will likely do nothing to inhibit it. On the other hand, asset prices have done a moon shot on the back of QE; so I am assuming that a decline in liquidity will have some counterproductive impact on those prices.

    1. geopolitical risks. Ukraine/Russia stayed out of the headlines this week though Putin continues saber rattling [he said that he won't allow the defeat of Ukrainian rebels] and moving forward with attempts to ameliorate sanctions. The Middle East was also comparatively quiet, save for the ongoing low level violence---which is of little consolation to those who died. Despite this relative calm, this is the source of a potential exogenous factor that could produce the loudest bang.
    1. economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. The debacle continues this week as PMI's around the world [including Germany and China] were reported to have declined. But perhaps the biggest headline was that Abe formally announced a delay in the second tax cut [good news both economically and politically], called for new elections in December in the search [hope?] for a mandate/approval of his policies and to hedge his bets, he threw some new spending proposals to try to buy at least a few votes. If he wins, the Japanese citizenry loses because nothing [i.e. recession] will change. If he loses, the question is what policy changes are going to take place and how will they impact global markets? Talk about a potential exogenous event.

    Bottom line: the US economy continues to struggle along and, at least for the moment, appears strong enough to withstand any negative fallout from a slowing world economy. The rest of the globe once again produced economic results that pointed to recession, leaving that as number one on our risk hit parade.

    Abe is putting his economic policies on trial. The bad news is that whether he wins or loses, the outcome is likely to be negative long term. The good news is if he wins Japanese QEInfinity marches on in the short run and with it the asset price chasing of hedge funds, carry traders, yield chasers and prop trading desks.

    China moved to ease monetary policy and Draghi is once again promising QE, though I think that this is just more of his 'whatever necessary' rhetoric which to date has never been backed up by action. So for the time being, financial markets are awash with cheap, easy money.

    On the geopolitical front, there was little news this week. While the odds of a disastrous exogenous event occurring may be small, the magnitude of the consequences of such an event are enormous.

    This week's data:

    1. housing: weekly mortgage and purchase applications were up; October housing starts fell but permits were up; October existing home sales were better than anticipated; November homebuilder confidence was up,
    1. consumer: weekly retail sales were mixed; weekly jobless claims were down less than consensus,
    1. industry: October industrial production and capacity utilization fell; the November Markit PMI was disappointing; the November NY and Kansas City Feds' manufacturing indices were slightly better than expectations, while the Philly Fed index blew that doors off estimates [however, as I noted Friday, it seems likely to me that this number will be revised],
    1. macroeconomic: the October leading economic indicators rose more than anticipated; PPI for final demand rose much more than consensus; the headline and ex food and energy CPI came in slightly hotter than expected.

    The Market-Disciplined Investing

    Technical

    The indices (DJIA 17810, S&P 2063) continued their sideways consolidation early in the week, then spiked on Friday after QE good news from China and Draghi. The Dow closed in uptrends across all timeframes: short term (16084-18830, intermediate term (16053-21083) and long term (5159-18512).

    The S&P finished one point above the upper boundary of its long term uptrend (983-2062). That starts our time and distance discipline. If the S&P remains above that upper boundary though the close next Friday, the break will be confirmed. Of course, the question becomes, then what? How do you measure how far up is, when the S&P is already over its upper boundary? My initial thought is that if it exceeds the upper boundary by the same magnitude that it did at the 2007 high, the potential upside target could be around 2450.

    Of course, a lot has to happen technically before we get serious about that kind of upside, i.e. the break has be confirmed plus the Dow has to confirm its own break and it's still 700 points away from that. Furthermore, I think it important to note that the S&P intraday traded well above 2062 on Friday but couldn't hold that magnitude of an advance. To fall back and finish so near 2062 suggests to me that the quality of this break is not that great. Nonetheless, the S&P has challenged its upper boundary and I am just quantifying what the potential upside if a break is confirmed.

    Volume rose on Friday but much of it was due to options expiration; breadth was strong. The VIX fell, ending right on the lower boundary of its short term uptrend, closely reflecting (inversely) the action in the S&P. It continued within its intermediate term downtrend and below its 50 day moving average.

    http://www.zerohedge.com/news/2014-11-21/levered-canary-coalmine-high-yield-flashing-sell-signal-says-barclays

    The long Treasury was up and is close to breaking out of its very short term trading range. It remained within its short term uptrend, its intermediate term trading range and above its 50 day moving average.

    GLD had another strong day on Friday, ending (1) above the lower boundary of its former long term trading range for the second day, leaving open the question as to whether this boundary will prove to be effective resistance or mark the bottom in price for GLD? and (2) very close to its 50 day moving average. Nonetheless, it continues to trade within short, intermediate and long term downtrends.

    Bottom line: the markets are again in a period where numerous boundaries are either being or are very close to being challenged. While a break to the upside in the S&P and a break down in the VIX would be consistent, a rally in the long Treasury and a bottom in GLD are not. Nor are they necessarily consistent with a strong stock market. The point here is that there is a lot cross currents in multiple markets and not all the potential outcomes are positive. I await some clarity.

    Fundamental-A Dividend Growth Investment Strategy

    The DJIA (17810) finished this week about 49.9% above Fair Value (11876) while the S&P (2063) closed 39.7% overvalued (1476). 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.

    US economic progress appears to be back on track. On the other hand, the global economy seems to be going from bad to worse. Japan is in recession and the latest PMI numbers from around the world did not make great reading.

    QE got a boost this week from an interest rate cut by China and more 'whatever necessary' rhetoric from Draghi. So QEInfinity is alive and well and investors are loving it.

    Politically, the conditions have deteriorated. Aside from a more belligerent Putin, violence in the Middle East, the prospect of a nuclear Iran, (1) in the US, Obama has started a fight in which gridlock may be the good news outcome, (2) the EC is thumping France on the wrist over its 2015 budget---not a good sign for concerted policy action to avoid a recession and (3) Abe has called for elections to validate his economic policies. Given their disastrous results, I can't imagine that the electorate would give him a thumbs up. But he is the politician, so he seems to think that he will win. If he is right, I am going to stop feeling sorry for the Japanese electorate. On the other hand, if he loses [which incidentally, no one is talking about], there is the potential for the Mother of All Policy Reversals.

    Yet all of the above remain only potential risks; and in the meantime, in addition to better US economic numbers and an enhanced QE, corporate profits are still rising, the dollar is strong, Japan is pumping out liquidity at a historically unprecedented rate and Santa Claus in coming to town.

    Overriding all of these considerations is the cold hard fact that stocks are considerably overvalued not just in our Model but with numerous other historical measures which I have documented at length. This overvaluation is of such a magnitude that it almost doesn't matter what occurs fundamentally, because there is virtually no improvement in the current scenario (improved economic growth, responsible fiscal policy, successful monetary policy transition) that gets valuations to Friday's closing price levels.

    Bottom line: the assumptions in our Economic Model haven't changed (though our global 'muddle through' scenario is at risk). The assumptions in our Valuation Model have not changed either. I remain confident in the Fair Values calculated---meaning that stocks are overvalued. So 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 2014 Year End Fair Value* 11900 1480

    Fair Value as of 11/30/14 11876 1476

    Close this week 17810 2063

    Over Valuation vs. 11/30 Close

    5% overvalued 12469 1549

    10% overvalued 13063 1623

    15% overvalued 13657 1697

    20% overvalued 14251 1771

    25% overvalued 14845 1845

    30% overvalued 15438 1918

    35% overvalued 16032 1992

    40% overvalued 16626 2066

    45%overvalued 17220 2140

    50%overvalued 17814 2217

    Under Valuation vs. 11/30 Close

    5% undervalued 11282 1402

    10%undervalued 10688 132815%undervalued 10094 1254

    * 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.

    Nov 22 10:22 AM | Link | 1 Comment
  • The Morning Call---Central Banks Continue To Ease

    The Market

    Technical

    The indices (DJIA 17719, S&P 2052) moved higher yesterday, leaving them within uptrends across all timeframes: short term (16082-18828, 1851-2215), intermediate term (16053-20153, 1697-2413) and long term (5159-18521, 783-2062). They are also finished above their 50 day moving averages. The pin action followed the blueprint of the last year---early morning sell off bringing in the 'buy the dip' crowd and finishing up on the day. So appears that the driving force in this uptrend is alive and well.

    Volume was flat; breadth improved. The VIX fell, closing within a short term uptrend, an intermediate term downtrend and remained on its 50 day moving average.

    Update on sentiment (short):

    http://www.bespokeinvest.com/thinkbig/2014/11/20/bullish-sentiment-back-below-50.html

    The long Treasury rose, remaining within a very narrow short term trading range, a short term uptrend, an intermediate term trading range and above its 50 day moving average.

    GLD was up. It ended back above the lower boundary of its former long term trading range for the second time. So the battle over this price level continues. As I have noted, how this tension gets resolved may determine where the bottom is in the current downtrend and will likely indicate near term price direction. Meanwhile, it finished within short, intermediate and long term downtrends and below its 50 day moving average.

    Bottom line: the Averages rallied yesterday as domestic economic data improved while the US political environment grows more hostile and global measures were abysmal, indicating that the positive bias/uptrend remains intact. However, the question that I have posed and still needs an answer, is how will the S&P (2052) handle the upper boundary of its long term uptrend (2062)? I believe that it is the key technical factor at this time; and how it gets resolved will likely determine S&P price movement over the short term and perhaps even longer.

    Stock performance in December (short):

    http://blog.stocktradersalmanac.com/post/December-Top-Performing-SP-500-Month-SPY

    Fundamental

    Headlines

    It was a full day for US economic data which weighed to the plus side: the sole negative was the November Markit PMI which joined the rest of the world's poor performance; the October CPI and ex food and energy numbers were mixed; and weekly jobless claims, the Philly Fed manufacturing index, October existing home sales and October leading economic indicators were all positive. The good news is that many of these measures are primary indicators continuing the trend back to a mixed to positive dataflow and providing more support to our current forecast.

    Clouding the picture somewhat was the ongoing debate as to just how much confusion and uncertainty were apparent in the FOMC minutes released Wednesday.

    Mohamed El Erian on the FOMC minutes (medium):

    http://www.bloombergview.com/articles/2014-11-19/fed-and-markets-more-codependent-than-ever

    Scott Gannis on the FOMC minutes (medium):

    http://scottgrannis.blogspot.com/2014/11/inflation-expectations-are-just-fine.html

    Overseas, the news wasn't quite so jolly with UK grocery store sales falling for the first time in 20 years, Chinese and EU November PMI's down across the board (including Germany), and EU consumer confidence plunging (-11.6) to nine month lows. Finally, the European Commission is considering fining France for failure to reduce its budget deficit---more evidence of the turmoil within EU policy making circles. All this clearly portrays why global recession is the number one risk to our economy.

    ***overnight, China cut its benchmark interest rate, Draghi said that the ECB is 'ready to expand' its asset purchase program---both sure to thrill the easy money, hedge fund, carry trade, yield chasing crowd. The EU reported inflation at +0.4% versus its 2.0% target.

    The other subject commanding investor attention was Obama's speech last night on His executive order on immigration. I don't want to get too deep in the weeds on politics; but (1) most of what Obama proposed I think makes sense---assuming the measures on border security, deportation of criminals and liberalizing the statutes that apply to highly educated/entrepreneurial applicants are more than boilerplate, (2) however, how He did is unconstitutional by His own admission, (3) hence, it is a very slippery slope to initiate good policy using unconstitutional means. Yes, the first time [like now] may seem justifiable; but how soon will it be when we reach the point that not so good policy can be successfully dictated by unconstitutional means?

    That said and forgetting the appropriateness of the policy measure, this step is clearly a thumb in the eye of the GOP which sets the stage for an acrimonious next two years. Unfortunately aside from the entertainment value of the vitriol we are apt to see, nothing is likely going to get done on budget, tax and regulatory reform for another two years, at least; and that is a big negative.

    Obama in His own words on immigration (8 minute video and a must watch):

    http://www.powerlineblog.com/archives/2014/11/day-of-infamy-part-2.php

    Bottom line: the US economy appears to be back on its prior sluggish, below average secular growth rate---'growth rate' being the operative words. That helps expectations for earnings growth and a higher dollar which it turn contributes to investor optimism.

    Regrettably, the rest of the world shows no sign of halting its economic decline, much less stabilizing---there are now three of the world's largest 10 economies officially in recession (Japan, Brazil, Italy). In addition, the current pissing contest between the EC and France over its 2015 budget is indicative of the lack of policy consensus within the EU---not a good sign that agreement can be reached on future policy decisions/moves.

    All other things being equal, it would appear that the pluses and minuses may be in some sort of balance and, hence, provide a modest incentive to accumulate cash only to the most pessimistic investor. However, all things aren't equal. Specifically, there currently exists a really poor equity price/value equation which sooner or later will likely be rectified. And given the magnitude of the downside when, as and if it does occur, it seems reasonable to me that portfolio protection makes sense.

    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 this market on borrowed time (medium)?

    http://www.thefiscaltimes.com/Columns/2014/11/19/Why-Bull-Market-Borrowed-Time

    Thoughts of an investment manager 'riding the wave' (medium and a must read):

    http://www.zerohedge.com/news/2014-11-20/hugh-hendry-live-1-it-felt-sun-only-rose-humiliate-me

    Thoughts on Investing---Lessons from a Dividend Investor #3

    Lesson 3: Let the Dividends Do the Work!

    Most value strategies in stocks--like most growth strategies or momentum strategies--place the burden of earning returns on the investor rather than the investment. Buy low, sell high, repeat as necessary. It is possible to be successful within this framework, but it's not always the most practical approach. Often, the much-maligned buy-and-hold mentality works best, especially with large and growing dividends.

    When I disaggregate the performance of Dividend Investor's model portfolios into income and capital appreciation components, the advantage of letting dividends do the work becomes clear. Cumulatively, there's very little difference between the capital gains we've earned since inception and those of the S&P 500. Our stocks go up when the market goes up, our stocks go down when the market goes down, and there's not much I've been able to do about it.

    But there's a giant difference in terms of income: Thanks to our focus on high-yielding stocks, we've collected more than twice the dividend income that the S&P 500 has paid, and this premium represents our entire margin of outperformance. Better yet, our income--as opposed to the market value of our holdings--is a factor I can influence. By choosing to focus on high-yield stocks, I can manage the amount of income we're receiving. I can't make the market go up or stop going down. By holding our stocks through thick and thin, I've been able to collect all of the income they've paid. I couldn't hope to achieve that while darting in and out.

    I do make trades in our portfolios from time to time. I can't expect to buy and hold a stock forever, and I also enjoy a steady inflow of dividends that I reinvest. But when I make a trade, it's only because I expect it to benefit our income, in terms of current yield, future dividend growth potential, or the quality of the business paying it. Capital appreciation is a hoped-for side effect that I think is reasonable to expect from a stock over a long time horizon, as long as its dividend is growing, and that's the kind of result we've gotten from our portfolios to date. But capital appreciation is still just an item in the cart; it's not the horse.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    The November Markit PMI was reported at 54.7 versus expectations of 56.5. (must read):

    http://www.capitalspectator.com/the-global-economys-slowdown-weighs-on-us-manufacturing/

    Weekly jobless claims dropped 2,000 versus estimates of 6,000.

    http://www.capitalspectator.com/jobless-claims-fell-last-week-underlining-bullish-trend/#more-4471

    The November Philadelphia Fed manufacturing index came in at 40.8 versus forecasts of 18.0. This report is so out of whack with expectations that I wouldn't be surprised if there either isn't a bad number in there or it gets revised in a significant way.

    October existing home sales rose 1.5% versus an anticipated decline.

    http://www.calculatedriskblog.com/2014/11/a-few-comments-on-october-existing-home.html

    The October leading economic indicators jumped 0.9% versus expectations of up 0.5%.

    Other

    Politics

    Domestic

    International War Against Radical Islam

    Nov 21 8:57 AM | Link | Comment!
  • The Morning Call---Confusion At The Fed

    The Market

    Technical

    The indices (DJIA 17685, S&P 2048) ended basically flat yesterday (Dow up slightly, S&P down a tad). Both remained within uptrends across all timeframes: short term (16077-18823, 1846-2212), intermediate term (16053-20153, 1697-2413) and long term (5159-18521, 783-2062). They are also finished above their 50 day moving averages.

    Volume fell; breadth was really poor. The VIX was up modestly, finishing within a short term uptrend, an intermediate term downtrend and remained on its 50 day moving average.

    http://www.seeitmarket.com/high-yield-divergence-subtle-warning-us-equities-13892/

    The long Treasury was down, closing within a very narrow short term trading range, a short term uptrend, an intermediate term trading range and above its 50 day moving average. I mentioned yesterday that the rising dollar was a source of strength for US asset prices.

    http://www.capitalspectator.com/a-conundrum-for-treasury-yields/#more-4451

    (click to enlarge)

    GLD fell. It ended back below the lower boundary of its former long term trading range for the second time, clearly demonstrating the strength of its resistance. That doesn't mean that it won't ultimately be violated; but for the moment, it pushes off any thought that GLD has bottomed. Meanwhile, it finished within short, intermediate and long term downtrends and below its 50 day moving average.

    Bottom line: the Averages paused again yesterday, though they remained well within uptrends across all timeframes. However, divergences continue (as the link above shows), breadth is lousy and the S&P is bumping up against the upper boundary of its long term uptrend. I continue to think that the key technical factor at this time is how the S&P handles the long term trend's upper boundary.

    Three lessons on assuming past indicators of market action will work in the future (medium):

    http://www.marketwatch.com/story/3-lessons-from-the-stock-market-anniversary-everyone-forgot-about-2014-11-18?link=mw_home_kiosk

    Seasonal small cap performance (short):

    http://blog.stocktradersalmanac.com/post/Looking-for-Seasonal-Small-Cap-Outperformance-IWM

    Fundamental

    Headlines

    More news on US housing yesterday: both weekly mortgage and purchase applications were up; October housing starts were disappointing although permits were better than expected. The latter two numbers are by far the more important and they depict a housing market that is struggling just like the entire economy.

    ***overnight, UK grocery store sales fell for the first time in 20 years; EU November PMI's were down across the board, including Germany: the Chinese Markit November PMI was lower.

    There was no international news to digest. But there was plenty happening here to keep the newswires humming. First, the Fed released the minutes of its October FOMC meeting. Dispensing with the mind numbing 'on the one hand' and 'other the other hand' summary of the discussions, I would characterize the overall theme of the minutes as follows: we (the Fed) are about to raise interest rates, but we are not sure of the exact conditions under which we will do so and the global slowdown is really making us nervous (my translation of the latter point is that it will used as the crutch not to raise interest rates if conditions are not perfect). Here is a discussion of the full text if you want to wade through it.

    http://www.zerohedge.com/news/2014-11-19/fomc-minutes-show-deflation-wary-fed-not-worried-about-global-growth

    On the political front, apparently Obama will announce His new executive order on immigration tonight. Rumors are that it will extend protection from deportations to 5 million illegals and provide them with work permits. However, they will not be eligible for social backstop benefits: healthcare, food stamps, etc. benefits. Whether you like this or not, the problems will be (1) no actions are included to secure the border and (2) it is a step too far [in my opinion] in the expansion and exercise of executive authority. What the congress, whose power has been usurped, does about this is anyone's guess. Mine is, a lot of bluster, little action and a further loss of freedom for the electorate.

    http://www.zerohedge.com/news/2014-11-19/president-obama-dictate-immigration-executive-order-vegas-friday

    And (medium):

    http://www.reuters.com/article/2014/11/20/us-usa-immigration-legal-idUSKCN0J40PU20141120

    In addition, a senate panel will investigate commodity price manipulation by JP Morgan and Goldman Sachs. The crimes are not new news, we have covered the regulators' investigation and fines for these misdeeds in prior notes. What is new is that congress is starting to take an interest which could potentially lead to additional penalties. That said, given the massive influence Wall Street exerts on our political process, nothing is likely to come out of this save for some showboating by the pols.

    Bottom line: the US economy continues to advance albeit at a tortured pace. Foreign economies are not nearly so lucky---Japan is a mess and the electorate is now going to be given the chance to vote on whether they want to go down with the ship; Europe is also a mess but has too many conflicting constituencies to come up with coherent, workable monetary/fiscal policies, even assuming that the ruling class can figure out coherent, workable fiscal/monetary policies which to date they haven't.

    ***overnight the European Commission is considering fining France for failure to cut its budget deficit.

    On a longer term basis, that leaves US corporate profit growth at risk and as a result the dollar's current competitive advantage of being the best house on a lousy block. While seasonal biases will be around for another 45 days, stocks are still having to fight other difficult and longer lasting technical problems.

    Over all of this, hangs a really poor price/value equation which sooner or later will likely be rectified. And given the magnitude of the downside when, as and if it does occur, it seems reasonable to me that portfolio protection makes sense.

    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.

    Current asset allocation among fund managers (medium and a must read):

    http://fat-pitch.blogspot.com/2014/11/fund-managers-current-asset-allocation.html

    Investing for Survival

    Building in a margin of safety (medium):

    http://abnormalreturns.com/personal-margin-safety/

    Company Highlights

    EOG Resources Inc. engages in the exploration, development and production of natural gas and crude oil primarily in the US, Canada and offshore Trinidad. The company has grown profits and dividends at a 10-20% rate over the last ten years while earning a 7-20% return on equity. EOG suffered along with most energy related companies in the recent economic downturn. However, management expects results in 2011 to improve and put the company back on a course of rising profits and dividends as a result of:

    (1) a huge inventory of drilling opportunities [Eagle Ford, Bakken],

    (2) growing emphasis on crude oil production, now growing at a 30-50% annually rate,

    (3) management's focus on rationalizing operations,

    Negatives:

    (1) lack of international diversification,

    (2) fluctuations in energy prices,

    (3) intense competition.

    EOG is rated A by Value Line, carries a 26% debt to equity ratio and its stock yields 0.6%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2004

    EOG 0.6% 20% 12% 10

    Ind Ave 2.4 3 41 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2004 Margin Rating

    EOG 26% 19% 4 18% A

    Ind Ave 37 11 NA 14 NA

    Chart

    Note: EOG 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. Long term, the stock is in an uptrend (blue lines). Intermediate term it is in a trading range (purple lines) though it has been struggling to regain its former uptrend. The wiggly red line is the 50 day moving average. The Aggressive Growth Portfolio owns a full position in EOG. The upper boundary of its Buy Value Range is $65; the lower boundary of its Sell Half Range is $171.

    (click to enlarge)

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

    11/14

    News on Stocks in Our Portfolios

    Donaldson misses by $0.02, misses on revenue

    • Donaldson (NYSE:DCI): FQ1 EPS of $0.40 misses by $0.02.
    • Revenue of $597M (-0.3% Y/Y) misses by $25.6M.

    Qualcomm lower after providing long-term targets

    • Qualcomm (QCOM -1.2%) guides at its 2014 analyst day for an 8%-10% revenue CAGR from FY14 (ended in September) to FY19. The company adds it aims to grow EPS faster than revenue, and to return 75% of its free cash flow to shareholders.
    • Qualcomm has set an 85%-86% near-term op. margin target for its licensing unit (QTL), and an 86%-88% long-term target. The chip division (QCT) has been given an 18%-20% near-term op. margin target, and a 20%-22% long-term target. QTL and QCT respectively had 87% and 20% op. margins in FY14.
    • With Chinese payments remaining an issue, QTL is expected to have FY15 revenue of $7.3B-$8.3B vs. $7.6B in FY14. 3G/4G devices sales are expected to rise 7%-8%, and ASPs to fall 9%-10%.
    • QCT's revenue is expected to rise to $19.3B-$20.3B from FY14's $18.7B. MSM chip ASP is expected to fall 3%-5% due to a mix shift towards emerging markets and "premium tier mix challenges" - the latter could be a reference to the fact Apple (unlike Samsung) exclusively relies on its own app processors, albeit while relying on Qualcomm for baseband modems and other ICs.
    • Qualcomm sold off two weeks ago after missing FQ4 estimates and providing light FQ1/FY15 guidance.

    Economics

    This Week's Data

    Weekly jobless claims fell 2,000 versus expectations of down 6,000.

    October CPI came in flat versus estimates of -0.1%; ex food and energy, it was +0.2% versus forecasts of +0.1%.

    http://www.calculatedriskblog.com/2014/11/cpi-unchanged-in-october-weekly-initial.html

    Other

    Why is anyone surprised that Abenomics failed (medium)?

    http://www.nakedcapitalism.com/2014/11/anyone-surprised-abenomics-failed.html

    Wage inflation remains low (short):

    http://blog.yardeni.com/2014/11/wage-inflation-remains-abnormally-low.html

    Politics

    Domestic

    International

    Update on US/Russian relations (short):

    http://www.zerohedge.com/news/2014-11-19/meanwhile-what-really-taking-place-behind-second-us-russian-cold-war

    Disclosure: The author is long EOG, DCI, QCOM.

    Nov 20 9:12 AM | Link | Comment!
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