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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---Liar,Liar, Pants On Fire

    The Market

    Technical

    After a rough Tuesday, the indices (DJIA 18162, S&P 2123) bounced back yesterday. Both closed above their 100 day moving average. However, they are again out of sync on their former all-time highs. The S&P traded back above that level, leaving it as support; while the Dow remains below its comparable level.

    Longer term, the Averages remained well within their uptrends across all timeframes: short term (17247-20052, 2026-3005), intermediate term (17405-22533, 1828-2595 and long term (5369-19175, 797-2138).

    Volume fell; breadth recovered nicely. The VIX dropped 5%+, finishing below its 100 day moving average and the upper boundary of its very short term downtrend. It remains a plus for stocks.

    A break in the advance/decline indicator (medium):

    http://www.zerohedge.com/news/2015-05-28/bull-market-dealt-significant-blow

    The long Treasury rose fractionally, but closed below its 100 day moving average and within a short term downtrend. However, it remained above the upper boundary of a very short term downtrend, negating that trend.

    GLD was down slightly, ending below its 100 day moving average and the neck line of the head and shoulders pattern.

    Oil was down again, leaving it within a short term trading range. The dollar was up fractionally, finishing well above the lower boundary of that short term uptrend which had been technically negated. It is near the upper boundary of a developing very short term downtrend. If it pushes through that level, I will re-instate the short term uptrend.

    Bottom line: clearly, the buy the dip crowd still has life in it. Yet to be seen is whether it has the power to make that push the indices to the upper boundaries of their long term uptrends. I remain of the opinion that prices will almost surely challenge those trend lines but that any further advance will be limited to the rate of ascent of those boundaries.

    The dollar, TLT, GLD and oil all took the day off; apparently unimpressed with whatever was making the stock boys get jiggy. This doesn't improve my confusion.

    Update on sentiment (short):

    http://www.marketwatch.com/story/irrational-exuberance-is-dooming-the-stock-market-2015-05-27?siteid=rss&rss=1&curator=thereformedbroker&utm_source=thereformedbroker

    Fundamental

    Headlines

    Following Tuesday data dump fest, US economic releases slowed to a trickle: weekly mortgage applications fell while purchase applications rose; the rate of growth in month to date retail chain store sales declined for a second week in a row. In short, a mixed reading among secondary indicators; so not a lot of information value.

    Given the NASDAQ making a new all time high, I should mention the takeover offer for Broadcom which helped send the chips stocks on a moonshot.

    No international economic news; though once again the Greek bail out negotiations were center stage. This time on a statement by the Greek PM that Greece and the Troika were near a deal. Here is the statement and the Troika's response (medium):

    http://www.zerohedge.com/news/2015-05-28/greece-feigned-deal-progress-launched-rumors-avert-bank-run

    The German denial (medium):

    http://www.zerohedge.com/news/2015-05-27/jpmorgan-warns-greece-not-investable-germany-denies-any-deal-progress

    ***overnight, Japanese April retail sales were up modestly after three down months in a row.

    Bottom line: very little in the fundamentals to account for yesterday's rebound in equity prices---certainly nothing in the economic outlook either here or abroad. The Broadcom takeover is just part of the QE cheap money fueled M&A extravaganza that has kept investors wetting their pants. Unfortunately, all this cheap money is not being spent to increase American productive capacity or efficiency, which ultimately will come back to haunt us. But that is a long term negative; and right now investors can't see much past today's close.

    The Greek news may also be a plus, assuming that it is not more of the same crap trumpeted by the Greek government in their 'game theory' approach to the Troika negotiations. For the sake of our own forecast, I hope that it is true. But as I have made clear, if Greece defaults/exits all bets are off. In any case, with the S&P sniffing the upper boundary of its long term uptrend, there is not a lot of room on the risk/reward scale for anything short of a storybook ending.

    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.

    The Fed's pretense of knowledge (medium):

    http://www.alhambrapartners.com/2015/05/25/the-pretense-of-knowledge/

    Update on S&P earnings expectations (short):

    http://politicalcalculations.blogspot.com/2015/05/spring-2015-snapshot-of-expected-future.html#.VWX7es_BzGd

    Company Highlight

    Blackrock Inc. provides investment management services (fixed income, equity and cash management) to institutional clients and individual investors worldwide as well as a family of open-end and closed-end mutual funds and offers risk management, investment system outsourcing and financial advisory services. The company has grown its earnings per share between 22% over the last ten years and raised its dividend per share from $.40 in 2003 to $7.72 in 2014. In addition, BLK earned an 8-10% return on equity. Growth should continue as the company:

    (1) introduces new financial services, especially ETF's,

    (2) expands globally,

    (3) buys back stock,

    (4) makes acquisitions.

    Negatives:

    (1) a large portion of its fees are performance based,

    (2) increasing operating expenses,

    (3) global presence increases currency and regulatory risks.

    Blackrock is rated A by Value Line, has a 25% to equity ratio debt and its stock currently yields 2.5%.

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    BLK 2.5% 9% 44% 10

    Ind Ave 2.0 9 30 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    BLK 25% 12% 1 28% A

    Ind Ave 36 18 NA 18 NA

    Chart

    Note: BLK stock made good progress off its March 2009 low, quickly surpassing the downtrend off it September 2008 high (straight red line) and the November 2008 trading high (green line). Long term it is in an uptrend (blue lines). Intermediate term it is in an uptrend (purple line). Short term, it is an uptrend (brown line). The wiggly red line is the 100 day moving average. The Aggressive Growth Portfolio owns a 75% position in BLK. The upper boundary of its Buy Value Range is $340. The lower boundary of its Sell Half Range is $546.

    (click to enlarge)

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

    5/15

    Investing for Survival

    12 things I learned from Morgan Housel: Part 12

    12. "When you think you have a great idea, go out of your way to talk with someone who disagrees with it. At worst, you continue to disagree with them. More often, you'll gain valuable perspective. Fight confirmation bias like the plague."

    "Starting with an answer and then searching for evidence to back it up. If you start with the idea that hyperinflation is imminent, you'll probably read lots of literature by those who share the same view. If you're convinced an economic recovery is at hand, you'll probably search for other bullish opinions. Neither helps you separate emotion from reality."

    "Charles Darwin regularly tried to disprove his own theories, and the scientist was especially skeptical of his ideas that seemed most compelling. The same logic should apply to investment ideas."

    I have always loved this Charlie Munger quote on confirmation bias: "Most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. …The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can't get in. … And of course, if you make a public disclosure of your conclusion, you're pounding it into your own head." The trick is to really listen to other people who you trust. Ray Dalio's investing process is very focused on this approach. Set out immediately below are two paragraphs on Dalio's view:

    "There's an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it's worth the effort to consider what others are saying - not simply the others' conclusions, but the reasoning behind them - to be assured that they aren't making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call 'open-minded and assertive at the same time.' This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven't reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions.

    When most people hear me describe this approach, they typically say, "No problem, I'm open-minded!" But what they really mean is that they're open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view."

    Both Morgan Housel and Charlie Munger cite Darwin as a model for people working hard to avoid confirmation bias. Here's Munger: "The great example of Charles Darwin is he avoided confirmation bias. Darwin probably changed my life because I'm a biography nut, and when I found out the way he always paid extra attention to the disconfirming evidence and all these little psychological tricks. I also found out that he wasn't very smart by the ordinary standards of human acuity, yet there he is buried in Westminster Abbey. That's not where I'm going, I'll tell you."

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    Weekly jobless claims rose 7,000 versus expectations of a decline of 4,000.

    Other

    The $500 million spec home (short):

    http://www.coyoteblog.com/coyote_blog/2015/05/ok-i-am-calling-the-market-top.html

    Politics

    Domestic

    Obama gets set back on immigration executive order (medium):

    http://www.zerohedge.com/news/2015-05-27/obama-loses-immigration-battle-states-block-executive-order

    International

    How China's new 'silk road' is altering geopolitics (medium and very interesting):

    http://www.nakedcapitalism.com/2015/05/how-the-chinas-new-silk-road-is-shifting-geopolitics.html

    I have to wonder if this Russian move in Ukraine is the result of or in conflict with whatever agreement Kerry made with Putin in his recent visit?

    http://www.reuters.com/article/2015/05/27/us-ukraine-crisis-russia-military-idUSKBN0OC2K820150527

    May 28 8:55 AM | Link | Comment!
  • The Morning Call---Stocks Losing Momentum?

    The Market

    Technical

    The indices (DJIA 18041, S&P 2104) took a lickin' yesterday. Both closed above their 100 day moving average but below their former all-time highs. The S&P traded above that level long enough that it technically should have become support. The issue now is follow through---in either direction. A quick rebound would leave it as support; more downside would suggest its May 20 high would become resistance.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17247-20052, 2024-3003), intermediate term (17398-22526, 1826-2593 and long term (5369-19175, 797-2138).

    Volume rose noticeably; breadth was terrible. The VIX spiked 16% but still finished below its 100 day moving average and the upper boundary of its very short term downtrend. It remains a plus for stocks.

    The long Treasury was quite strong, closing above the upper boundary of a very short term downtrend. This is the first indication since mi April of a break in downward momentum. However, it remained below its 100 day moving average and within a short term downtrend. The key now is follow through: a quick drop would leave the very short term downtrend in tact; another one point move to the upside would imply a challenge of its 100 day moving average and the upper boundary of its short term downtrend.

    GLD was down big and finished below its 100 day moving average and the neck line of the head and shoulders pattern.

    Oil was down 3%, leaving it within a short term trading range. The dollar rallied 1%. While the lower boundary of its short term uptrend has been technically negated, it didn't remain below that trend very long and its rally back up through the trend line has been substantial enough that another 1.5% to the upside will re-establish that short term uptrend and set it up for a challenge of its intermediate term trading range.

    Bottom line: that there wasn't sufficient momentum to push the Averages to a challenge of the upper boundaries of their long term uptrends---something that I thought was inevitable---suggests some exhaustion among the bulls. That doesn't mean that the end is near; we have to see a big pick up in selling and the buyers manning the foxholes before that happens. It does support my belief that that the upper boundaries of the indices long term uptrends will likely prove unassailable.

    I thought that the up dollar, up TLT, down GLD, down oil all made sense if you assume a low inflation scenario; however, that would also suggest a rate hike later rather than sooner which has heretofore meant higher stock prices. So can still color me confused on what exactly is being discounted.

    Charles Biderman on falling commodity prices (medium):

    http://www.zerohedge.com/news/2015-05-26/were-living-make-believe-world-biderman-warns-global-recession-inevitable

    Stock performance in June (short):

    http://jeffhirsch.tumblr.com/post/119965592678/near-the-bottom-historically-june-only-improves

    Fundamental

    Headlines

    Yesterday was huge for US economic data. In fact, it represented half of all the datapoints being released this week. Most of stats were either slightly above (May consumer confidence, the Case Shiller home price index, April durable goods), slightly below (the May Markit flash services index) or right on (May Richmond Fed manufacturing index) estimates. Two numbers were well off expectations: April new home sales were over forecast while the May Dallas Fed manufacturing index was much lower than anticipated.

    On balance, the results were a plus, especially with the upbeat April durable goods and new home sales reports---which are primary indicators. That said, in aggregate, the data wasn't so positive that it would give me pause to reconsider our forecast or, in my opinion, the data driven Fed to contemplate a sooner versus later rate hike.

    ***overnight in Greece (medium):

    http://www.zerohedge.com/news/2015-05-27/greece-nowhere-close-deal-depositors-pull-%E2%82%AC300-million-banks-single-day

    And (medium):

    http://www.bloomberg.com/news/articles/2015-05-26/greek-default-nerves-risk-eclipsing-germany-s-dresden-g-7-agenda

    David Stockman on a Grexit (medium and a must read):

    http://www.zerohedge.com/news/2015-05-26/graccident-will-trigger-demise-ecb-and-worlds-toxic-regime-keynesian-central-banking

    Bottom line: every time we get a positive data dump, I caution that we need some upbeat stats just so I don't have to lower our economic growth forecast again. Further, a number of in line and/or slight beats would just confirm our new outlook. The key to considering any improvement in the growth rate would be a whole series of reports that are well above consensus. We are not even close to that. So our forecast for sub, subpar growth is intact. That suggests more downward sales and earnings revisions are in the offing.

    Of course, equity investors may continue to ignore any decline in the E of P/E as long as the Fed keeps rates low. Even so, the discount rate on corporate earnings can't decline much further simply because there is not much further to go. In short, with limited upside on P/E's and downward pressure E, what is left to drive prices higher other than more QE? I suggest that at some point, the Fed is going to provide too much of a good thing. When that occurs, I haven't a clue. But I am just suggesting that from here the upside is limited while the downside, while unknown, potentially includes some very large numbers. For me, that makes cash attractive, dismal yield aside.

    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.

    The greater fool (medium):

    http://www.ft.com/intl/cms/s/0/0dfc22da-fedc-11e4-94c8-00144feabdc0.html#axzz3bF2YRnP7&curator=thereformedbroker&utm_source=thereformedbroker

    The latest from John Hussman (medium):

    http://www.advisorperspectives.com/commentaries/20150525-hussman-funds-voting-machine-weighing-machine

    A valuation metric for the bulls; but is that inflation number correct? (short):

    http://www.ritholtz.com/blog/2015/05/inflation-vs-pe-model-1965-to-present/

    Investing for Survival

    12 things I learned from David Tepper: #2

    2. "Markets adapt. People adapt."

    People have a tendency to extrapolate from the present in trying to predict the future. Many pundits make their living extrapolating X or Y to the sky or to the ground depending on the most recent trend. David Tepper makes the point with an example: "In 1898, the first international urban-planning conference convened in New York. It was abandoned after three days because none of the delegates could see any solution to the growing crisis caused by urban horses and their output. In the Times of London, one reporter estimated that in 50 years, every street in London would be buried under nine feet of manure." The nature of capitalism is that often the remedy for high prices is high prices and low prices is low prices. Incentives are created and people respond in a capitalist economy by adapting based on price signals. David Tepper likes to make bets against people who don't believe markets will adapt. He stuffs perma-bears and perma-bulls in his game bag.

    News on Stocks in Our Portfolios

    Tiffany beats by $0.11, beats on revenue

    · Tiffany (NYSE:TIF): Q1 EPS of $0.81 beats by $0.11.

    · Revenue of $962M (-4.8% Y/Y) beats by $43.32M.

    Economics

    This Week's Data

    The March Case Shiller home price index rose 1.0% versus expectations of +0.9%.

    The May Markit flash services index was reported at 56.4 versus estimates of 56.5.

    April new home sales jumped 6.8% versus forecasts of up 5.8%.

    http://www.calculatedriskblog.com/2015/05/new-home-sales-increased-to-517000.html

    May consumer confidence came in at 95.4 versus consensus of 95.1.

    http://www.advisorperspectives.com/dshort/updates/Conference-Board-Consumer-Confidence-Index.php

    The May Richmond Fed manufacturing index was reported at 1, in line.

    The May Dallas Fed manufacturing index came in at -20.8 versus expectations of -10.0.

    Weekly mortgage applications fell 1.6% but purchase applications rose 1.0%.

    Month to date retail chain store sales slowed further.

    Other

    Fears of a global recession (medium):

    http://www.telegraph.co.uk/finance/economics/11625098/HSBC-fears-world-recession-with-no-lifeboats-left.html

    Why consumers didn't spend the savings on lower oil prices (medium):

    http://www.minyanville.com/business-news/editors-pick/articles/peter-atwater-gas-consumer-spending-gas/5/26/2015/id/56067

    Chinese stocks on a moonshot (short):

    http://www.zerohedge.com/news/2015-05-26/china-equity-rally-reaches-escape-velocity-shenzhen-trades-71x-earnings

    And yet, another Chinese company defaults (medium):

    http://www.zerohedge.com/news/2015-05-26/chinas-third-bond-default-imminent-coke-supplier-miss-payment

    Politics

    Domestic

    International War Against Radical Islam

    May 27 9:06 AM | Link | Comment!
  • Tuesday Morning Chartology

    The Market

    Technical

    Tuesday Morning Chartology

    The S&P is in uptrends across all timeframes even the very short term and remains well above its 100 day moving average. The only negative from a technical standpoint is that it has not shown much follow through after trading above its former all-time high. It is only 12 points from the upper boundary of its long term uptrend which, it seems to me, it will inevitably challenge. However, I continue to believe that challenge will not be successful in any meaningful way.

    (click to enlarge)

    A minor rally last week notwithstanding, the momentum remains to the downside in TLT, apparently the result of the bond guys seeing a rate hike sooner than the stock guys.

    (click to enlarge)

    GLD retreated last week back below its 100 day moving average and the neckline of the head and shoulders pattern. The best thing we can say is that it isn't going down, at least, on a short term and intermediate term basis.

    (click to enlarge)

    The VIX closed the week below its 100 day moving average and below the upper boundary of its very short term downtrend. It is drawing neared to the lower boundaries of its short and long term trading ranges, suggesting its value as portfolio insurance continues to rise.

    (click to enlarge)

    Fundamental

    The latest from Greece (short):

    http://www.reuters.com/article/2015/05/26/us-eurozone-greece-idUSKBN0OB0U820150526

    Anti-austerity parties win in Spanish elections (medium):

    http://www.zerohedge.com/news/2015-05-25/greek-anti-austerity-wave-spreads-dramatic-loss-spanish-status-quo

    Investing for Survival

    12 things I learned from Morgan Housel: Part 11

    11. "Daniel Kahneman's book Thinking Fast and Slow begins, 'The premise of this book is that it is easier to recognize other people's mistakes than your own.' This should be every market commentator's motto."

    It is an unfortunately aspect of human nature that we do not have perspective on ourselves. Humans have developed a series of heuristics that make it hard for us, especially in a modern world, to see our own mistakes. If you have an interest in exploring this topic, Daniel Kahneman explains why this is true in this excerpt from his book:

    "I'm better at detecting other people's mistakes than my own…. When you are making important decisions and you want to get it right, you should get the help of your friends. And you should get the help of a friend who doesn't take you too seriously, since they're not too impressed by your biases."

    Having a posse of people around you who are afraid to tell you that the emperor has no clothes is not helpful in overcoming this bias. Morgan Housel cites Charlie Munger's wisdom on this problem: "Only in fairy tales are emperors told they're naked." Pavlovian association and other heuristics Morgan has written about acting together in the form of a lollapalooza make things worse.

    News on Stocks in Our Portfolios

    Economics

    This Week's Data

    April durable goods fell 0.5% versus expectations of down 0.6%; ex transportation, they rose 0.5% versus estimates of +0.4%.

    Other

    How the Fed depressed the recovery (short):

    http://blog.yardeni.com/2015/05/how-fed-depressed-recovery-excerpt.html

    Politics

    Domestic

    International

    In case you weren't aware (medium):

    http://www.zerohedge.com/news/2015-05-25/war-will-be-inevitable-unless-us-stops-meddling-terrotorial-dispute-chinese-state-ne

    Propaganda but something to think about (medium):

    http://www.zerohedge.com/news/2015-05-25/isis-planning-us-nuclear-attack-next-12-months-report

    May 26 9:18 AM | Link | Comment!
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