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Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 46 years of investment... More
My company:
Strategic Stock Investments
My blog:
Investing for Survival
  • The Morning Call & Subscriber Alert--Is The Bond Market Pushing The Fed To Raise Rates?

    The Market

    Technical

    The indices (DJIA 17928, S&P 2089) got banged yesterday. The S&P remained above its 100 day moving average; but fell back below its prior high---this is the second failed attempt to break the trend of lower highs. The Dow closed above its 100 day moving average and (remains) below its prior high. The trend of lower highs remains intact.

    Longer term, the indices continue to trade well within their uptrends across all timeframes: short term (17110-19907, 2003-2984), intermediate term (17232-22347, 1809-2582 and long term (5369-18873, 797-2129).

    Volume rose; breadth was terrible. The VIX was up 11%, but still finished below its 100 day moving average and within a short trading range. Its pin action remains supportive of rising stock prices; though given its proximity to the lower boundary of its long term trading range, I still believe that it cheap portfolio insurance.

    The long Treasury was down again, though only slightly. It ended below its 100 day moving average, the lower boundary of its short term trading range, thereby negating it and the lower boundary of its intermediate term uptrend. If TLT closes below this boundary at the end of the day, that trend will also be negated.

    As you know, I am very concerned about the fundamental implications of rising interest rates because (1) it suggests our economic forecast (weak economy, potential deflation) is incorrect and (2) hence, our muni bond bet in the ETF Portfolio is at risk. I listed a number of different explanations for higher interest rates in yesterday's Morning Call.

    Two of those were cited as reasons for yesterday's sell off: higher oil prices (inflation) and fear of a Fed rate hike. I still have a problem with the inflation explanation. But the more I think about it, the more the reason (3) listed in yesterday's Morning Call (i.e. investors are sick and tired of getting paid little to nothing and are fearful that others may feel the same) is making sense to me in this context: the Fed has always missed the timing of a transition to tighter money; indeed, what has prompted the eventual tightening move most frequently was not economic conditions but rather the bond market forcing the move by pushing interest rates up on its own leaving the Fed no choice but to follow. I am not saying that this is what is now occurring; I am saying that it is becoming my number one choice if this latest move in yields is something more than noise. I am on the edge of my seat.

    The Fed balance sheet is shrinking. i.e. it is tightening. Could this help explain the poor price action in Treasuries? (short):

    http://gavekal.blogspot.com/2015/05/total-assets-at-fed-at-six-month-lows.html

    Here is a discussion on the time lag between rising rates and recession (medium):

    http://www.zerohedge.com/news/2015-05-05/mistake-everyone-making-about-fed-rate-hikes

    GLD was up but closed below its 100 day moving average and continued to build a head and shoulders formation.

    Finally, oil appears to be breaking out to the upside of its recent trading range (see above).

    (click to enlarge)

    Bottom line: try as they might, the indices have not been able to successfully challenge (under our time and distance discipline) the trend of lower highs dating back to late February. That suggests that the ranks of the bulls are diminishing. That said, there has been no sign of a pickup in number of bears. So on a short term basis, the Averages seem stuck between their 100 day moving averages (or the lower boundary of their short term uptrends) on the downside and the trend to lower highs on the upside. I have no clue which way they break.

    Longer term, the Averages are solidly within uptrends across all timeframes.

    The pin action in the long Treasury makes me more nervous each day---I just don't know about exactly what. There are several possible fundamental explanations and one strictly technical one---random price movement. The last notwithstanding, I am looking for a potential change in the economic landscape which could alter our economic and investment outlooks.

    Sell in May and go away. Myth or reality? (medium):

    http://streettalklive.com/index.php/blog.html?id=2711

    Fundamental

    Headlines

    Lots of US economic data yesterday; and they were evenly divided. Negatives: the March US trade deficit and the April PMI services index. Positives: month to date retail chain store sales and the April ISM nonmanufacturing index---the ISM and trade data being the most significant. Week to date, the stats have been mixed.

    http://blog.yardeni.com/2015/05/us-trade-data-confirm-weak-global.html

    Overseas, Australia's central bank lowered its key interest rate, keeping the global QE merry-go-round spinning; and the EU raised in 2015 economic growth forecast---another indication that Europe may be pulling out of its slump. On the other hand, forecasts of improvement, especially from eurocrats, for the last seven years have largely proven to be well short of reality.

    Plus, I doubt that there is any provision for a Greek exit/default in that outlook; and yesterday's news on that front was anything but optimistic:

    (1) EU Commission slashes Greek economic forecasts (medium):

    http://www.reuters.com/article/2015/05/05/us-eurozone-forecasts-greece-idUSKBN0NQ0Q220150505

    (2) the Troika can't agree among themselves on the proper conditions for a bail out (medium):

    http://www.zerohedge.com/news/2015-05-05/greek-deal-limbo-after-serious-disagreement-between-eu-imf

    (3) and the ECB tightens the screws on Greek banks (short):

    http://www.bloomberg.com/news/articles/2015-05-06/ecb-meeting-agenda-said-to-include-greek-collateral-haircuts

    ***overnight, Greece made a E200 million payment to the IMF but faces a more daunting one of E750 million on May 12; the UK services PMI came in at 59.5 versus expectations of 58.5.

    Bottom line: yesterday's US economic news was mixed and that is a plus. But it is not to say that economy isn't weakening. The eurocrats are predicting that the EU economy is improving, though I believe it should be taken with a grain of salt. The Greek bail out remains iffy. The Australian central bank is cutting rates, suggesting that all may not be well out in the Pacific. And finally, bonds are acting like something is amiss (at least in our weak economy/deflation forecast). In short, the news flow is confusing; so it is no wonder stocks are acting the same way.

    I have no big picture conclusions about this mixed bag of news or about the message of the bond market. I do believe that stocks are extremely overvalued; so unless the ultimate economic/interest rate environment is quite positive, stock prices are at risk.

    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 latest from John Hussman (medium):

    http://www.advisorperspectives.com/commentaries/20150504-hussman-funds-two-point-three-sigmas-above-the-norm

    QE and stock prices (short):

    http://www.ritholtz.com/blog/2015/05/the-qe-era/

    Subscriber Alert

    A number of the stocks on our Buy Lists have fallen below the lower boundaries of their respective Buy Value Ranges, so they are being Removed from their respective Buy Lists. None of them have traded down to their Stop Loss Price. They include:

    In the Dividend Growth Portfolio:

    ITC Corp (ITC-$36)

    South Jersey Industries (SJI-$51)

    Chevron (CVX-$108)

    The Dividend Growth Portfolio doesn't own ITC and will continue to Hold SJI and CVX.

    In the Aggressive Growth Portfolio:

    Cummins (CMI-$139)

    Donaldson (DCI-$35)

    The Aggressive Growth Portfolio will continue to Hold CMI and DCI.

    Investing for Survival

    How to learn more about investing?

    There are three main answers here:

    1. Study the classics

    2. Study areas where there are current problems

    3. Read widely

    When I talk about the classics, I am talking about the writings of Ben Graham, Buffett, Munger, Phil Fisher, and notable investors who have spilled their theories to the world. Also men like Seth Klarman, Howard Marks, Ray Dalio, George Soros, Bill Gross, Jeffrey Gundlach and other clever investors who understand the markets well.

    Second, if there are current problems in the market, do your research, and try to understand them well. This may take more effort, because current problems are not well-understood, or they would have been solved already.

    The correct answer is not immediately obvious. Prior to the crisis, it is a minority view. After the crisis, everyone knew it would happen .

    Try to view the markets in a comprehensive way. Think of the buyer and the seller, and their motives. Look for minority opinions, and analyze them - maybe that have it right. Most of the time, you will throw their opinions away, but in rare cases you might find something valuable.

    Finally, read widely. Try to understand the changing economy. and where value is being added where current valuations don't reflect it. Understand the economic world, and dedicate time to it. I dedicated an hour par day while I was an actuary to understanding all manner of investments for ten years before I had my first job in investing at age 38.

    And read economic history. It is very valuable to understand how things worked in the past, because it offers clues to those of us in the present who don't think "It's Different This Time."

    News on Stocks in Our Portfolios

    Occidental Petroleum EPS in-line, misses on revenue

    · Occidental Petroleum (NYSE:OXY): Q1 EPS of $0.04 in-line.

    · Revenue of $3.09B (-37.7% Y/Y) misses by $210M.

    Western Gas Partners EPS of $0.26

    · Western Gas Partners (NYSE:WES): Q1 EPS of $0.26 may not be comparable to consensus of $0.44.

    · Revenue of $375.1M (+27.7% Y/Y) beats by $32.03M.

    Economics

    This Week's Data

    Month to date retail chain store sales improved slightly year over year.

    The April PMI services index was reported at 57.4 versus estimates of 57.7.

    The April ISM nonmanufacturing index came in at 57.8 versus forecasts of 56.5.

    http://www.calculatedriskblog.com/2015/05/ism-non-manufacturing-index-increased.html

    Weekly mortgage applications fell 4.6% but purchase applications rose 1.0%.

    The April ADP private payroll report showed a 3.4% decline in employment versus expectations of an 8.4% increase.

    http://www.advisorperspectives.com/dshort/updates/Anticipating-the-Friday-Employment-Report.php

    First Quarter nonfarm productivity declined 1.9%, in line; unit labor costs rose 5.0% versus consensus of up 4.6%.

    Other

    The source of the EU's economic problems (medium):

    http://www.nakedcapitalism.com/2015/05/persecution-assassination-people-greece-performed-inmates-troika-direction-eurogroup.html

    QE and inflation (short):

    http://www.pragcap.com/no-the-inflation-from-qe-is-not-inevitable

    SEC commissioner bashes Deutschebank (medium):

    http://www.zerohedge.com/news/2015-05-05/sec-commissioner-furious-deutsche-banks-decade-lying-cheating-and-stealing

    Politics

    Domestic

    International War Against Radical Islam

    May 06 9:29 AM | Link | Comment!
  • The Morning Call--Is The Long Treasury Trying To Tell Us Something?

    The Market

    Technical

    The indices (DJIA 18070, S&P 2114) rallied yesterday. The S&P remained above its 100 day moving average and rose above its prior high---this is the second attempt to break this trend. A close above it today will negate it---though remember last time, it negated the trend, then reversed sharply the following day. The Dow closed above its 100 day moving average (it bounced off this support level on Friday) and below its prior high. So the Averages may once again be out of sync with respect to their recent trend of lower highs.

    Longer term, the indices remained well within their uptrends across all timeframes: short term (17091-19888, 2003-2984), intermediate term (17213-22339, 1807-2580 and long term (5369-18873, 797-2129).

    Volume fell sharply (UK and Japanese markets were closed); breadth was mixed. The VIX rose slightly, finishing below its 100 day moving average and within short and intermediate term trading ranges. Its pin action remains supportive of rising stock prices.

    http://www.zerohedge.com/news/2015-05-04/no-really-who-buying

    Seasonal MACD sell signal (short):

    http://jeffhirsch.tumblr.com/post/118146339888/seasonal-macd-sell-signal

    The long Treasury was seriously pounded again, ending below its 100 day moving average and the lower boundaries of its short term trading range and intermediate term uptrend. If TLT remains below these boundaries, the short term trading range will be negated today and the intermediate uptrend tomorrow.

    As I noted last week, a break of the intermediate trend would raise questions about our underlying fundamental assumptions, i.e. a weak economy/potential deflation. What could account for rising rates?: (1) an anticipated burst of inflation, though GLD performance belies that, (2) an improving US economy of which there is little evidence, (3) investors are sick and tired of getting paid little to nothing and are fearful that others may feel the same; then what about stocks? (4) an improving EU economy prompting a shift by investors from dollar assets to EU assets. This is a possibility. It is supported by [a] a weakening dollar [b] a stronger bund and [c] better numbers from Europe of late; though I think it way too early to soon to make the call of a recovery, especially with the Greek bailout talks unresolved. Nevertheless, it seems that TLT is potentially signaling that changes are afoot. I am not convinced of any scenario yet; but if our muni bond holdings in the ETF Portfolio break a major trend, I will lighten up.

    GLD was up but closed below its 100 day moving average and continued to build a head and shoulders formation.

    Bottom line: the S&P is back challenging the recent trend of lower highs. If it is successful and the Dow can confirm the break, I remain doubtful that the Averages can break above the upper boundaries of their long term uptrends in any meaningful way.

    The long Treasury seems to be alerting us that times, they are a'changin'. To that I would add that historically, the bonds guys have been smarter than stock guys in anticipating an alteration in trend. May not happen this time; indeed, nothing may be happening. But the warning light is flashing and I am watchful

    Fundamental

    Headlines

    We got one US economic indicator yesterday: March factory orders which were up and in line. Positive news is always welcome.

    Overseas, the April Chinese and EU PMI's were below expectations (more of the same); and according to Greek officials, progress is being made in that country's bail out negotiations with the Troika.

    Although the IMF apparently didn't get the memo (medium):

    http://www.zerohedge.com/news/2015-05-04/imf-splinters-rest-troika-threatens-cut-greek-funding

    ***overnight, Australia's central bank lowered its key interest rate; and the EU raised in 2015 economic growth forecast (see above).

    Bottom line: nothing in yesterday's news suggests any improvement in the global economy or in any particular country. Nor were there any changes in monetary/fiscal/regulatory policies to offer hope of some subsequent advance. What did occur was that stocks got more expensive while a key component of the discount factor (interest rates) used for their valuation rose. And there is a whiff in the air that a key element (inflation) of that component may also be moving higher. To be clear, I am not making an inflation call; I am saying that there is evidence that it may be about to rise and we need to pay attention.

    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 latest from Bill Gross (medium and a must read):

    https://17eb94422c7de298ec1b-8601c126654e9663374c173ae837a562.ssl.cf1.rackcdn.com/Documents/umbrella/bill%20gross/30638%20TL-Bill%20Gross%20Investment%20Outlook_May%202015_exp%205.30.16_3.pdf

    How does a bursting bubble sound? (medium):

    http://www.marketwatch.com/story/heres-how-a-stock-market-sounds-when-the-bubble-bursts-2015-05-04?link=MW_popular

    Stephen Roach on central bankers' delusions (medium and today's must read):
    http://www.zerohedge.com/news/2015-05-04/stephen-roach-derides-central-bankers-mass-delusion

    Update on valuation:

    http://www.advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

    http://www.advisorperspectives.com/dshort/updates/Crestmont-PE-Ratio.php

    http://www.advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php

    http://www.advisorperspectives.com/dshort/updates/Regression-to-Trend.php

    Of the S&P 500 members that have already released results this season, 73 percent beat profit projections and 49 percent topped sales estimates. Analysts have tempered their predictions for a corporate profit slump, now projecting a first-quarter drop of 0.4 percent, compared with April 17 calls for a 4.3 percent decline.

    On the other hand, estimates continue to drop (short):

    http://blog.yardeni.com/2015/05/analysts-continue-to-lower-s-500.html

    Company Highlight

    The Bank of Nova Scotia (Scotiabank) is Canada's third largest bank with operations in Canada, the US and 50 foreign countries. BNS has earned a 14-20% return on equity over the last ten years and has grown profits and dividends at a 9-11% pace. While the 2008-2009 financial credit crisis impacted BNS, it weathered the storm much better than most large US banks and should continue to grow earnings and dividends as a result of:

    (1) an improving Canadian economy,

    (2) a very strict cost control program,

    Negatives:

    (1) a slowdown in the Canadian mortgage market,

    (2) increased losses in the Caribbean and Puerto Rico,

    (3) margin pressures.

    BNS is rated A by Value Line, carries a 15% debt to equity ratio and its stock yields 4.3%

    Statistical Summary

    Stock Dividend Payout # Increases

    Yield Growth Rate Ratio Since 2005

    BNS 4.3% 9% 48% 9

    Ind Ave 2.6 11 35 NA

    Debt/ EPS Down Net Value Line

    Equity ROE Since 2005 Margin Rating

    BNS 15% 14% 2 NA* A

    Ind Ave 28 10 NA NA* NA

    *banks' income statements don't provide a Net Margin number

    Chart

    Note: BNS stock made good progress off its March 2009 low, surpassing the downtrend off its October 2007 high (straight red line) and its November 2008 trading high (green line). Long term, it 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 High Yield Portfolio owns an 85% position in BNS. The upper boundary of its Buy Value Range is $33; the lower boundary of its Sell Half Range is $84.

    (click to enlarge)

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

    5/15

    Investing for Survival

    12 things I have learned from Morgan Housel: Part 2

    2. "There are no points awarded for difficulty."

    The best investors make frequent use of a "too hard" pile when it comes to investing. One of the many things that investors like Morgan Housel have learned from great investors like Charlie Munger is how much investing performance can be improved by just avoiding some of the boneheaded mistakes made by other investors. For example, there is no shame in admitting that a given business can't be valued. There are plenty of other businesses that are understandable which present investment decisions that are not very difficult. Most of the time what an investor should do is nothing. And there is no better time to do nothing than when something is difficult.

    On this point Warren Buffett likes to say "I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over." These 1-foot bar jumping opportunities with big financial payoffs don't appear very often, but when they do, it is wise to bet big.

    News on Stocks in Our Portfolios

    Emerson Electric misses by $0.11, misses on revenue

    o Emerson Electric (NYSE:EMR): FQ2 EPS of $0.65 misses by $0.11.

    o Revenue of $5.4B (-7.1% Y/Y) misses by $20M.

    AmeriGas Partners misses by $0.34, misses on revenue

    · AmeriGas Partners (NYSE:APU): FQ2 EPS of $2.17 misses by $0.34.

    · Revenue of $1.1B (-26.2% Y/Y) misses by $60M.

    EOG Resources beats by $0.03, misses on revenue

    · EOG Resources (NYSE:EOG): Q1 EPS of $0.03 beats by $0.03.

    · Revenue of $2.32B (-43.1% Y/Y) misses by $390M.

    Economics

    This Week's Data

    March factory orders came in at +2.1%, in line.

    The April US trade deficit was $51.4 billion versus expectations of $42.0 billion.

    Other

    The liquidity paradox (medium):

    http://www.zerohedge.com/news/2015-05-04/nor-any-drop-drink-citi-maps-liquidity-paradox

    David Einhorn on the price of oil and oil company balance sheets (medium):

    http://www.zerohedge.com/news/2015-05-04/us-shale-sector-crashes-after-david-einhorn-repeats-what-everyone-knows-already

    Is the ECB running out of bonds to buy? (medium):

    http://www.zerohedge.com/news/2015-05-04/has-ecb-run-out-willing-bonds-sellers-long-end

    Politics

    Domestic

    International War Against Radical Islam

    May 05 9:08 AM | Link | Comment!
  • Monday Morning Chartology

    The Market

    Technical

    Monday Morning Chartology

    The S&P closed right on the trend line connecting the lower highs. The brief period above that trend line did not meet our time and distance discipline, so it was negated. Clearly, the close today will be important.

    (click to enlarge)

    On Friday, the long Treasury closed below its 100 day moving average, the lower boundary of its short term trading range and the lower boundary of its intermediate term uptrend. If it remains below the trading range by the close Tuesday, the trend will be negated. If it remains below the intermediate term uptrend by the close Wednesday, the trend will be negated. Our muni bond holdings in the ETF Portfolio have not started to challenge comparable trends yet; but they are getting close.

    (click to enlarge)

    No change here: head and shoulders formation still intact. Avoid.

    (click to enlarge)

    The VIX is still near lows but also still in a very short term downtrend. I continue to believe that this represents cheap portfolio insurance.

    (click to enlarge)

    Fundamental

    Friday's economic data was universal misses versus expectations. Most were slight misses to the downside: April manufacturing PMI (54.1 versus 54.5), April light vehicle sales (16.5 million versus 16.9 million), April ISM manufacturing index (51.5 versus 52.0) April consumer sentiment (95.9 versus 96.0); with one really lousy number thrown in for good measure: March construction spending (-0.6 versus +0.4%). So thirteen of the last fourteen weeks have been disappointments.

    ***overnight, April Chinese PMI was reported at 48.9 versus 49.6 in March; April EU PMI was reported at 52.0 versus 52.2 in March; and according to Greek officials, progress is being made in that country's bail out negotiations with the Troika.

    http://www.reuters.com/article/2015/05/04/us-eurozone-greece-talks-idUSKBN0NP0BA20150504

    What bubble? An up to date look at investor psyche (medium):

    http://www.zerohedge.com/news/2015-05-03/what-bubble-wall-street-turn-p2p-loans-cdos

    QE and creative destruction (medium and a must read):

    http://www.zerohedge.com/news/2015-05-03/socialists-central-banks-credit-not-capital

    Investing for Survival

    12 things I have learned from Morgan Housel: Part 1

    1. "'I don't know' are three of the most underused words in investing."

    "What's really interesting about finance - and I think this is true for a lot of fields whether you're in physics, math, chemistry, history, or whatever it is - the more you learn, the you more you realize how little you know."

    There is nothing more fundamental to investing than understanding that risk comes from not knowing what you are doing. And as Morgan Housel is saying here: the more you know, the more you know that there is even more that you do not know. If you are not getting more humble as you: 1) get older, 2) grow as a person, or 3) learn, then you are not paying attention. The best investors keep their circle of competence tightly defined and limited in scope. Skills can atrophy or become outdated. New competencies can be developed with time and effort.

    What you are doing when you are investing is buying an ownership interest in an actual business. No matter how hard you may work to know everything about that business, the phenomenon effecting that business, and the markets in which it competes, there always be much that you do not know. Even if you may chose an index-based approach to investing, you are making choices about what types and amounts of assets to buy. The very best investors have been able to develop systems that deal effectively with the fact that investing is probabilistic process. The best systems are designed to enable the investor to buy and sell assets in a way that is "net present value positive" over time after fees and expenses. Systems that do not produce net present value positive results over time after fees and expenses, are speculation and are not investing.

    News on Stocks in Our Portfolios

    Chevron beats by $0.58, beats on revenue

    · Chevron (NYSE:CVX): Q1 EPS of $1.37 beats by $0.58.

    · Revenue of $34.56B (-35.1% Y/Y) beats by $10.19B.

    Economics

    This Week's Data

    Other

    WSJ slams Bernanke (medium):

    http://www.zerohedge.com/news/2015-05-03/wsj-slams-bernankes-rambling-blog-post-stop-blaming-everyone-your-mistakes

    Politics

    Domestic

    International War Against Radical Islam

    May 04 8:40 AM | Link | Comment!
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