Wednesday, November 27, 2013

Kevin Warsh on Fed policy

Saturday, November 23, 2013

Thoughts on Investing

Thoughts on Investing from Tim Harford

When James Tobin won the Nobel memorial prize in 1981, a journalist asked him to summarize his research in simple language. The great macroeconomist attempted to respond to this challenge, and one wire service dutifully reported that Professor Tobin had won the prize “for his work on the principle of not putting all your eggs in one basket”.

A newspaper cartoon then appeared announcing the award of a Nobel prize for “an apple a day keeps the doctor away”.

But Tobin perhaps anticipated the awkward history of the Nobel memorial prize and financial economics. Robert Merton and Myron Scholes won in 1997 for their work on option pricing – less than a year before the dramatic bailout of Long-Term Capital Management, a hedge fund in which Merton and Scholes were closely involved.

Harry Markowitz, who shared the prize in 1990, was really the founder of the whole “don’t put all your eggs in one basket” school of portfolio allocation. Markowitz showed how investors could pick an optimal portfolio of assets, minimizing risk for any given expected return, or maximizing expected return for any given risk. (The basic idea is simple enough to be worthy of Tobin: if you hold shares in a sun block manufacturer and an umbrella company, your finances will be fine in all weathers.)

In 1952, Markowitz had had the perfect opportunity to put his theory to good use. He joined the Rand corporation and had to decide how to invest his pension. Did he compute the efficient risk mitigating frontier? He did not. He split his contributions 50/50 between stocks and bonds. So there.

Here’s a question, though: are these practical tips from Markowitz and Tobin as useful as their sophisticated academic theories? Could it be that simply dividing your money equally between a bunch of different assets – known as the “1/N” strategy – a perfectly good approach to investment?

It might seem implausible: after all, the “1/N” strategy is arbitrary and ignores useful information about historical risks, returns and correlations across asset classes. We know, thanks to the research of the behavioral economists Shlomo Benartzi and Richard Thaler, that many investors do exactly what Markowitz did. Surely this is an error, or at least clear evidence of our cognitive limitations?

Perhaps. But here’s the intriguing thing about the financial theory that Markowitz developed: it’s extremely difficult to apply in practice. If you know for certain the distribution of returns for all the assets in which you are investing, you can compute an efficient frontier. But you don’t. You can only guess.

One problem is that historical correlations are poor guides to future ones. Imagine the shares of two oil companies, for instance: as the oil price rises and falls, so would the shares, which would seem highly correlated. If one company then ran into some kind of trouble – another Deepwater Horizon, for instance – then the shares might well become negatively correlated as the unaffected company picked up market share from the affected one.

A second problem is that even with lots of historical data, it is hard to estimate the likelihood of rare events. (By definition, there will be few or no historical examples.)

Portfolio theorists have produced a variety of sophisticated methods to try to update Markowitz’s ideas for an uncertain world. But in research published in 2009 in the Journal of Financial Studies, Victor DeMiguel, Lorenzo Garlappi and Raman Uppal showed that the naive 1/N approach outperforms far more complex calculations until a vast amount of historical data are available with which to calibrate them. How much data? For a 50-asset portfolio, about 500 years. Perhaps “don’t put all your eggs in one basket” is financial wisdom enough. 

The Closing Bell

The Closing Bell

11/23/13

Children and grandchildren arrive today.  I will be taking this coming week off in order to have fun with them.  I hope everyone has a Happy Thanksgiving and I will return on 12/2.  As always, I will stay tuned to the Market and if any action is warranted, I will be in touch via a Subscriber Alert.

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%

   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                               15339-20339
Intermediate Uptrend                              15339-20339
Long Term Trading Range                       5050-17400
                                               
                        2013    Year End Fair Value                                     11590-11610

                  2014    Year End Fair Value                                     11800-12000                                          

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                 1726-1880
                                    Intermediate Term Uptrend                       1635-2215 
                                    Long Term Trading Range                         728-1900
                                                           
                        2013    Year End Fair Value                                      1430-1450

                        2014   Year End Fair Value                                       1470-1490         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                              43%
            High Yield Portfolio                                        46%
            Aggressive Growth Portfolio                           43%

Economics/Politics
           
The economy is a modest positive for Your Money.   This week’s data was generally upbeat: positives---weekly jobless claims; weekly purchase applications, weekly and October retail sales, September inventories, Markit PMI, October CPI and PPI; negatives---mortgage applications, November small business optimism index, September business sales, the Philly Fed manufacturing index; neutral---October existing home sales and the November Kansas City Fed manufacturing index. 

The only number that I would highlight is the small business optimism index; and that is because it plays to my concern that government policies are negatively impacting business and consumer sentiment that will eventually be reflected in retail sales and business investment.

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 along with...... the historic inability of the Fed to properly time the reversal of a vastly over expansive  monetary policy.
           
            Update on the big four economic indicators (medium):  

                Two reasons the recovery is so weak (medium):
               
        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.

Oil [gasoline] prices continue to fall.  This is like a tax cut for [a] the American consumer and, hence, is a positive for savings or consumption or both and [b] any business in which energy is a significant operating cost.  It helps margins or allows for price reductions.

(2)   the sequester.  the economic stats continue to reflect a growing economy despite the sequester, the tax increase and the recent government shutdown.  So far the doomsayers have been proven wrong. 

There remains a problem; and that is the costs associated with Obamacare.   Those are more of a mystery than the sequester, the tax increase or shutdown because the numbers associated with the latter were more easily defined.  We don’t have a clue at the moment on the eventual costs of Obamacare; but as I am sure you know, we are getting dire predictions daily..  That said, if the doom and gloomers were wrong on the sequester/tax increase/shutdown, there is at least a chance that they will be wrong on Obamacare.

       The negatives:

(1)   a vulnerable global banking system.  As Rosanna Rosanna Danna once said, ‘if it’s not one thing, it’s another’.  Unfortunately, every week seems to bear that out when it comes to bankster misdeeds.  In this week’s episode: 

Moody’s lowers senior debt rating of major banks

MF Global settles

JP Morgan settles and is now in business with the government

Goldman takes a big loss in its currency trading operations

Corporate credit levels are back to frothy (short):

‘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.’

(2)   fiscal policy.  the budget debate draws closer, though the whole DC focus is now on Obamacare.  We are bombarded daily with one f**k up after another in its administration and estimates of the constantly rising costs of new healthcare insurance policies; and with each, the total forecast costs both in human and monetary terms rise further. 

The bad news is that the whole political circus, be it the failed budget discussions, Obamacare or the partial elimination of the 60 vote cloture rule in the senate, could be doing sufficient damage to business and consumer confidence to have a material impact on the economy---this notion supported by the latest small business optimism report.  To be sure, we don’t have any evidence of an economic impact yet; but there are still lots of  November/December stats to be released.

The good news is that because of this unmitigated disaster, the negotiating axe is now in the hands of the GOP---which is to say that they have a lot more bargaining leverage in the upcoming budget and debt ceiling discussions than they had two months ago.  Now if they can just resist the temptation to allow the dems to snatch victory from the jaws of defeat, we could be a step closer to real budget reform.

One last comment on the senate’s recent action doing away with the 60 vote cloture rule for judicial and executive nominees.    This rule was designed  as a curb on legislative activism and the protection of a large minorities.  While it is true that it only applies to nominations, it is a short step to include all votes in the senate.  So for those who think that an improvement in fiscal/regulatory policy is one of the keys to getting our economic house in order, this would be bad news because it would eliminate gridlock and ease the passage of detrimental legislation on spending, taxing and regulating.  It is not good for our democracy whoever is in the majority.

I include this as a counterpoint (medium):

The November small business optimism index declined:

                  Saturday morning humor (short):

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

The major news this week was the release of the latest FOMC minutes which revealed a Fed that clearly understands that it has put itself in a very tenuous position viz a viz its bloated balance sheet but is clueless on how to extract itself. 

It seems to me that there are two possible ending scenarios in this tragedy: [a] the Fed remains paralyzed by the difficulty of their position and the Markets eventually take matters into their own hands, spiking upward the entire yield curve and forcing the Fed into a transition to tighter money by raising rates at the short end, [b] in desperation to be showing that it is doing something, the Fed acts and bungles the transition on its own.

No one is expecting the latter except this guy (medium):

And lurking in the background is Chinese monetary policy which appears to be tightening.  I have no idea if this could have a spillover effect on US Markets/monetary policy; but it is something that has to be watched.

The central point of all of this is not when but how the transition process  to tighter monetary policy occurs.  My bet is that history repeats itself and the Fed bungles the process, most likely by not tightening fast enough.

(4)   a blow up in the Middle East.  The negotiations on curbing Iran’s nuclear program have resumed; but there is no news on any agreement.  As you know, my concern is that Obama will agree to almost anything in order to generate a bit of what He at least thinks is good news.  If that occurs, it will likely put Israel and most of the sunni muslim powers on red alert and could likely be more de-stabilizing than no agreement.

Along those lines, the Iranian embassy in Beirut was bombed this week, killing a number of people.  Undoubtedly, it was meant to provoke Iran in to an action that would serve to scuttle the aforementioned negotiations.  So far that hasn’t worked, but the bombing itself is a sign of the continuing tension in that part of the world

On the other hand, if the negotiations lead to something more than a face saving way out of very difficult situation, it would certainly turn the heat down in this part of the world.  I await the details.

(5)   finally, the sovereign and bank debt crisis in Europe.  The economic news out of Europe remained mixed this week, though it was tilted to the negative side.  My hope is that Europe is recovering in the same fashion as the US---slowly, fitfully but on a sustained basis.  That would allow our ‘muddle through’ scenario to remain in tact. 

That said, we got some disturbing news this week---allegations that the Spanish government was just making up all the economic data that signaled a recovery.  By itself, that is not good; but if it is reflective of a more widespread conduct in the economically weak EU countries, it would clearly suggest a less positive outlook for the EU and its financial system.


     And:

Bottom line:  the US economy continues to improve albeit sluggishly.  I remained concerned about the potential impact on business and consumer confidence of the last as well as the upcoming budget battle, the mounting confusion and frustration over Obamacare and the latest gem from the senate.  Last week’s small business optimism index only reinforces that notion.   On the other hand, that lowering in confidence has to get reflected in the real economic numbers before it has any meaning---and so far that hasn’t happened. 

The economic data out of Europe continued mixed this week but the news of a fix in the Spanish stats clearly doesn’t breed a lot of trust.  The question is how wide a practice is fudging the numbers among the weak EU economies?  We won’t know short term; but sooner or later the truth will be known on the ground.  We will just have to wait and see; but in the meantime, our ‘muddle through’ scenario remains intact..

Monetary policy, more specifically QEInfinity, remains the major risk to our forecast for several reasons: (1) it fosters lousy fiscal policy, (2) the longer it goes on, the greater the risk that the transition from easy to tight money will cause severe dislocations and (3) the Fed may be in a position where it could lose control of the transition process [assuming it even has a plan and that the plan could actually work] to multiple sources---China, Japan, the Markets themselves to name a few.  My guess is that the Fed will do very little until forced to by an outside force.  The only question is how much larger will the Fed’s balance sheet be when that happens.

This week’s data:

(1)                                  housing: weekly mortgage applications fell but the more important purchase applications were up; October existing home sales declined though they were in line with estimates,

(2)                                  consumer: weekly retail sales were positive, while October retail sales were ahead of forecasts; weekly jobless claims fell more than anticipated,

(3)                                  industry: November small business optimism index declined; the November Market PMI was stronger than estimated; the Philly Fed index was a big disappointment while the Kansas City Fed index was roughly in line; September business inventories were up strong but ominously sales were weak,

(4)                                  macroeconomic: October CPI and PPI were quite tame.


The Market-Disciplined Investing
           
  Technical

The indices (DJIA 16064, S&P 1804) had another good week, with the Dow breaching 16000 on Thursday and the S&P 1800 on Friday.  Both of the Averages are well within uptrends along all timeframes: short term (15339-20339, 1726-1880), intermediate term (15339-20339, 1635-2217) and long term (5050-17400, 728-1900).

Volume on Friday was up slightly; breadth was mixed. The VIX fell 3% and closed within a short hair of the lower boundary of its short term trading range.  A confirmed breach of this boundary would be a positive for stocks.

The long Treasury was up fractionally, following a very volatile week.  The pin action suggests that it will go lower (yields higher).  However, it remains well within a short term trading range and an intermediate term downtrend.

GLD was down, continuing to act like a very sick puppy.  It finished right on the lower boundary of an intermediate term downtrend, remains within a short term downtrend and is drawing nearer to the lower boundary of its long term trading range---a breach of which would be very bad news for GLD holders.

Bottom line:  all trends of both indices are up.  Nothing in the price action suggests an end anytime soon.  Indeed this week, the Averages experienced a second ‘outside’ down day (a negative technical indicator) in as many weeks and completely shrugged it off.  Nevertheless, divergences exist and grow more numerous each week. 

It seems reasonable to assume that there is at least an even chance of another leg up, and the most likely targets, in my opinion, are the upper boundaries of the Averages long term uptrends (17400/1900).  If that is the case and the downside is simply Fair Value (11575/1436), then the  risk reward from current levels is not all the attractive.

As a longer term investor, I think that the aforementioned risk/reward ratio is an invitation to lose money.  I would, however, take advantage of the current high prices to sell any stock that has been a disappointment and to trim the holding of any stock that has doubled or more in price.

In the meantime, if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

                Trading Thanksgiving week (short):

   Fundamental-A Dividend Growth Investment Strategy

The DJIA (16064) finished this week about 38.8% above Fair Value (11575) while the S&P (1804) closed 25.6% overvalued (1436).  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.

The economy continues to track our forecast and, indeed, to overcome the numerous fiscal barriers (sequester, tax increases, Obamacare) being thrown up by our elected officials.  The one thing I worry about is the lousy business and consumer sentiment numbers which I fear will translate into weaker spending and capital expenditures.  The good news is that to date it hasn’t shown up in the stats; but I have the yellow light flashing until January. 

Europe still seems to be recovering though the economic news over the last two weeks has not been all that great.  In addition, the Spanish government was caught fudging its data.  So we know that that country is not doing quite as well as we thought.  The big question is, how many of the other weak countries have been less than honest?   The recent rate cut by the ECB will likely make progress easier; but if the Spanish fibbing is hiding a hopeless situation, lower rates are not going to help. 

So for the moment, we are caught in a situation where we have to question the data we are getting.  Spain may be the only fraudster and the economic momentum from the rest of Europe could overwhelm its shortcomings.  On the other hand, it may not be and the EU could be closer to a third recession than we now think.  In addition,  if this problem spills over into the EU bank solvency difficulties; that is, if the EU economies are weaker than the data reflect, then their ability to service all that sovereign debt on bank balance sheets has been diminished

The wild card in our economic/Market future is QEInfinity.  In the latest FOMC minutes, the Fed all but admitted that its easy monetary policy could be a huge potential negative and that it was uncertain exactly how to extricate itself from the mess it has created.  The Market’s reaction seems to suggest that a majority of investors have concluded that the Fed’s only course is to keep pumping as fast as it can.

As you know, I think that a prescription for disaster; and I think that the growing technical divergences in the Market are a sign that the ranks of eternally optimistic may be thinning out a bit. 

My point on monetary policy is and has been that (1) QE has to end, (2) what prompts the end is not necessarily in the hands of the Fed, (3) but when it does end, the Market impact is likely to be ugly and (4) the longer it goes on, the uglier the impact.

Bottom line: the assumptions in our Economic Model haven’t changed; though we got bad news on virtually every front this week (poor business sentiment, Spanish lies, higher Chinese interest rates, an uncertain Fed and the bombing of the Iranian embassy in Beirut). 

Nor have they changed in our Valuation Model.  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.

Margin expectations (short):

Everybody’s portfolio gets whacked sometime (short): 

Another bear bites the dust (medium):

Cognitive dissonance (short):

        This week, our Portfolios did nothing.

DJIA                                                    S&P

Current 2013 Year End Fair Value*                11600                                             1440
Fair Value as of 11/30/13                                 11575                                              1436 
Close this week                                           16064                                                  1804

Over Valuation vs. 10/31 Close
              5% overvalued                                 12153                                                    1507
            10% overvalued                                 12732                                                   1579 
            15% overvalued                                 13311                                                   1651
            20% overvalued                                 13890                                                    1723   
            25% overvalued                                   14468                                                  1795   
            30% overvalued                                   15047                                                  1866
            35% overvalued                                   15626                                                  1938
            40% overvalued                                   16205                                                  2010
           
Under Valuation vs.10/31 Close
            5% undervalued                             10996                                                      1364
10%undervalued                                10417                                                  1292   
15%undervalued                             9838                                                    1220

* 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.








Friday, November 22, 2013

Morning Journal--Business expansion versus Fed expansion

Economics

   This Week’s Data

            The November Markit PMI came in at 54.3 versus expectations of 53.0.

            However, the Philadelphia Fed manufacturing index was reported at 6.5 versus estimates of 15.5.

   Other

            TIPS are priced for low inflation and weak growth (medium):

            Negative home equity declined rapidly in the third quarter (short):

            Economic expansion now in top 20% in history; Fed expansion at the top of the list (short):


The Morning Call--Bad news is still good news

The Morning Call

11/22/13

The Market
           
    Technical

            The indices (DJIA 16009, S&P 1795) resumed their move up, with the Dow breaching 16000 but the S&P falling short of 1800.  Both remained within uptrends across all time frames: short term (15339-20339, 1724-1878), intermediate term (15339-20339, 1635-2217) and long term (5015-17000, 728-1850).

            Volume fell; breadth improved.  The VIX was down 6%, again nearing the lower boundary of its short term trading range (a penetration would be a plus for stocks).  It ended within its intermediate term downtrend.  In addition, it looks like the second ‘outside’ down day experienced earlier in the week will suffer the same fate as the first, i.e. worthlessness.

            The long Treasury rose slightly, finishing with its short term trading range and intermediate term downtrend.

            GLD (119.94) was off, closing within its short term downtrend and on the lower boundary of its intermediate term downtrend.  It is once again nearing the lower boundary of its long term trading range (114.43) ---a break of which would be very negative for GLD.

Bottom line:  the assault on 16000/1800 is on again with the Dow managing to close above 16000 and the S&P falling short.  The technical question is, will this assault be successful?  Certainly, there is no reason to doubt momentum.  In addition, the chorus of bears is growing predicting that stocks will experience a blow off top before rolling over.  I wonder about their motivation; but whatever, it is, the consensus seems to be for more upside. 

I continue to believe that the upper boundaries of the Averages long term uptrends are the most logical upside objectives, especially with stocks so overvalued fundamentally.  That is not much reward to chase if the downside risk is Fair Value (S&P 1430).

So my recommendation continues to be to take advantage of the current high prices and any additional move to the upside to sell any stock that has been a disappointment and to trim the holding of any stock that has doubled or more in price.

If one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Market at record spread to analysts’ expectations (short):
           
            Chart of the day (short):

            An historical review of Market performance in December (short):

            Update on sentiment (short):
           
    Fundamental
    
     Headlines

            Yesterday’s US economic news was mostly positive: weekly jobless claims fell more than anticipated, October PPI was tame and the November Markit PMI reading was above consensus. 

The only negative number was the November Philly Fed manufacturing index.  But of course, investors in this ‘bad news is good news’ environment chose to positively interpret that along with some lousy industrial production stats from the EU and a poor Chinese flash PMI and resume the attack on 16000/1800.

In political news, Yellen’s nomination for Fed chief received the approval of the senate banking committee and will be sent to the full senate for a vote.

The other item worth mentioning is that senate democrats voted to end the rule requiring a 60 vote majority for cloture on nominations of judicial and executive nominations.  This ends a rule that, as a conservative, I valued because it was a curb on legislative activism (he who governs least, governs best).  While it is true that it only applies to nominations, it is a short step to include all votes in the senate.  So for those who think that an improvement in fiscal policy is one of the keys to getting our economic house in order, this is bad news.  To be clear, I believe that this change in the legislative process will be just a detrimental to political/social/economic policy if the conservatives are in the majority.  It is not good for our democracy whoever is in the majority.

Bottom line: none of the above stats alter the assumptions in either of our Models.  So I remain stuck in an environment in which stocks are considerably overvalued.  I can point to multiple scenarios in which stocks return to Fair Value, not the least of which is a painful transition from easy to tight money brought by either increasingly cynical investors, a tightening Chinese central bank or a bungling by the Fed. 

That said, I remain on the wrong side of this trade.  But as much as I challenge my own assumptions, I can’t come up with a logical scenario that values the S&P at 1800.  As a corollary, our Valuation Model has many stocks valued at or above their Sell Half Range and that has pushed our Portfolios cash position to 40-45%.  The good news is that our Portfolios are still 55-60% invested; the bad news is that they are only 55-60% invested. 

So as an investor not a trader, my long term strategy calls for me to sit on my hands until valuations return to normalcy.

            More on QE and the damage that it has done (long but a must read):

            Sternlicht on the QE melt up (4 minute video):

            QE for as far as the eyes can see (medium):

            The latest from Doug Kass (medium):

            Five themes for the next five years (medium):

            The yield curve and ‘bubbles’ (medium):

       Investing for Survival

            Five numbers you need to know before paying 2014 taxes (medium):




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. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Thursday, November 21, 2013

Stocks I am Selling or have already Sold

Stocks I am selling or have already sold

One reminder---under our Buy/Sell discipline, our Portfolios only Sell one half of their position as long as the underlying fundamentals meet the criteria for inclusion in our Universe.


            The High Yield Portfolio Sold Half of its KMB position in early 2013.  The upper boundary of its Buy value Range is $53; the lower boundary of its current Sell Half Range is $91.



Morning Journal--Funding problems in China

News on Stocks in Our Portfolios

Target beats by $0.20, misses on revenues
·                                 Target (TGT): Q3 EPS of $0.84 beats by $0.20.
·                                 Revenue of $17.26B (+1.9% Y/Y) misses by $0.13B.
·                                
Cato beats by $0.03, revenues in-line
o                                                        Cato (CATO): Q3 EPS of $0.17 beats by $0.03.
o                                                        Revenue of $201.04M (+1% Y/Y) in-line.
o                                                        Comparable store sales -1%.
·                                  
·                                  
Donaldson beats by $0.03, beats on revenues
o                                                        Donaldson (DCI): FQ1 EPS of $0.42 beats by $0.03.
o                                                        Revenue of $599.38M (+2% Y/Y) beats by $0.69M.
 
Economics

   This Week’s Data

            September business inventories rose 0.6% versus expectations of +0.3%; ominously, business sales increased by only 0.2%.

            October existing home sales fell 3.2%, in line with estimates.

            Weekly jobless claims declined 21,000 versus forecasts of a drop of 4,000.

            October PPI came in at -0.2%, in line; ex food and energy, it was +0.2% versus expectations of +0.1%.

   Other

            Funding problems continue in China (medium):

Politics

  Domestic

Quote of the day (short):

            A look back at the housing crisis (medium and a very interesting read):