Monday, June 30, 2014

Monday Morning Chartology

The Morning Call


The Market

      Monday Morning Chartology

            What is there to say about this chart?  All systems go.

            The long bond has recovered the lower boundary of its short term uptrend.  The issue is, were those two violations of that boundary head fakes or has the short term trend re-set to a trading range?  The best positive indicator would be an advance to above 115 (establishing a higher high).  An inability to do that would then set up 113.2 level as a lower high; and if followed by another confirmed break below the lower boundary of the short term uptrend, it would pretty much nail the change in trend.  If that occurs, it would add weight to the ‘coming inflation’ thesis.

            After breaking out of its short term downtrend and re-setting to a short term trading range, GLD has done zip.  That makes me a little skeptical of the break.  However, it is above its 50 day moving average.  While it is now supporting the ‘coming inflation’ thesis, a failure to advance further would call this notion into question. 

It would seem that TLT and GLD are both hesitating over whether inflation is upon us or not.  I need both to confirm before I feel comfortable with that expectation.

            The VIX remains near historical lows.

            Update on margin debt (short):


            The latest from the Bank of International Settlements (a bit long but a must read):
            The latest from Ukraine (or not) (medium):

            The latest from Iraq (medium):

                Goldman on the latest data on the Japanese economy (medium):
                And BofA on the end of the Japanese carry trade (medium):

                The global hunt for taxes (medium):

            Central banks are buying stocks (medium):

   News on Stocks in Our Portfolios

   This Week’s Data




  International War Against Radical Islam

Saturday, June 21, 2014

The Closing Bell

The Closing Bell


Next week is the last of my month long hiatus.  We are headed to the beach for our annual anniversary fling.  Nothing next week.  I will be watching the Markets and in communication if necessary.  See you Monday June 30.

Statistical Summary

   Current Economic Forecast


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                               16045-17524
Intermediate Uptrend                              16271-20636
Long Term Uptrend                                 5081-18193
                        2013    Year End Fair Value                                   11590-11610

              2014    Year End Fair Value                                   11800-12000                                          

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     1875-2045
                                    Intermediate Term Uptrend                        1821-2621
                                    Long Term Uptrend                                    757-1974
                        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                                     51%
            Aggressive Growth Portfolio                        46%

The economy is a modest positive for Your Money.   Not a lot of data this week; and what we got was mixed: positives---weekly retail sales, weekly jobless claims. May industrial production, the June NY and Philadelphia Fed manufacturing indices; negatives---May housing starts, weekly mortgage and purchase applications, May CPI, June leading economic indicators and the first quarter trade deficit; neutral---none.

The standout datapoints were: (1) stats on two key sectors of the economy [May industrial production and May housing starts] were released.  One a plus, the other a negative.  Thus, keeping the ‘slow sluggish growth’ scenario alive and well, and (2) May CPI.  This put its six months rolling average over the Fed’s 2% target range.  One more high reading will put the year over year average at the same threshold. 

The latter would suggest a tightening in Fed monetary policy.  But as you know, Yellen dismissed this data as ‘noise’.  As I noted in Thursday’s Morning Call, I believe that this is a solid signal that the Yellen Fed will stay too easy, too long and will follow in the footsteps of its predecessors, botching the transition to a normalized monetary policy.  More on that later.

It also raises the risk that the economy may be about to suffer another period of stagflation.  Remember the economic narrative of the last six weeks has been whether or not the US growth rate will slow.  While I haven’t altered our forecast, the recent data leave open that possibility (risk).   Now with the pickup in inflation, we may face the risk of an economy still restrained by fiscal, regulatory and monetary mismanagement but with excess liquidity finding its way beyond the securities markets.   Bottom line---I leave the outlook in tact but the yellow light flashing:
 ‘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.’
            Weekly recession indicator (short):

        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.

Clearly, this factor becomes even more important as the turmoil in Ukraine and Iraq threaten global oil supplies.

       The negatives:

(1)   a vulnerable global banking system.  It was a slow week for bankster malfeasance.

 ‘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.  While nothing related to directly to fiscal policy is happening, the election season has begun with a stunner---the defeat of house majority leader, Eric Cantor in the Virginia GOP primary.  I don’t want to read too much into this event.  But the least we can say is that immigration is likely to be a much bigger issue in 2014 than in previous elections. 

I will note, however, that my contention has been that the only way this country re-sets itself to a more fiscally responsible, less intrusive course was to throw out the whole ruling class or enough of it to scare the shit out of the rest.  I have no idea whether or not the Cantor defeat was a first step in that direction.  But we can hope.


(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 Fed gave its first clear signal this week that there is nothing new about the current regime and that it intends to pursue the same reactive policies of the past Feds, insuring that it will be a day late and a dollar short with any tightening move and thereby increasing the risk of inflation going to unhealthy levels.  The tipoff: (1) Yellen dismissing the recent rise in inflation data as ‘noise’, (2) her refusal to provide any guidelines whatsoever as to the timing of any prospective monetary tightening [‘it depends’] and (3) her unwillingness to comment on the overextended metrics of the securities’ markets.

My bottom line is that I continue to believe that the Fed hasn’t a clue how to extricate itself from its current historically overly expansive monetary policy.  That, in turn, has rendered it frozen in the headlights of oncoming inflation.  QEInfinity is not likely to end well, especially for the Markets.
                 (must read)

                          The latest from Marc Faber (medium):

(3)   rising oil prices.  This risk is now front and center brought on by the turbulence in Ukraine and Iraq.  Pipelines and refineries are being destroyed as we speak; and, at least in the case of Iraq, sooner or later, the oil fields themselves may be in danger of lost production.

Given our ongoing diplomatic ineptitude, I am concerned that things will only get worse.  World energy supplies are now in danger of disruption from either a cynical economic/political move from Russia or a splintering of the Middle East or both.  Even if that doesn’t occur, oil prices may likely be driven higher and that is not going to help our rising inflation problem.

Iraq just got messier (medium):

Ukraine just got messier (medium):

(4)   finally, the sovereign and bank debt crisis in Europe and around the globe.  Despite pursuing a ‘QEInfinity on steroids’ monetary policy, the Japanese economy continues to sink of its own weight, demonstrating, in my opinion, beyond a reasonable doubt that monetary policy is the problem not the solution.

China’s real estate market is imploding.  On top of that vast quantities of warehoused commodities that were used as collateral for loans have disappeared; and all signs are that this problem also exists at multiple warehouses.  Even worse it appears that these commodities could have been used as collateral for multiple loans.  I have no idea the extent to which this touches the banking systems outside China; but if it does, our banks could be in for another round of losses/failures.  Even if it is confined to the Chinese banking system, the potential losses there would likely be sufficient to threaten that country’s economic growth with at least some spillover effect on the rest of the globe.

And (must read):

The ECB recently lowered interest rates and promised that some new form of QE was in the offing.  Why it believes this will do any good when (1) the same exact policies haven’t worked in the US or Japan and (2) its sovereigns are already overly indebted and its banks over leveraged, is beyond me.


I remain dumbfounded by the economic and securities communities’ willingness to accept at face value that QE has, is and will work anywhere, anytime.  To be sure, nothing untoward has occurred yet.  But then no one except the Chinese has even attempted the unwinding process and the last chapter has not been written on the Chinese real estate implosion. 

Bottom line:  the US economy continues to progress. However, Fed policy (or perhaps a lack thereof) remains a growing risk in that the unwinding of QEInfinity could result in economic, or more likely, unanticipated Market disruptions.  I am not saying that this is a foregone conclusion; I am saying that history suggests that the odds of this risk materializing are mounting.

Likewise, unconventional monetary policy is causing problems around the globe: [a] Japan seems intent on seeing how close its monetary policy can come to Zimbabwe’s without destroying the economy, [b] the Chinese actually appear to be trying to do something to wind down its expansive monetary and fiscal policies.  However, the commodity re-hypothecation scandal could very well get out of hand and negate any efforts by the authorities to do the right thing.  Whatever the outcome, some heartburn seems inevitable, [c] the ECB looks to me like it has the same deer in the headlights syndrome as our own Fed.  What they have done so far hasn’t worked.  Indeed, like Japan and the US, it hasn’t worked because it was the wrong thing to do---trying to save the banking class, greedy politicians and other rent seekers have only made things worse.

Finally, military/political turmoil reigns supreme in Ukraine and Iraq.  I have no idea if either or both drive up energy prices further; but I believe that the odds grow every day that they will.  And that won’t be good for economic growth.

In sum, the US economy remains a plus, though the recent growth and inflation numbers are somewhat worrisome.  Unfortunately, those are not the only potentially troublesome headwinds. 

This week’s data:

(1)                                  housing: May housing starts were well below expectations; weekly mortgage and purchase applications were both down,

(2)                                  consumer:  weekly retail sales were up; weekly jobless claims were better than estimates,

(3)                                  industry: May industrial production was above forecasts as was the  June NY and Philadelphia Fed manufacturing indices,

(4)                                  macroeconomic: May CPI was hotter than anticipated; June leading economic indicators were less than consensus; the first quarter trade deficit was above expectations.

The Market-Disciplined Investing

            The indices (DJIA 16947, S&P 1962) had a great week, finishing above their 50 day moving averages and remain within uptrends across all time frames: short [16045-17524, 1878-2045], intermediate [16271-20636, 1821-2621] and long term [5081-18193, 757-1924].

Volume on Friday was up, largely as a function of quadruple witching (option expiration); breadth improved.  The VIX rose, but still closed within its very short term, short term and intermediate term downtrends, below its 50 day moving average and near the lower boundary of its long term trading range.  In the meantime, internal divergences within the Market persist.  If they can’t be reversed, they should act as a governor on upward momentum.

The long Treasury had a roller coaster week.  On Friday, it bounced off its previous low and back above its 50 day moving average.  However, it remains below the lower boundary of its short term uptrend.  A close below that trend line on Monday will confirm its break.  At this point, the TLT chart is sufficiently confusing that I am uncertain about the near term direction---which means that it is also unclear whether or not the bond guys are buying the higher inflation thesis.
While GLD was down fractionally on Friday, it had already executed a major turnaround for the week, breaking out of its very short term and short term downtrends and above its 50 day moving average.  Unlike the TLT, it left little doubt about a change in direction.  That said, GLD can be quite volatile; so I am going to be patient in the interest of not getting suckered by a head fake. 

Bottom line: technically speaking, the Averages acted superbly this week, overcoming an already overbought condition and multiple servings of bad news.  That said, it continues to advance on lousy volume and in spite of a growing number of divergences.  Of course, all these non-confirming indicators could re-sync with the indices.  But the point is that at present they are becoming less not more in sync.  My assumption remains that the Averages will assault the upper boundaries of their long term uptrends if not the next set of ‘round numbers’ (Dow 17,000/S&P 2000). 

 Our strategy remains to do nothing save taking advantage of the current momentum to lighten up on stocks whose prices are pushed into their Sell Half Range or whose underlying company’s fundamentals have deteriorated.

A word of caution.  If you absolutely, positively just can’t help but buy something be sure to set very tight trading stops.

From the Sentiment Trader:

‘Precious metals jumped on Thursday, with gold showing its largest one-day gain in more than six months. In the past 30 years, the S&P 500 has closed at a 52-week high on a day gold spiked the most in six months 6 other times. All 6 saw stocks decline over the next three weeks, averaging -2.1%. The dates were 6/7/89, 9/14/92, 2/13/97, 11/4/10, 7/22/13 and 9/18/13.’

Fundamental-A Dividend Growth Investment Strategy

The DJIA (16947) finished this week about 44.2% above Fair Value (11750) while the S&P (1962) closed 34.4% overvalued (1459).  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.

The economic data flow continues to reflect a slow sluggish recovery though it is now faced with the potential of a rise in inflation.  At the moment, investors seem positively giddy about these prospects.  To be clear, I continue to stick with our economic outlook. Unfortunately, our Valuation Model has this good news very generously priced into stocks; and that ignores a plethora of potential problems that could negatively impact the economy or the securities markets or both.  To be sure, nothing disastrous has occurred to date.  The risk is what could happen tomorrow.

The Fed is at the top of the list of those headwinds.  It has done little (save QE1) to help the economy and has made a mess of asset pricing (the securities markets).  With this week’s FOMC meeting, it appears that it will now ignore mounting inflationary forces until it is too late to prevent the resultant damage.  I maintain my belief that the Fed will botch the return to a normal monetary policy and that the Markets will pay dearly for the Fed’s mistake.

Of course, the Fed isn’t the only central bank capable of mischief.  Japan continues to talk up the greatest expansion in money supply by a major nation since the Weimar Republic.  The only thing saving it from a similar outcome is its productive capacity (at least there are some goods to chase).  We haven’t seen the end game to this experiment; but any further impairment to its economy could impact our own while a forced unwind of the yen ‘carry trade’ could destabilize securities prices in the US market.

The EU continues struggling to get out of recession/deflation.  While the ECB has stated that it will take whatever measures necessary to avoid another downturn, that is all that it has done---all talk and no do.  Expectations are for some sort of QE to come out of the ECB June meeting.  It could happen.  Regrettably, it would do nothing to address the EU main problems. My concern here is about a disruption in our financial system resulting from either a default of one of the EU’s many heavily indebted sovereigns or the bankruptcy of one of its many overleveraged banks.

The Chinese have been trying to do the right thing by wringing speculation out of its financial system.  Regrettably, it is now faced with a second problem---commodity re-hypothecation, i.e. using the same collateral to back multiple loans.  To date, it has been traced to a series warehouses in only one Chinese city; but the rumor mill is speculating this scandal is more widespread.  I have no clue how either or both of these difficulties will ultimately impact that country’s banking system.  Clearly the risk is of a Chinese Lehman Brothers and its effect on the global financial community.

Ukraine has been replaced by Iraq as the source of rising oil prices.  How much worse conditions can get in Iraq is anyone’s guess.  But if you take the ISIS jihadists at their word, the answer is a lot.  Plus we don’t know if Putin will use the Middle East crisis to help Russia put the squeeze on Ukraine or even the EU.  Whatever the outcome, a continuing advance in oil prices will not help our inflation or consumer discretionary spending numbers.

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 if this week’s bond and gold market signals are correct, our inflation forecast may have to be revised up).  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.
            It is a cautionary note not to chase this rally.
               For the bulls (medium):
DJIA                                                   S&P

Current 2014 Year End Fair Value*              11900                                                  1480
Fair Value as of 6/30/14                                  11750                                                  1459
Close this week                                               16947                                                  1962

Over Valuation vs. 6/30 Close
              5% overvalued                                12375                                                    1531
            10% overvalued                                12925                                                   1604 
            15% overvalued                                13512                                                    1677
            20% overvalued                                14100                                                    1750   
            25% overvalued                                  14687                                                  1823   
            30% overvalued                                  15275                                                  1896
            35% overvalued                                  15862                                                  1969
            40% overvalued                                  16450                                                  2042
            45%overvalued                                   17037                                                  2115

Under Valuation vs. 6/30 Close
            5% undervalued                             11162                                                      1386
10%undervalued                            10575                                                       1313   
15%undervalued                             9987                                                    1240

* 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, June 20, 2014

Thoughts on Investing

Thoughts on Investing from Kid Dynamite
A commenter on my recent post about the role of the ratings agencies in the financial crisis came close to (if not outright) suggesting that the buyers of crappy complex financial products had no choice but to rely on the ratings agencies because the products were too complex for them to understand.   I want to be clear that this “the product was too hard for me to understand, so I relied on someone else to understand it” excuse is utter and complete horseshit, and any fiduciary who employs such an excuse should be arrested for gross negligence.

Sonic Charmer at Rhymes With Cars and Girls offered up his own view of this concept, as he replied to a recent post from Barry Ritholtz.  Barry writes:

“I do not want to excuse the bad purchase decisions made by the buyers of this junk — they clearly violated one of the first rules of investments: Know what you own. However, the complexity of these products required they use third party analysts and agencies to facilitate the purchase decision. That is why the bad purchases is merely lousy investing but the payola-like ratings are actual fraud.”

Sonic Charmer responds, boldface mine:

‘Required’? I cannot agree. FACT: No financial actor, anywhere, was ‘required’ to buy, consider buying, or even look at any of these structured securities in the first placeYou can’t, logically, be ‘required to use third party analysts and agencies’ to analyze something you are not even buying or going to buy. (Yachts are probably complex purchases, but I’m not ‘required to use third parties’ to analyze them, since I ain’t buying one anytime soon.)

What he must mean (if it makes any sense at all) is that, given that someone had chosen to play in this space (why is this a given exactly?), then they were ‘required’ to rely on third parties (e.g. ratings). That is also FALSE.

Seriously, if you’re too lazy or unable to read (or, perhaps more commonly, at least get a trusted subordinate to read) the Prospectus, Portfolio Management Agreement, Credit Support Annex, Total Return Swap Agreement, Collateral Management Agreement, Initial Portfolio Annex, etc., etc., etc. and whatever other docs these deals depended on, and translate the information there into a reasonable sense of its value and risks, you shouldn’t be even thinking about putting down tens of millions on it. I know these docs are painful and boring to read – believe me. But come ON. That’s the job!

At best, I would say that feel free to use third parties (including rating agencies) – but then that’s a conscious decision on your part (your time being oh so way too valuable, etc. so you outsource) that you need to own, so don’t come around whining afterwards that those third parties messed up. They messed up, sure, but you messed up too, and worse. That’s because, in this hypothetical, you’re the one who’s supposed to be the big fancy smartypants money manager, not some schlub at S&P.

Morning Journal---The declining importance of the dollar


   This Week’s Data

            The June Philadelphia Fed manufacturing index was reported at 17.8 versus expectations of 13.0.

            June leading economic indicators came in up 0.5% versus estimates of up 0.6%.


            Anecdotal evidence on the Chinese economy (short):

            The declining importance of the dollar (short):



Quote of the day (short):


            The latest from Iraq (medium):

The Morning Call--A dramatic turnaround in gold

The Morning Call

The Market

            While the indices (DJIA 16921, S&P 1959) weren’t as wildly enthusiastic as on Wednesday, they nonetheless eked out a gain, closing up above their 50 day moving averages and within uptrends across all time frames: short (16045-17524, 1877-2044), intermediate (16263-20624, 1821-2621) and long (5081-18193, 757-1974). 

            Volume rose slightly; breadth was mixed, though the flow of funds indicator remains quite strong.  The VIX was up fractionally, but finished within very short term, short term and intermediate term downtrends, below its 50 day moving average and near the lower boundary of its long term trading range.  With the Averages hitting new highs I checked our internal indicator: in a Universe of 146 stocks, 46 were at or over their all-time highs, 30 were near but still below and 70 were neither.

            Staying with the recent schizophrenic theme, the long Treasury got smoked yesterday, closing below the lower boundary of its short term uptrend, below the upper boundary of its former intermediate term downtrend, below its 50 day moving average and is on the cusp of making a new lower low.  If TLT makes that new lower low, our ETF Portfolio will likely lighten its current bond position.

            GLD rose 4%, finishing above the upper boundary of its very short term and short term downtrends as well as its 50 day moving average.  This move was large enough that it fulfills the distance element of our time and distance discipline on both downtrends, re-setting both to trading ranges.  However, I would like to see some follow through before taking any action.

Bottom line:  while the stock jockeys weren’t tiptoeing through the tulips yesterday, the QEInfinity/the Fed has your back scenario got great support from both the bond market (TLT breaking down) and gold market (breaking out).  All systems are go for an assault on the upper boundaries of their long term uptrends, if not the next set of ‘round numbers’ (Dow 18,000/S&P 2000). 

 Our strategy remains to do nothing save taking advantage of the current momentum to lighten up on stocks whose prices are pushed into their Sell Half Range or whose underlying company’s fundamentals have deteriorated.


            Yesterday’s economic data remained mixed: the June Philly Fed manufacturing index was better than expected while the June leading economic indicators fell a tad short of estimates.   That keeps the irregular flow of stats intact and with it our forecast for sluggish growth.

            Of course, these new numbers were barely noticed as most attention remained on Wednesday’s FOMC meeting/Yellen news conference.  I have nothing to add to my comments or conclusions in Thursday’s Morning Call; though I will note that while Yellen demurred on the subject of imposed ‘gates’ on the redemption of bond funds saying that it was bailiwick of the SEC, this NY Fed paper clearly shows that the Fed has considered the issue (medium):

Bottom line: despite Yellen’s dismissal of inflation and a stock bubble, inflation has suddenly found its way back into the Street lexicon and equity investors have had their faith in not fighting the Fed confirmed.  In addition, the bond and gold markets are adding fuel to the shift in thought on the former.  Of course, it is still a bit early to be assuming that there are major changes coming in the economy that would justify the trend change in either bonds or gold or both. 

That said, historically rising interest rates and gold prices can be bad for stocks.  Not always.  And certainly given the current euphoric state of investors psyche, that concern is not at the top of their list.   Nonetheless, they are now part of a growing list of developments that, should they worsen, would wreak havoc on a Market priced to perfection.

My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

 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.
            It is a cautionary note not to chase this rally.

Thursday, June 19, 2014

Tiffany (TIF) 2014 Review

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

(1) higher sales made possible by rising capital expenditures in its distribution, manufacturing and diamond sourcing process,

(2) increased penetration in international markets,

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

(4) stock buyback program.


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

(2) recent disruptions in foreign capital markets could impact its ability to financial future growth,

(3) its customers are sensitive to macroeconomic events.

TIF is rated A+ by Value Line, carries a 22% debt to equity ratio and its stock yields 1.6%.

    Statistical Summary

                Stock       Dividend       Payout      # Increases  
                Yield      Growth Rate     Ratio       Since 2004

TIF            1.6%             9               31%              10
Ind Ave     1.7                16*            27                NA 

                Debt/                      EPS Down       Net        Value Line
               Equity         ROE      Since 2004    Margin       Rating

TIF            22             18%           2                 14%          A+
Ind Ave      23            18             NA                6              NA.

*many retailers do not pay a dividend.


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