Wednesday, December 31, 2014

The Morning Call

The Morning Call


The Market

            Yesterday, the S&P (2080) closed right on the upper boundary of its long term uptrend, having remained above it for the prior four trading days.  Under on time and distance discipline, that technically confirms the break above that boundary.  However, (1) the magnitude [distance] of the break was never that great and (2) the holiday impacted lack of volume raises a question about the validity of the break.  Nonetheless, I am making the call, but with some lack of conviction.   The real test will come next Monday when everyone is back at their desks.

Tuesday, December 23, 2014

The Morning Call

The Morning Call


The Market

            The indices (DJIA 17959, S&P 2078) are close to or are challenging resistance levels.  For the Dow, the former high is 17991 and the upper boundary of its long term uptrend is 18957.  The S&P busted through the upper boundary of its long term uptrend (2075) for the second time.  If it remains above this level though the close next Tuesday, that boundary will have been successfully challenged.  Its former high is 2080 (which was reached during its first unsuccessful challenge).

            Meanwhile, the TLT continues to perform well (slowing economy or safe haven?) and GLD is again getting beaten up (no safe haven thesis, here).

            Free money still appears to be driving the bid.  Housing starts reported yesterday were not good; but the Bank of Japan announced that it would buy the entirety of new bonds issued by the government and Draghi’s QE is starting to get positive headlines again.  Buying stocks because central banks are making speculation cheap is not my idea of a reasonable or safe investment strategy.

            An inside look at this morning’s upbeat GDP report:

            And the lousy durable goods order number:

Friday, December 19, 2014

The Morning Call

The Morning Call


The Market

            ‘Money for nothing and the chicks are free.’  The renew vow from the Fed that it will never, ever allow stocks to go down has infused a rejuvenated sense of euphoria in investors.  In two days we have gone from worrying about potential support levels to focusing on resistance.  At the moment, the upper boundaries of the indices long term uptrends are 19162 and 2071---which means the S&P is a short hair away from another challenge.  Let’s see how they handle these resistance areas; but given the current magnitude of jigginess, the odds of a break seem reasonable.

            It seems almost useless to attempt to analyze fundamental developments and their potential impact on stock valuation, because nothing else matters but investor faith in an endlessly easy Fed.


Thursday, December 18, 2014

Yet another brief Morning Call

The Morning Call


The Market

            Helped along by a more dovish than expected Fed statement, the technically oversold market bounced early in the day and then short covering pushed on the afterburners in the afternoon.  Both indices (17356, 2012) closed back above their 50 day moving averages and the Dow finished back above its former high support level---which are quite positive.  However, before we can assume that the current downtrend is over, the Averages, at the very least, have to trade back above the upper boundaries of their developing very short term downtrends (circa 17483, 2023). 

            ***overnight, the Swiss central bank imposed negative interest rates on foreign capital inflows.  For all practical purposes that is an easing move on top of the Fed meeting.

            The main reason for the euphoria over the Fed statement/Yellen news conference was that (1) the Fed weaseled its way out of corner---raising interest rates next year.  Not that it won’t lift rates next year, it just gave itself more room not to without looking like is changing its policy and (2) Yellen downplayed the decline in the price of oil and its potential impact on the economy and the banking system---which as you know has been a driving force behind the recent Market decline.  How you can be so nonchalant about a 50% reduction in the price of one of the primary economic inputs and its impact is frankly a bit unsettling.  Her statement is very reminiscent of a similar one by Bernanke in 2008 about how little risk there was in the housing and mortgage markets.  Not that all will turn out the same; but the circumstances seem hauntingly familiar.


Wednesday, December 17, 2014

Another short Morning Call

The Morning Call

The Market

The Averages (17068, 1972) got whacked again yesterday; but not before an early rally.  Note that the pattern has changed from buying the dips to selling the rips.  This obviously could reverse itself again, but until it does, those support levels that I have mentioned remain the key:  the next support levels for the Dow are circa 16852 (200 day moving average) and 16232 (lower boundary of its short term uptrend).  For the S&P, it is 1945 (200 day moving average, 1904 (its prior resistance, now support level) and 1876 (the lower boundary of its short term uptrend.

            Most of yesterday’s indigestion was to the problems lower oil prices are causing the Russian economy:

            And what impact that may have on the Fed’s decision today:

Tuesday, December 16, 2014

A short Morning Call

The Morning Call


The Market
            The indices (DJIA 17180, S&P 1989) got whacked again yesterday.  Apparently it was the continuing decline in oil prices that was the catalyst.  Surprisingly, Abe’s victory and a good industrial production number didn’t count.  However, the Market ended up in its most oversold position in sometime, so a bounce would not be unexpected.

            ***overnight, the Chinese manufacturing PMI fell into contraction territory (below 50.0).  And housing starts and building permits were just reported below expectations.

Both Averages busted through their 50 day moving averages.  Plus the Dow broke through its prior resistance (now support) level (now back to resistance).  The next support levels for the Dow are circa 16852 (200 day moving average) and 16232 (lower boundary of its short term uptrend).  For the S&P, it is 1945 (200 day moving average, 1904 (its prior resistance, now support level) and 1876 (the lower boundary of its short term uptrend.

            In other Markets, the TLT confirmed the break of the upper boundary of its intermediate term trading range and re-sets to an uptrend.  GLD got whacked but remained above the lower boundary of its long term trading range.


Monday, December 15, 2014

Monday Morning Chartology

The Morning Call


The Market

        Monday Morning Chartology

            The S&P closed Friday within uptrends across all timeframes.  That said, the pin action suggests that we should be looking for support levels.  The three most visible for the S&P right now is the 50 day moving average (wiggly red line)---which the S&P basically closed right on Friday.  The purple line is at circa 1902.  The 200 day moving average is circa 1944.  Of course, these all exist within the confines of all the uptrends; so the break of any of them would not be catastrophic a technical development.

            The long Treasury finished above the upper boundary of its intermediate term trading range for the third day.  A close above it today would reset that trend to an uptrend.  Meanwhile, TLT is within very short term and short term uptrends and above its 50 day moving average.  The bond guys are telling us that either an economic slowdown is coming or that a crisis is coming overseas.

            GLD rose Friday, ending within a very short term uptrend, a short term trading range, an intermediate term downtrend, a long term trading range and above its 50 day moving average.  GLD buyers are also suggesting that there could be trouble in River City.

            The VIX was up big again on Friday, finishing within a short term trading range and intermediate term downtrend and above its 50 day moving average.  It is now near the top end of a trading range going back more than a year.  That argues that stocks are near a bottom.


            Abe won the elections by a landslide---so QEInfinity rolls on and I now officially have no sympathy for the Japanese workingman.  The Fed meets this week with rumors of a change in language to indicate an early move to raise interest rates.
       Investing for Survival

            You can control bad timing (medium):

      News on Stocks in Our Portfolios

   This Week’s Data




  International War Against Radical Islam

Saturday, December 13, 2014

The Closing Bell

The Closing Bell


My number one grandson arrives today followed by my number two and four granddaughters and number three grandson on Wednesday.  I will attempt to post next week though it could be sketchy; I know that I won’t be posting 12/29-1/4.  Happy Holidays in advance.

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%

            2015 estimates

Real Growth in Gross Domestic Product                   +2.0-+3.0
                        Inflation (revised)                                                          1.5-2.5
                        Corporate Profits                                                            5-10%

   Current Market Forecast
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 16211-18957
Intermediate Term Uptrend                      16191-21156
Long Term Uptrend                                  5369-18960
                        2013    Year End Fair Value                                   11590-11610

                        2014    Year End Fair Value                             11800-12000                                          

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     1870-2234
                                    Intermediate Term Uptrend                       1712-2425
                                    Long Term Uptrend                                    783-2071
                        2013    Year End Fair Value                                    1430-1450

                        2014   Year End Fair Value                                     1470-1490         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          47%
            High Yield Portfolio                                     54%
            Aggressive Growth Portfolio                        49%

The economy is a modest positive for Your Money.   There wasn’t much by way of US economic data this week, but what we got was mostly to the plus side: positives---weekly purchase  and purchase applications, November retail sales, November PPI, November small business optimism, consumer sentiment and the November US budget deficit; negatives---October business inventories and sales; neutral---weekly retail sales, weekly jobless claims and October wholesale inventories and sales.

This week’s most important number was the one primary indicator (retail sales) which appeared very strong.  I caution that there was a huge seasonal adjustment factor calculated into the final figure which makes revisions more likely.  Nonetheless, in the current environment, I will take any positive that I can get.

These upbeat stats are made even more so by the fact that the US economy continues to fight off the effects of an otherwise slowing global economy.  Speaking of which, the numbers from overseas are not getting any better (see below). So, our outlook remains the same, and the primary risk (the spillover of a global economic slowdown) remains just so.

Our forecast:

 ‘a below average secular rate of recovery resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with an impaired balance sheet, and a business community unwilling to hire and invest because the aforementioned, the weakening in the global economic outlook, along with...... the historic inability of the Fed to properly time the reversal of a vastly over expansive monetary policy.’
        The pluses:

(1)   our improving energy picture.  The US is awash in cheap, clean burning natural gas.... In addition to making home heating more affordable, low cost, abundant energy serves to draw those manufacturers back to the US who are facing rising foreign labor costs and relying on energy resources that carry negative political risks.

This week the realization that lower oil prices [which we got in spades] were not an unmitigated positive seems to have sunk into investor consciousness. It was helped, of course, by terrible overseas macroeconomic data as well as specific problems in Ukraine and Norway [both economies heavily dependent on oil].  The primary concern at the moment is the extent of bank lending to the oil industry in particular the sub prime market [why does this sound familiar?]

So it seems that oil prices may have hit that crossover point about which I have been concerned.  I am not going to switch this factor from a positive to a negative just yet; but if the evidence continues to develop as it has this week, it is not far off.

Counterpoint (medium):

       The negatives:

(1)   a vulnerable global banking system.   What do you do with a bunch of habitual crooks?  My answer is make it more painful to commit crimes---like throw the lot of them in jail.  Otherwise, the same ol’ shit is just going to keep happening:

[a] the IRS accused Deutschebank of failing to pay $190 million in taxes,

[b] bank regulators told JP Morgan that it was $22 billion short in its capital account,

[c] and the clincher, Deutschebank and Barclays were accused of using algorithms to rig the futures market---after all how do you fine an algorithm or send it to jail,

[d] OK, it wasn’t the clincher.  This is the clincher---the bought and paid for GOP placed an amendment in the budget bill that negates a provision of Dodd Frank that forced the banks to divest a segment of their derivative trading operations {meaning you and I remain on the hook if something goes wrong---which is all but inevitable.}

‘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. Congress passed the FY2015 budget with more difficulty than I had originally supposed---and for good reasons.  The house leadership [the republicans]:

[a] allowed a provision to be slipped into the budget bill that enables bank to hold on to their derivative trading operations.  Just to reminder you, Dodd Frank was enacted with the purpose of avoiding disasters such as occurred in 2007/2008 in the banking industry.  One of those purposes was to reduce the incentive of traders to make big, risky bets which the taxpayer was ultimately on the hook for.  This action is in direct conflict with that purpose,

[b] also accepted over 1000 earmarks in the bill,

[c] and finally, presented the 1600 page bill to the full house with less than three days’ notice prior to the scheduled vote.  Remember all righteous indignant criticism of the dems when they posted a bill with little notification? 

Unfortunately, it would appear, at least at first blush, that the election simply replaced one group of self-interested politicians with another; and that the prospects for real fiscal, tax and regulatory reform are not as promising as I  may have hoped.

And Powerline:

Nonetheless, avoiding a government shutdown and keeping spending roughly flat are positives in themselves---the latter keeping the Federal budget shrinking as tax revenues increase, the benefits of which are less usurpation of national income [resources] by the government and less [more] reason for a tax increase [cut].

(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. 

This week there were mixed messages from several quarters:

[a] an internal ECB memo was leaked that suggested that Draghi has lost his voting majority on the board and the promised 2015 QE was on indefinite Hold.  On the other hand, a member of that board swore up and down that QE was coming. I have no clue which to believe; but clearly there is internal dissention that calls into question the likelihood of an EU QE.

In another matter, the ECB ran a second round of TLTRO {three year asset re-purchase agreements from banks} which was a disappointment.  In other words, the banks either don’t have enough quality assets to participate in the program {impaired balance sheets} or they don’t feel the need for more liquidity {no loan demand}. 

[b] the Bank of China first raised margin requirement and banks raised the time deposit rates {tightening}, then the BOC injected reserves into the banking system {easing}.  As with the ECB, I don’t know exactly what to make of these seemingly conflicting actions except that it shows that a massive QE out of China is not a sure thing.

(3)   geopolitical risks.  Relative quiet this week although [a] OPEC’s {the Saudi’s} decision to not cut production could have potentially significant implications if the cash flow negative members of OPEC get desperate and [b] the US is sending additional arms to NATO members bordering Russia. Plus the Ukraine government invited Russian ‘specialists’ in to help stabilize the country {what could possibly go wrong here?}. Despite this comparative calm, this is the source of a potential exogenous factor that could produce the loudest bang.

(4)    economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe.  The economic events from the rest of the world continued to get worse this week: the German trade numbers were below expectations; UK industrial production was down; Japanese consumer confidence fell; Ukraine needs almost twice as large a bailout as originally estimated; in response to the economic damage to its economy wrought by lower oil prices, Norway’s central bank lowered interest rates; Moody’s downgraded France’s credit rating and Greece is undergoing a political crisis that could lead to a default or withdrawal from the EU. 

‘I have no idea when, as and if the rest of the globe’s worsening economic straits will ever wash on to our shores; but I do know that there is a clear risk of it happening; so this remains the biggest risk to our forecast.’

Bottom line:  the US economic news continued to improve last week and accomplished it while avoiding any negative fallout from a slowing world economy---which only got worse. 

The QE advocates received some bad news this week as (1) China implement a host of new policies that both eased and tightened various components of monetary policy.  While it may continue to provide some easing, it appears that it won’t be joining the QE free for all, and (2) the ECB put out its own set of mixed signals, the most significant of which as a leaked internal memo that Draghi had lost his voting majority on the board and QE was being postponed indefinitely.

Falling oil prices were the principal headline this week which seems to have changed perceptions from it being an unmitigated positive to a more balance view that some economic sectors aside more oil could also suffer and perhaps more important that a credit crisis is possible stemming from defaults on loans to the energy industry.

This week’s data:

(1)                                  housing: weekly mortgage applications and purchase applications were up,

(2)                                  consumer:  weekly retail sales were mixed; November retail sales were well ahead of estimates, however, ex autos and gas, they were only slightly better than anticipated; weekly jobless claims fell fractionally,

(3)                                  industry: October wholesale inventories were up solidly, but sales increased only half as much; October business inventories were up but short of forecasts and sales decline 0.1%; the November small business optimism index was better than expected; the preliminary December reading for consumer sentiment was well above consensus,

(4)                                  macroeconomic: the November US budget deficit was considerably lower than estimates; November PPI was lower than anticipated.

The Market-Disciplined Investing

            The indices (DJIA 17280, S&P 2002) had a rough week but nonetheless closed within uptrends across all timeframes: short term (16211-18957, 1870-2234), intermediate term (16191-21456, 1712-2428) and long term (5369-18860, 783-2071).  In fact, they remain a good distance from any of their lower boundaries.  So the current decline could continue without jeopardizing any of the major trends.

            That is not to say that there are no support levels closer in that can give us a reading on the Market.  (1) at the moment, both the Dow and S&P are very close to their 50 day moving averages, (2) as fate would have it, the former resistance high [now support] on the Dow coincides almost exactly with its 50 day moving average.  So for the Dow, it is right at an important double support level, (3) the S&P’s next line of defense is its 200 day moving average which currently is circa 1944 and finally (4) the last support level before hitting the lower boundaries of their short term uptrends is [a] the 200 day moving average for the Dow {circa 16838} and for the S&P, its former resistance high {now support---1902}. 

The Market’s late December trading pattern (short):

Volume rose on Friday; breadth deteriorated. The VIX jumped another 5%, closing within a short term trading range, an intermediate term downtrend and above its 50 day moving average.  So far, it had remained within a much longer term trading range.  Any violation of that trend could spell trouble.
            This indicator suggests that the bull market is not over (medium):

The long Treasury moved up strongly again.  It closed above the upper of its intermediate term trading range for the third day; if it holds that level through the close on Monday, the trend will re-set to up.  In the meantime, it remained within very short term and short term uptrends and above its 50 day moving average.

Pay attention to junk bonds (short):

GLD was up on Friday, closing within a very short term uptrend, a short term trading range, an intermediate term downtrend, a long term trading range and above its 50 day moving average.

Bottom line: the Averages retreated this week, with the S&P bouncing off the upper boundary of its long term uptrend.  As unnerving as some of the trading was, there remains quite a distance from current levels and the lower boundaries of any uptrends.  So at least for the moment, this correction is nothing more than a pause that refreshes.  That said the VIX is getting close to pushing above a year plus trading range, TLT is yelling that something is awry somewhere and GLD is supporting it.  So it is too soon to head for the hills but time to be careful.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (17280) finished this week about 45.2% above Fair Value (11900) while the S&P (2002) closed 35.2% overvalued (1480).  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.

Despite getting only a trickle of economic data this week, what was reported was mostly positive.  That keeps our forecast on track and, hence, the positive economic numbers in our Valuation Model unchanged.

In addition, the economy remains immune to the poor performance of virtually all of our major trading partners.  Given current valuation levels, investors clearly believe that our economy can continue to avoid the fallout of a global slowdown.  They may be correct, but I believe the risk of this not happening is sufficient to make it the number one risk now facing both the economy and the Market.

 Another Market risk is the potential that QEInfinity could be over much sooner than expected.  I noted above the confusing signals from both the ECB and the Bank of China---not that QE won’t occur in their economies, but the risk of it not happening looks to be increasing.  Not to be forgotten is the upcoming Japanese elections (Sunday) in which Abe’s economic policies will be on trial.  I can’t understand why the electorate would endorse what can only be described as destructive policies; but the latest polls suggest otherwise.  Nonetheless, the ousting of Abe (and his triple down, balls to wall QE) could trigger some serious re-evaluation of the QEInfinity mindset.
Oil (prices) remained the biggest economic factor in investors’ minds this week.  As I noted above, the general perception has gone from it ‘being an unmitigated positive to a much more balanced view’.  The wild card here lies with the magnitude of subprime debt that has been incurred in order to finance the enormous pick up in exploration and production spending.  The negative thesis being that a continuing decline in oil prices will render many current and planned projects uneconomic, reducing oil companies free cash flow and, hence, their ability to service that debt and thus lead to defaults and possibly another credit crisis.  There are a lot if’s in that thesis; but the point is that lower oil prices are no longer being viewed as the greatest thing since sliced bread.

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

Bottom line: the assumptions in our Economic Model haven’t changed though our global ‘muddle through’ scenario is at risk and lower oil prices have suddenly developed a dark underside.  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.

            All of my above negative commentary aside, I am amazed at how much damage had been done to the oil stocks while the rest of the Market remains near highs.  Indeed, the valuations of many of the oil stocks in our Universe are either in or within shouting distance of their Buy Value Ranges---which is to say, valued at bear market levels.  Usually, poor performing sectors will anticipate a similar move by stocks in general but the divergence that we are now witnessing is nothing like I have seen before.  My conclusion is that it is probably time to nibble but only at the very best quality oil stocks (CVX, XOM) and only a little, leaving room to average down if the shit hits the fan.     

            Accordingly, at the open Monday morning, the Dividend Growth and High Yield Portfolios will Add to their XOM holdings.

            Contrarians take note (short):
DJIA                                                   S&P

Current 2014 Year End Fair Value*              11900                                                  1480
Fair Value as of 12/31/14                                11900                                                  1480
Close this week                                               17280                                                  2002

Over Valuation vs. 12/31 Close
              5% overvalued                                12495                                                    1554
            10% overvalued                                13090                                                   1628 
            15% overvalued                                13685                                                    1702
            20% overvalued                                14280                                                    1776   
            25% overvalued                                  14875                                                  1850   
            30% overvalued                                  15470                                                  1924
            35% overvalued                                  16065                                                  1998
            40% overvalued                                  16660                                                  2072
            45%overvalued                                   17255                                                  2146
            50%overvalued                                   17850                                                  2220

Under Valuation vs. 12/31 Close
            5% undervalued                             11305                                                      1406
10%undervalued                            10710                                                       1332    15%undervalued                            10115                                                  1258

* 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, December 12, 2014

Morning Journal--The shame of a crumbling infrastructure


   This Week’s Data

            October business inventories were up 0.2% versus expectations of up 0.3%; sales fell 0.1%.

            November PPI fell 0.2% versus estimates of down 0.1%; ex food and energy, it was flat versus forecasts of +0.1%.





The shame of a crumbling infrastructure (medium):


            Michael Hudson on US foreign policy (medium):