Thursday, February 28, 2013

Linear Technology (LLTC) 2013 Review


Linear Technology designs and manufacturers high end linear chips which monitor, amplify or transform continuous analog signals associated with real world phenomena (temperature, pressure, weight, position, light, sound and speed) and markets them in over 4,700 products.  The company has grown profits and dividends between 8-22% annually over the past 10 years earning in excess of a 20% return on equity.  LLTC  has experienced considerable earnings volatility of late; however, long term, it should be able to resume earnings growth because:

(1) it is broadening its product base to take advantage of infrastructure build out and the trend toward energy efficiency in industrial applications,

(2) continuing high level of investment in R&D,

(3) gains in market share,

(4) increased prices,

(5) an aggressive cost control effort.

    Negatives:

(1) the consumer segment of its business is weak due to low consumer confidence,

(2)  a leveraged balance sheet.

LLTC is rated B++ by Value Line, has over 50% debt to equity ratio and its stock yields 3.0%.

  Statistical Summary


                 Stock      Dividend         Payout      # Increases
                 Yield      Growth Rate     Ratio       Since 2003

LLTC        3.0%         5%                57%              10
Ind Ave      3.3            8*                 55                NA

                Debt/         Return     EPS Down       Net        Value Line
             Equity        on Equity    Since 2003      Margin       Rating

LLTC       50%           21%            3                32%           B++
Ind Ave     11              14             NA              16              NA

*most companies in LLTC’s industry don’t pay a dividend

     Chart

Note:  LLTC stock made good progress off its March 2009 low, quickly surpassing the downtrend off its May 2008 high (red line) and the November 2008 trading high (green line).  Long term, the stock is in a trading range (straight blue line is the lower boundary).  Intermediate term, it is in an uptrend (purple lines).  Short term, it is in an uptrend (brown lines).  The wiggly blue line is on balance volume.  The Dividend Growth Portfolio owns an 85% position in LLTC.  The upper boundary of its Buy Value Range is $17; the lower boundary of its Sell Half Range is $80.





http://finance.yahoo.com/q?s=LLTC
2/13

Art Cashin on the recent pin action

Morning Journal--Rationale for the nanny state


News on Stocks in Our Portfolios courtesy of Seeking Alpha

Target (TGT): Q4 EPS of $1.65 beats by $0.13. Revenue of $22.4B (+6.8% Y/Y) misses by $0.26B.


Economics

   This Week’s Data

   Other

            More on yesterday’s durable goods orders (short):

            And (short):

Politics

  Domestic

The rationale for a nanny state (medium):

            Rand Paul’s letter to the CIA (medium):

            Thursday morning (ironic) humor (medium):

  International War Against Radical Islam

            The ghost cities of Islam (medium):

The Morning Call--The joys of ignorant bliss


The Morning Call

2/28/13

The Market
           
    Technical

            The bulls returned yesterday.  The indices (DJIA 14075, S&P 1515) smoked to the upside but remained within their (1) short term uptrends [13509-14169, 1472-1541] and intermediate term uptrends [13419-18419, 1421-2015].

            Volume declined, breadth continued to improve.  The VIX sold off, finishing within its short term and intermediate term downtrends.

            GLD got hit after a couple of up days.  It remains within its short term downtrend; so the immediate direction is down and will remain so, until that downtrend is successfully challenged.

Bottom line: yesterday’s pin action notwithstanding, I think that the jury is still out as to whether the Market is in a topping process or positioning itself for an attack on the 14140/1576 levels.  Whatever occurs, our strategy hasn’t changed.  If prices continue to the upside, our Portfolios will raise more cash; if it rolls over, they will wait for a return to more reasonable values to put their current cash position to work. 

Main street versus Wall street (short):

    Fundamental
    
     Headlines

            Yesterday’s economic data was mixed: weekly mortgage and purchase applications were down, January durable goods orders also declined rather sizably but that was primary a function of poor aircraft orders---ex transportation, orders rose well above expectations.  Not great but it fits.

            Bernanke did a second day on the Hill and just in case anybody had any doubts after Tuesday’s testimony that the Fed would be printing dollars as fast as it could buy the paper and ink, he re-emphasized the point.  As you know, there wasn’t much of a question in my mind that easing would go on for an extended time.  But I think he wanted to be sure that those who interpreted last week’s FOMC minutes as a foreboding of future Fed tightening were completely assured that it ain’t happenin’.   Obviously, investors were overjoyed to know the Fed intends to do all it can to support stock prices irrespective of the underlying valuation.

            More low lights from Bernanke’s testimony (medium):

            Great graphic providing a slightly different take on Bernanke’s record on inflation (short and a must read):

            One day older and deeper in debt.  The sequestration effective date is tomorrow.  Obama continues to do what He does best---campaign, this time for tax hikes; but so far, the GOP is hanging tough.  As you know, I believe that all the whining over the coming cuts will be proven wrong; I believe that for there to be any chance of a return to fiscal responsibility, the sequester has to be implemented; indeed, I believe that there is a reasonable probability that the cuts in government spending could have a positive impact on economic growth. 

Hence, I am encouraged; and to the extent that yesterday’s optimism reflects investors’ agreement with that position, then I understand their upbeat mood.  However, a move back from ever growing budget deficits will not be a day in the park.  It will take time; and the burdens of too much inefficient government spending will continue to impact growth for several years.  So even in the best case, corporate profits are not going to suddenly explode to the upside; and I suspect that the readjustment of the US economy will cause sufficient heartburn that multiples aren’t going to expand until it is truly clear that the ruling class has the will to complete the task.  In sum, with stocks already overvalued, I can’t make a case for higher prices under even the optimum scenario.
           
            The tired rhetoric of sequestration (medium):

            More nanny state regulatory authority for the Fed (medium):

            A failing Italian economy and political process couldn’t dampen investor enthusiasm.  However, I believe that the third Act of this play has not yet started---and this is a tragedy.  The news is not likely to improve.

            The Germans are upset; but it may not matter (medium):

            And (medium):

            A century of French and Italian economic decline (medium):

            Unfortunately, at present, it is more than just the French and Italian economies that are declining (medium):

Bottom line:  I continue to be encouraged by the economic progress the US is making.  In addition, I am encouraged that the sequestration process could prove to the first step back in the direction of fiscal responsibility.  While not a magic elixir that will smooth over years of profligate behavior, if it proves to the tipping point then that is enough for today.

That said, I believe that the Fed is digging itself into such a hole that it will never be able to right the sum total of its wrongs without causing either a more significant economic slowdown or a more destructive level of inflation than would otherwise occur with a less aggressively expansive monetary policy.

In addition, I am losing what little confidence I had in the eurocrats’ ability to fix a hangnail much less the growing sovereign/bank insolvency problem.  This is a stick of dynamite stuck up the global financial system’s ass.  A wrong move could be very painful for us all.

I like our cash position.

            The latest from Cumberland Advisors (medium):

            The latest from David Rosenberg (medium):

            Bill Gross’ latest monthly letter (medium):

     Investing for Survival

            Bermuda tax haven (medium):

Wednesday, February 27, 2013

The latest from Bill Gross

Today's action in gold

Morning Journal--Wealth and immigration

News on Stocks in Our Portfolios courtesy of Seeking Alpha

Expeditors International (EXPD): Q4 EPS of $0.4 misses by $0.03. Revenue of $1.53B (+2% Y/Y) beats by $0.02B.

Ecolab (ECL): Q4 EPS of $0.89 in-line. Revenue of $3.0B misses by $0.04B.

HollyFrontier (HFC): Q4 EPS of $1.92 misses by $0.32. Revenue of $5.14B (+3.5% Y/Y) beats by $0.21B.
Home Depot (HD): Q4 EPS of $0.68 beats by $0.04. Revenue of $18.2B (+13.9% Y/Y) beats by $0.54B.

ONEOK Partners (OKS): Q4 EPS of $0.66 beats by $0.04.

Economics

   This Week’s Data

            The International Council of Shopping Centers reported weekly sales of major retailers up 0.1% versus the prior week and up 2.9% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales up 1.4% versus the similar time frame last month and up 1.7% on a year over year basis.

            The December Case Shiller home price index rose 0.9%% versus expectations of an increase of 0.8%.

            The February Conference Board’ index of consumer confidence came in at 69.6 versus estimates of 61.0

            January new home sales were up 16.5% versus an anticipated rise of 3.2%.

                A complete review of the housing market (medium):

            The February Richmond Fed’s manufacturing index was reported at +6 versus forecasts of -3.

            Weekly mortgage applications fell 3.8% while purchase applications dropped 5.0%
           
            January durable goods orders declined 5.2% versus expectations of a decrease of 4.0%; however, ex transportation, orders were up 1.9% versus estimates of up 0.2%.

   Other

Politics

  Domestic

Interesting---wealth versus immigration (short and a must read):

  International War Against Radical Islam

            Russia’s aim in Syria (medium):


The Morning Call--Bernanke doubles down

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The Morning Call

2/27/13

The Market
           
    Technical

            The indices (DJIA 13900, S&P 1496) rebounded yesterday, though the pin action was largely that of an oversold bounce.  The Market is starting to give the impression that it is drifting into another one of its schizophrenic phases (lots of volatility, no direction).  That said, the Averages remain within their (1) short term uptrends [13509-14164, 1469-1539] and (2) intermediate term uptrends [13410-18410, 1421-2015].

            Volume declined; breadth recovered.  The VIX fell but finished within both a short term and intermediate term downtrend.

            GLD rallied hard, though it is well within its short term downtrend.  The recent recovery has been on above average volume, suggesting the potential that we have seen the lows.  However, we won’t know or consider taking action until the current short term downtrend has been successfully challenged.

Bottom line: the recent churn on better volume is suggestive of a pitched battle between the bulls and bears and/or, more ominously, a topping process.  We likely won’t know which for a while; but the erratic pin action relieves somewhat the pressure of being under invested.  For the moment, equities remain in a technical uptrend---and will remain so until they are not. 

If investors are rethinking their overactive optimism, the Averages will tell us when given the chance to challenge those uptrends.  If not, our Portfolios will continue to Sell into rising prices.

            The lead/lag report (medium):

            Market performance in post election years (short):

                Major correction or bear trap? (short):

    Fundamental
    
     Headlines

            Lots of economic data was reported yesterday and it was universally good: weekly retail sales showed growth, the Case Shiller home price index was up more than expected, new home sales were very strong as was consumer confidence and the Richmond Fed’s manufacturing index was up versus estimates that it would be negative.  In sum, very supportive of our forecast and clearly a reason for investors’ positive mood.

            Bernanke kept the party going by:

(1) promising to keep the presses running into infinity and shrugging off the risks associated with an ‘all in’ liquidity surge.  As long as all that money remains as reserves on bank balance sheets, he will be correct.  But when, as and if velocity ever picks up, he [and the rest of us] will have a problem,

(2) doubling down by supporting the doomsayers on sequestration.  Given the Keynesian economic model and orientation of the Fed staff, this opinion is not a surprise.  I was a bit taken back that Bernanke ventured into fiscal policy---something the Fed normally eschews.  I can understand that if he believes that the economy could weaken and worries that everyone will be looking at the Fed for even more ease to offset that weakness, then he would rightfully be nervous about expanding the Fed’s balance sheet beyond its current gluttonous and ever growing size. 

Frankly, the only reason that I even care about Bernanke’s opinion on sequestration is the extent to which he could influence the GOP determination to hold fast.  Obama will likely be blitzing the media with Bernanke’s comments and urging the public to pressure their congressmen to ease up.  The good news is that He only has two days to do it.  The line in the sand is still there.
           
Must read excerpts from Bernanke’s testimony (medium):

Bernanke downplays the risks of too easy money (medium):

            And how about this for a troublesome chart (short):

And finally, this from Charles Biderman (5 minute video):

Investors chose to ignore the potential fall out from the Italian elections---probably because no one seems to know exactly how things will play out.  However, the Italian and Spanish bond markets paid attention and the result was whackage.  My guess is that the political crisis in Italy won’t be disregarded by US investors for long.

Can the euro exist without a fiscal union (medium):

What the Germans think (medium):

But how much of a euro disaster is already priced into stocks?  Good point. (short):

Bottom line:  yesterday’s economic data was welcome after a period of more ‘mixed’ results.  Bernanke’s re-emphasis of monetary easing was not surprising, though his pitch for backing off sequestration concerns me.  If Obama uses it to successfully bludgeon republicans into backing off their stance, it would be.....unfortunate.

Just because investors elected to overlook the potential financial problems that could result from an anti austerity administration in Rome doesn’t mean that they don’t exist.

I like our cash position.




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 Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Tuesday, February 26, 2013

Cashin on Bernanke's testimony

General Dynamics (GD) 2013 Review

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General Dynamics is a leading defense contractor supplying products and technology to marine systems, combat systems, information systems and aerospace (basically submarines, tanks, aircraft and command and control systems). The company has grown earnings and dividends 14% and 12% respectively over the last 10 years and has earned a consistently high 17-18% return on equity.   GD should be able to continue to match that record because of:

(1) growth in commercial aerospace division,

(2) acquisitions,

(3) an aggressive cost reduction program

Negatives:

(1)    a large percentage of its sales are dependent on government spending both in the US and Europe,

(2)    its backlog has declined recently.

GD has a debt to equity ratio of approximately 17%, is rated A++ by Value Line and its stock provides a yield of 3.1%.

    Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                Yield      Growth Rate     Ratio        Since 2003

GD            3.1%         8%               29%              10
Ind Ave      2.3           11*                24               NA 

                Debt/                       EPS Down       Net        Value Line
                Equity         ROE      Since 2003      Margin       Rating

GD            17%           16%           0                 8%           A++
Ind Ave     39               18            NA               9             NA

*most companies in GD’s industry don’t pay a dividend

     Chart

Note: GD made good initial progress off its March 2009 low, quickly surpassing the downtrend off its September 2008 high (straight red line) and the November 2008 trading high (green line).  However, the advance soon stalled thereafter and the stock has been in an intermediate term trading range (purple lines) since.  Long term, GD is also in a trading range (blue lines).  As you can see, the stock is near challenging its 50 day moving average (wiggly red line).  The Dividend Growth Portfolio owns a full position in GD---though GD has been traded, selling in the high 60’s/low 70’s and buying back in the low 60’s,   The upper boundary of its Buy Value Range is $38; the lower boundary of its Sell Half Range is $80.


           
  
2/13

A good review of the Italian situation

Morning Journal--Crony capitalism

 
 News on Stocks in Our Portfolios

 Donaldson (DCI): FQ2 EPS of $0.34. Revenue of $596M (+3% Y/Y).

 
Economics

   This Week’s Data

            The February Dallas Fed’s manufacturing index fell from 12.9 to 6.2:

            The January Chicago Fed’s national activity index came in at -.32 versus December’s reading of +.25.

   Other

            Update on C&I loans (short):

            Truck tonnage continues to grow (short):

Politics

  Domestic

Big bank welfare queens (medium and today’s must read):

            A look at corporate taxes paid (medium and also a must read):

The Morning Call---Brussels, we have a problem

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The Morning Call

2/26/13

The Market
           
    Technical

            The indices (DJIA 13784, S&P 1487) had a roller coaster day, opening up big and falling out of bed later.  Nonetheless, they ended within their (1) short term uptrends [13462-14116, 1465-1535] and (2) their intermediate term uptrends [13398-18398, 1418-2013].

            Volume rose; breadth crashed.  The VIX soared (+34%) closing near the upper boundary of a short term downtrend but well within its intermediate term downtrend.

            GLD was up big, finishing back above the lower boundary of its short term downtrend and above the lower boundary of its intermediate term trading range.

Bottom line: equities took investors on a wild ride yesterday.  The late day sell off on top of last week’s hiccup seems to be telling us that investors are at last starting to be concerned about some of the problems about which I have been harping on for far too long.  It is too soon the suggest that prices could be heading back to Fair Value---although it is clearly possible that the Averages will challenge the lower boundaries of their short term uptrends.  Until those boundaries are broken, it remains probable that stocks can reach the 14140/1576 level.

            Five signs the rally is on hold (short):

            Market behavior in February (short):

    Fundamental
    
      Headlines

            Two regional Fed banks reported yesterday: (1) the Dallas Fed’s February manufacturing index grew but at about half the expected rate and (2) the January Chicago Fed’s national activity index was disappointing.  Not great news but not alarming within the context of our forecast.

            Overseas, Chinese PMI was below estimates.  As you know, a strong Chinese economy is a source of strength in our outlook.  So any additional weakness would be of concern.

            None of this mattered anyway as investors focused on several of the macro themes garnering attention of late:

(1)     Obama and Boehner held dueling press conferences, neither giving any hint of backing off their current positions on the sequester.  As you know, I consider this a positive scenario; although Obama’s ‘end of the world’ rhetoric does seem to be having a negative affect on investor sentiment,

(2)     Bernanke testifies before congress today and Wednesday.  Some investors apparently haven’t yet let go of last week’s FOMC minutes; so some chattering about tighter money  policy helped raise the level of yesterday’s heart burn,

(3)     finally and perhaps most importantly, in the Italian elections, Berlusconi outpolled the current ruling coalition.  While no one is sure whether a new government can be formed or if new elections must be held, the anti austerity vote appears to have been something of a wake up call for all those EU Pollyanna’s.  Not that they won’t be lulled back to sleep; but if investors are suddenly realizing that Italy, Spain, Greece, etc still have problems and that little to nothing has been done to correct the underlying causes of those problems, then we are apt to see more days like yesterday in the Markets.

Citi’s take (medium):

***overnight, Italian markets are not happy; and Spain’s political problem worsens:

Bottom line:  the economy continues to track our forecast; and I continue to believe that the risk of Fed tightening and/or the risk of economic weakness resulting from sequestration are straw men.  To be sure, we are still faced with debt ceiling and the continuing resolution negotiations.  But I just don’t see any critical economic impacts coming out of either.  There could be a psychological plus if our elected reps actually do the right thing; but I am not losing sleep on that outcome.

The 800 pound gorilla is European sovereign/bank insolvency.  It is way too early to tell if the Italian elections will erode investor confidence, drive interest rates up and spawn another funding crisis in Italy, Spain, Greece, etc., etc.

I like our cash position.

            The latest from Gary Shilling (long but worth the read):

            Is a great rotation underway (medium):

            Don’t blame the Fed for your investment mistakes (medium):
            http://www.fool.com/investing/general/2013/02/22/dont-blame-the-fed-for-your-own-investment-mistake.aspx




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 Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Monday, February 25, 2013

Monday Morning Chartology--2/25/13

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The Morning Call

2/25/13

The Market
           
    Technical

       Monday Morning ChartologyAs you can see, no technical damage was done to the S&P in last week’s selloff.  It remains solidly within its short and intermediate term uptrends.



           

GLD got trashed last week.  Despite a two day rally, it couldn’t even regain the lower boundary of its short term downtrend.



           

            The VIX continues to trade within a short and intermediate term downtrend---a plus for stocks.



            Update on ‘the best stock market indicator ever’:

    Fundamental
    
            The five biggest lies on Wall Street (medium):

            An optimist’s view of the Market (medium):

            The latest from David Rosenberg (medium):

            The quandary of negative real rates (medium):

      News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

   Other

Politics

  Domestic

Krauthammer on immigration (medium):

This week’s Time magazine looks at healthcare and its abuses.  Some of what follows is alarming but note the comment on the monopoly power of drug companies and their outrageous prices.  The author clearly doesn’t understand the rationale for patents.  The point here is that part of the article is good information, part is uniformed opinion (medium):

The dumbing down on America (short/medium and a must read):

  International

            North Korea: preparing for war (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 Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.