Wednesday, April 30, 2014

Investing for Survival

Investing for Survival---biases that make you do dumb things with Your Money

1. Normalcy bias 
Assuming that because something has never happened before, it won't (or can't) happen in the future. Everything that has ever happened in history was "unprecedented" at one time. The Great Depression. The crash of 1987. Enron. Wall Street bailouts. All of these events had never happened... until they did. When Warren Buffett announced he was looking for candidates to replace him at Berkshire Hathaway, he said he needed "someone genetically programmed to recognize and avoid serious risks, including those never before encountered." Someone who understands normalcy bias, in other words.

2. Dunning-Kruger effect 
Being so bad at a task that you lack the capacity to realize how bad you are. Markus Glaser and Martin Weber of the University of Mannheim showed that investors who earn the lowest returns are the worst at judging their own returns. They had literally no idea how bad they were. "The correlation between self-ratings and actual performance is not distinguishable from zero" they wrote.

3. Attentional bias
Falsely thinking two events are correlated when they are random, but you just happen to be paying more attention to them. After stocks plunged 4% in November 1991, Investor's Business Daily blamed a failed biotech bill in the House of Representatives, while The Financial Times blamed geopolitical tension in Russia. The "cause" of the crash was whatever the editor happened to be paying attention to that day.

4. Bandwagon effect 
Believing something is true only because other people think it is. Whether politicians or stocks, people like being associated with things that are winning, so winners build momentum not because they deserve it, but because they're winning. This is the foundation of all asset bubbles.

5. Impact bias 

Overestimating how big of an impact an event will have on your emotions. Most people are utterly terrible at predicting how happy they'll be after receiving a raise, or getting a new job, particularly as time goes on. We get used to more (or less) money quickly, but it's extremely difficult to realize that before it happens. Your financial goals might change after coming to terms with this.

Morning Journal--David Stockman on our crumbling infrastructure

 News on Stocks in Our Portfolios
·         C.H. Robinson Worldwide (CHRW): Q1 EPS of $0.63 beats by $0.02.
·         Revenue of $3.14B (+5.0% Y/Y) misses by $40M.

Economics

   This Week’s Data

            The International Council of Shopping Centers reported weekly sales of major retailers were up 1.6% versus the prior week and up 3.1% on a year over year basis; Redbook Research reported month to date retail chain store sales down 0.3% versus the comparable period a month ago but up 3.8% versus the similar timeframe last year.

            The February Case Shiller home price index rose 0.8% versus expectations of up 0.7%.

            April consumer confidence came in at 82.3 versus estimates of 83.0.

                Weekly mortgage applications fell 5.9% while purchase applications dropped 4.0%.

            The ADP private payroll report showed a 220,000 increase in jobs versus forecasts of a 210,000 rise.

                First quarter GDP came in up 0.1% versus expectations of +1.1%; the price index was up 1.3% versus estimates of +1.7%.

   Other
           
Politics

  Domestic

David Stockman on our crumbling infrastructure (medium):

The Morning Call--It's Fed day, so what could go wrong? (GDP?)

The Morning Call

4/30/14

I am preparing for cataract surgery (it is hell getting old).  Today is all the prep work which involves squirting that stuff in your eye to dilate the pupil.  I am not sure how long I will be unable to see to read/write; so I am unsure how thorough tomorrow’s Morning Call will be.   Bear with me.

The Market
           
    Technical

The indices (DJIA 16535, S&P 1878) had another good day.  They finished above their 50 day moving average. The Dow is a short hair away from negating its developing head and shoulder formation, while the S&P has not reached that point.  The S&P closed within uptrends across all timeframes: short (1819-1996), intermediate (1773-2573) and long (739-1910).  The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges (though clearly it is nearing the upper boundary of its short and intermediate term trading ranges) and a long term uptrend (5055-17405).  They continue out of sync in their short and intermediate term trends. 

Volume was back on track, declining on an up day; breadth improved.  The VIX fell, continuing its year-long meandering within a short term trading range and an intermediate term downtrend.  It remains below its 50 day moving average.

The long Treasury fell, keeping it within a short term uptrend, above its 50 day moving average and within an intermediate term downtrend.

GLD declined again, leaving it within short and intermediate term downtrends and below its 50 day moving average.

Bottom line: stocks repeated their usual Tuesday ramp, closing near their most recent highs and setting the stage for another potential leg up.  It won’t take much to (1) push the Dow above the upper boundary of its short and intermediate term trading ranges which would then put the Averages back in sync---to the upside and (2) negate the developing head and shoulders formation.  Likely helping matters along, the FOMC meeting ends today with the usual statement and press conference.  Since all news is good news of late when it comes to the Fed, which should add a boost to prices.

That clearly supports the notion that the indices will challenge the upper boundaries of their long term uptrends---although I still believe that the many current internal Market divergences will act as a governor on the pace of advance as well as the Averages ability to penetrate those long term upper boundaries.  Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

            The latest from Stock Traders Almanac (short):

    Fundamental
    
     Headlines

            US economic data yesterday were muddled: weekly retail sales were mixed; the February Case Shiller home price index was slightly better than expected while April consumer confidence was a bit worse.  Nothing to get jiggy about.

            Overseas, the news was a bit more negative: the UK first quarter GDP growth was up but below estimates, April German CPI was down (while everyone is praying for inflation) and Spanish unemployment was up from an already stratospheric level.  To be sure, the bull case on the EU is that the ECB is going to ease; and all the above provide more reasons for that to occur.  I have opined that the ECB has room to ease given its recent austere policy; but I wonder about the impact of even more liquidity sloshing around the global financial system.  That said, some experts in Europe are raising doubts. 

The prospects for an ECB QE (medium):

            Here is the basis for Draghi’s optimism reflected in the above link (medium):

            Draghi’s conundrum (short):  

India’s central banker comments on QE---he is not impressed (medium):


Bottom line: as long as investors look through the multitude of potential problems, stocks seem destined to go up.  Certainly, the US economy is a bright spot.  The Fed retains the Market’s confidence, despite the seeming confusion generated by inconsistent policy statements and its historical inability to manage a transition from easy to tight money.  Republicans appear hell bent on out-liberaling the dems.  But voters keep putting these guys in office; so they must be satisfied with the results.   Japan, China, the EU and Ukraine are apparently out of sight, out of mind.

Japan (both short):

China (medium):

Meanwhile, the latest from Ukraine---which isn’t stabilizing:

What bothers me is that there is no room in valuations for bad news.  To be sure, we may never get any.  It still seems prudent to me to have some cash reserves in case we do

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.
               
                The latest from Paul Singer (medium and today’s must read):

                More on valuation (medium):

     Subscriber Alert

            In our quarterly review of Sysco’s fundamentals, it failed to meet the criteria qualifying it for inclusion in the High Yield Universe.  Accordingly, SYY is being Removed from the High Yield Universe and will be Sold out of the High Yield Portfolio at the Market open.


Tuesday, April 29, 2014

Western Gas Ptrs (WES) 2014 Review

Western Gas Ptrs LP acquires, owns and operates midstream energy assets in east and west Texas, the Rocky Mountains and the mid-continent.  It gathers, treats and transports natural gas from its parent, Anadarko Petroleum Corp.  While profits have been somewhat erratic, the partnership has grown dividends at a 15%+ rate over the last four years while earning a 6-10% return on equity.  While the rate of increase in dividends will slow in the future, the partnership should continue to grow its payout at a sound rate because:

(1)    a very secure customer base [i.e. its parent],

(2)    acquisitions.

Negatives:

(1)    fluctuations in commodity prices,

(2)    demand is subject to seasonal and weather factors,

(3)    potential impact of new energy regulations.

            WES is rated A by Value Line, has a 42% debt to equity ratio and its stock yields 3.9%.

  Statistical Summary

                  Stock      Dividend        Payout      # Increases  
                  Yield      Growth Rate     Ratio       Since 2008

WES          3.9%            12%             94%              4
Ind Ave      6.2                7                 75               NA 

                Debt/                        EPS Down       Net        Value Line
                Equity         ROE      Since 2008      Margin       Rating

WES         42%             6%            233                22%           A
Ind Ave     52               16              NA                15              NA

     Chart
           
            Note: WES stock made great progress off its October 2008 low, quickly surpassing the downtrend off its June 2008 high (straight red line).  Long term, it is in an uptrend (blue lines).  The wiggly red line is the 50 day moving average.  The High Yield Portfolio owns an 85% position in WES.  The upper boundary of its Buy Value Range is $70; the lower boundary of its Sell Half Range is $85.   




4/14

David Stockman on the Fed

Morning Journal---Has Abenomics run its course?

 News on Stocks in Our Portfolios
·         Cummins (CMI): Q1 EPS of $1.83 beats by $0.16.
·         Revenue of $4.4B (+12.2% Y/Y) beats by $230M.

o    Coach (COH): FQ3 EPS of $0.68 beats by $0.07.
o    Revenue of $1.1B (-7.6% Y/Y) misses by $30M.
·         Franklin Resources (BEN): FQ2 EPS of $0.89 in-line.
·         Revenue of $2.09B (+4.0% Y/Y) misses by $20M.

    • Ecolab (ECL): Q1 EPS of $0.74 in-line.
    • Revenue of $3.33B (+16% Y/Y) beats by $0.01B.

Economics

   This Week’s Data

            March pending home sales rose 3.4% versus expectations of +0.6%

            The April Dallas Fed manufacturing index came in at 11.7 versus estimates of 6.0.

   Other

            Here is a great and brief summation by Greg Mankiw of the much talked about book from Thomas Piketty

            And a bit longer one from Scott Gannis:

            Has Abenomics run its course (short):

Politics

  Domestic

Quote of the day (short):

The Morning Call--The Tuesday ramp

The Morning Call

4/29/14

The Market
           
    Technical

The indices (DJIA 16448, S&P 1869) yo yoed yesterday, first up big, then down, then closing up.  Both finished above their 50 day moving averages but did nothing to negate the developing head and shoulders formations.  The S&P closed within uptrends across all timeframes: short (1819-1996), intermediate (1773-2573) and long (739-1910).  The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405).  They continue out of sync in their short and intermediate term trends. 

In a surprise break from the recent pattern, volume was up; breadth improved only slightly.  The VIX fell, remaining within a short term trading range and an intermediate term downtrend and below its 50 day moving average.

The long Treasury declined but continued to trade well within its short term uptrend, above its 50 day moving average but within an intermediate term downtrend.

GLD dropped, continuing its dreadful performance of late.  It closed within short and intermediate term downtrends and below its 50 day moving average.

Bottom line: though Monday’s pin action had a touch of schizophrenia, the Averages reversed Friday’s rough performance.  That bolstered the notion of a consolidation following the rapid eight day run up in prices.  While the developing head and shoulders pattern was not negated, a strong near term follow through would. 

I continue to believe that the best bet is for the indices to challenge the upper boundaries of their long term uptrends, but fail.  Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

            Historical stock performance in midterm years (short):

            The Fed and Tuesday’s (medium):

            Update on sentiment (short):

    Fundamental
    
     Headlines

            Yesterday, the economic news was a positive both here and abroad: March pending home sales were well above expectations, ditto the April Dallas Fed manufacturing index; finally, in contrast to what has been a drumbeat of disappointing stats, Japanese March retail sales were very strong.

            ***overnight, the UK reported first quarter GDP up but short of expectations, April German CPI fell and Spanish unemployment rose (it is already at 25%+).

            On the other hand, there is our banking system which collectively continues to prove that it is unworthy of our confidence.  The latest example is Bankamerica suddenly having to revise its recent positive financial report (medium):

            Ukraine is being pointed to as the source of Friday’s (Russia to invade Ukraine over the weekend) and yesterday’s (it didn’t…yet) pin action.  I am sure Putin is having a grand ol’ time yanking all of our collective chains; and I am sure that it will continue.  How it ends, only The Shadow knows.  However, I maintain the opinion that Putin will be happy with the outcome---which likely means that the Ukrainians won’t.

            The latest from Ukraine:

            Don’t forget about China.  The government continues to enact policies to shut down speculation (short):
                       

Bottom line: (1) the economy continues to advance albeit sluggishly, (2) we will hopefully know more about Fed policy come Wednesday [FOMC meeting], though, given its recent communications policy, I am not going to bet on it, (3) I am in the midst of watching the first season of House of Cards and we should be so lucky to have a ruling class that intelligent, (4) internationally, things are a mess with the Chinese economy and the Ukraine at the top of the list of potential problems.

Meanwhile, investors have remained unconcerned; and until they are, stocks are likely to go higher—despite rich valuations (as calculated by our Model) and an increasing number of technical divergences.  So as I noted above, the most probable Market scenario appears to be a move to the upper boundaries of the Averages long term uptrends.

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.
               
            The latest from John Mauldin (long but always a good read):

            The latest from John Hussman (medium):

            Why it is hard to win in investing (medium):

            Deutsche bank’s derivative exposure (medium):
           
            Consumer spending and recession (medium):

            US corporate earnings versus the rest of the world (short):

Monday, April 28, 2014

Monday Morning Chartology

The Morning Call

4/28/14

The Market
           
    Technical

      Monday Morning Chartology

            It looked like we were going to get two great up weeks in a row, until Friday’s pin action spoiled all the fun.  That aside, the S&P is still trading within uptrends across all timeframes.  However, at Friday’s close, it was again nearing its 50 day moving average (wiggly red line).  In addition, it could also be building the right shoulder of a head and shoulders formation---something to watch.



            The long Treasury continued to advance, finishing within a short term uptrend, above its 50 day moving average and within an intermediate term downtrend.  The bond guys are still betting on either recession/deflation or international turmoil---clearly at odds with the stock jockeys.



            GLD remains a broken chart.  Nothing positive to say.


            Except this must watch 13 minute interview with Grant Williams:



            The VIX is as boring as GLD is ugly.  This index has been in a trading range since mid-2013, providing us with little information on market directions.



            Update on ’the best stock market indicator ever’:

    Fundamental
    
     Investing for Survival

            Four reasons why real estate may not be as good an investment as you think (medium):

       News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

   Other

            What economics has become (medium)?

            Lumber prices and housing (short):

Politics

  Domestic

  International

            Latest from Ukraine:








Saturday, April 26, 2014

The Closing Bell

The Closing Bell

4/26/14

Statistical Summary

   Current Economic Forecast

           
            2013

Real Growth in Gross Domestic Product:                    +1.0-+2.0
                        Inflation (revised):                                                           1.5-2.5
Growth in Corporate Profits:                                            0-7%

            2014 estimates

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

   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Trading Range                     15330-16601
Intermediate Uptrend                              14696-16601
Long Term Uptrend                                 5055-17405
                                               
                        2013    Year End Fair Value                                   11590-11610

                   2014    Year End Fair Value                                   11800-12000                                          

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     1816-1993
                                    Intermediate Term Uptrend                        1770-2570
                                    Long Term Uptrend                                    739-1910
                                                           
                        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                                     47%
            Aggressive Growth Portfolio                        46%

Economics/Politics
           
The economy is a modest positive for Your Money.   This week’s economic data was mixed: positives---March durable goods orders, the April Richmond Fed manufacturing index, April consumer sentiment and March leading economic indicators; negatives---weekly mortgage and purchase applications, March new home sales, the April Kansas City Fed manufacturing index and weekly jobless claims; neutral---March existing home sales, weekly retail sales, the March Chicago Fed National Activity Index, and the April Markit Flash and service PMI’s.

The standout numbers were weak housing offset by strong industrial activity.  The tie goes to the positive side as determined by the leading economic indicators.  At the risk of being repetitious, mixed data is to be expected in our forecast.  In that sense, it is good.

Our outlook remains:

 ‘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.’

        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.

       The negatives:

(1)   a vulnerable global banking system.  Bankamerica got spanked this week for $13 billion for mortgage fraud

Barclays is winding down some of its prop desk trading.

But these thieves apparently still haven’t mended their ways (medium):                  http://www.salon.com/2014/04/23/massive_new_fraud_coverup_how_banks_are_pillaging_homes_while_the_government_watches/?source=newsletter

‘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.  All quiet among our ruling class this week except for yet another executive order---this one on reviewing the sentences of drug offenders convicted prior to a recent change in the law.  To be clear, I happen to agree with the purpose of this order.  However, it is a further usurpation of congressional authority [congress was already working on its own fix].  One day I believe that we will rue the imperial presidency [for those who aren’t already],

(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. 

Our central bankers were quiet this week save for the ECB stating that it may increase its asset purchases if it doesn’t see a pickup in inflation.  I have noted before that the ECB has been reasonably firm in its monetary policy. So some ease wouldn’t be a bad thing for the EU economy; although depending on how large the expansion and how the new liquidity is put to work, it could exacerbate the problems created by the hugely expansive policies of the US and Japan. 
                                  http://pragcap.com/the-most-amazing-chart-of-the-last-5-years

In the end, I continue to believe that [a] at some point, electorates are going to rebel over policies that only make their lives worse and [b] whether they do or not, history tells us that when, as and if a transition begins {i} the Fed (central banks) will bungle it and {ii} the longer it takes, the greater the pain.
           
(3)   a blow up in the Middle East or someplace else. The situation in Ukraine just keeps getting worse, with open conflict now between the government and the pro Russian rebels in the eastern provinces.  Indeed, last night many of the major news shows had experts on predicting a Russian invasion this weekend.  I maintain my belief that whatever the outcome, Putin will be happy.  

The latest from Ukraine:


My bottom line has been that ‘If He [Obama] would actually do something (pledge to reinvigorate NATO, resume negotiating the treaties with Poland and the Czech Republic) to project American power and show Putin that He is dead serious about preventing further expansion from Russia, I could get behind the Guy. 

Well to His credit, the US sent forces into Poland and the Baltic states this week on ‘maneuvers’.  That said, this could have been a bit more convincing.  Only 600 US troops are being deployed and not on a permanent basis---hardly a show of force.  Nevertheless, it is a start and perhaps the strategy is to escalate our presence should Russia ramp up its efforts in Ukraine. 

My concern remains that Obama will misplay this hand and precipitate not only His own public humiliation but also a spike in oil prices.


On another front (medium):

(4)   finally, the sovereign and bank debt crisis in Europe and around the globe.  The economic data out of China and Japan continues to be lousy.  Japan has responded by threatening to double down on its double down of QEInfinity.  I have absolutely nothing positive to say about this bit of insanity. 
Whatever the final outcome is from unwinding the global bout of monetary expansion, this will only make it worse---and that says nothing about the impact on the Japanese workingman.

The inflation rate in the EU fell; and the ECB made it known that if it doesn’t pick up it intends to begin asset purchases.  Of course, it has made this treat repeatedly and done nothing.  The difference this time is that the Germans are on board. To be fair, the ECB has been reasonably firm in its monetary policy to date; so all things being equal, it has the room to be more accommodative.  That said, easy money hasn’t worked for the US or Japan.  So I am not sure why the ECB expects a different outcome.  In addition, I am not sure how it will help the sovereigns to service their debt and the solvency of the banks that hold it.

China, on the other hand, has made it clear that it intends to let Market forces at least partially control the economic end game.  As you might suspect, I believe this the preferable strategy, although it will no doubt have some negative short term consequences---the most immediate of which is the unwinding of the yuan ‘carry trade’.

Of course, as I continue to note, to date the various government leaders have managed to keep their respective crises under control.  Clearly, they may be able to continue to do so.  However, this narrative is not a prediction of disaster; it is an analysis of risks facing the US economy and securities markets.  And the risk is one or more of these situations spins out of control.

Bottom line:  the US economy continues to progress. While the Fed continues its ‘taper’, it also continues to confuse the hell out of investors as it lurches from one contradictory statement to another.   I continue to believe that (1) the Fed has no idea about how to extract itself from a disastrous QEInfinity, (2) this means that it will once again bungle the transition to tighter money and induce more pain in the Markets than they might otherwise have had to suffer and (3) because QE has had so small an impact on the economy, then the transition process will be manageable, economically speaking---the pain being felt in the securities markets.

The Chinese government continues its new policies [the government is not the answer, re-introducing ‘moral hazard’ into the investment equation] in spite of a flow of disappointing economic data and the ongoing depreciation of the yuan.   If it sticks to its guns, then I believe that there is apt to be some discomfort along the way, not just for the Chinese but for the rest of the globe.  To its credit, it has managed the process reasonably well to date---the operative words being ‘to date’.

The weak EU and Japanese economies are also areas of concern.  This week, (1) the ECB promised easier money if inflation doesn’t pick up.  That is not necessarily bad; but depending on how it is executed, it may not be good, (2) Japan seems intent on going ahead with QEInfinity squared.  Given its total lack of effectiveness to date, I can’t see how this will help or how this economic mess resolves itself without some real pain.

Finally, military confrontation is now occurring in Ukraine.  While I have no idea what the final solution looks like, my best guess is that in the end, Putin will be happy.  I just hope he spares us Obama’s public humiliation.

In sum, the US economy is something about which to rejoice but is it facing a number potentially troublesome headwinds. 

This week’s data:

(1)                                  housing: weekly mortgage and purchase applications were both down; March existing home sales fell less than anticipated; March new home sales were terrible,

(2)                                  consumer:  weekly retail sales were mixed; weekly jobless claims rose more than forecast; April consumer sentiment was better than estimates,

(3)                                  industry: March durable goods orders were strong; the March Chicago Fed National Activity Index was in line with expectations; the April Richmond Fed manufacturing index was stronger than estimates while the Kansas City index was slightly weaker than anticipated; both the April Markit Flash and service PMI’s were slightly less than consensus,


(4)                                  macroeconomic: March leading economic indicators were slightly above forecast.
           
The Market-Disciplined Investing
           
  Technical

`           The indices (DJIA 16361, S&P 1863) had another volatile week, (1) trending up Monday through Thursday [it appeared that the Averages were consolidating the preceding big eight day spike up via a sideways move] (2) but then they suffered some severe whackage on Friday.  While none of their primary trends were broken, they ended the week near their 50 day moving averages.  In addition, they are now forming a right shoulder of a head and shoulders formation.  Now I recognized that many of these technical patterns have not gone according to Hoyle in the last year; but I think it would be a mistake to completely ignore them.  So, this developing head and shoulders is, at the least, something to watch.

The S&P closed within uptrends across all timeframes: short (1816-1993), intermediate (1770-2570) and long (739-1910).  The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405).  They continue out of sync in their short and intermediate term trends. 

Volume on Friday was up; breadth deteriorated.  The VIX rallied but continues to offer no directional help with the Market.  It finished within its short term trading range, below its 50 day moving average and within an intermediate term downtrend. 

The long Treasury resumed its upward march this week, closing within a short term uptrend and an intermediate term downtrend and above its 50 day moving average. 

GLD’s chart remains a dog.  It is within both short and intermediate term downtrends and below its 50 day moving average.

Bottom line: Monday though Thursday the indices weekly pin action was quite positive.  I was especially impressed with the Wednesday/Thursday consolidation process given the extent of their overbought condition. Then Friday’s performance spoiled it all.  Stocks got smacked supposedly over tensions in Ukraine; but that is old news.  The universe has known for weeks that Putin was going to push the issue until he got what he wanted; and investors have made a point of not caring. So this action may be nothing more than the finale to the consolidation process.

The two bits of bad news from Friday was (1) the indices neared their 50 day moving averages and (2) it set the stage for building the right shoulder of a head and shoulders formation.

Nonetheless, I remain of the opinion that the Averages will assault the upper boundaries of their long term uptrends but, due to the growing number of divergences, fail in that challenge.

Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.


   Fundamental-A Dividend Growth Investment Strategy

The DJIA (16361) finished this week about 39.8% above Fair Value (11700) while the S&P (1864) closed 28.3% overvalued (1452).  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 economy continues to perform as described in our outlook---a low growth rate.  Unfortunately that is the good news; and even more unfortunate, it is more than adequately reflected in our Valuation Model.  That leaves me in the peculiar position of being upbeat on the economy but very concerned about current valuations.  Especially so in the face of a bevy of risks that could derail the unbelievable effort by US industry to recover from the 2008/2009 recession.  They include:

(1)   a Fed that has gone out of its way to confuse investors while continuing to implement its tapering policy.  To be clear, I am not worried about either the confusion or the tapering.  Indeed, my hope is that the Fed sticks to its current policy.  However, that is only because it is the less painful route to a normalized monetary policy. If history is any guide then given the magnitude of reserves sitting on bank balance sheets, the transition from easy money will likely be a very bumpy one and not without a snoot full of hurt.  Nonetheless, I continue to maintain most of the agony will be in the equities markets not the economy for the simple reason that the QE’s have had more impact on the Markets than on the economy.

(2)   problems in the other major global economies. 

[a] Japan seems to have a death wish in attempting to set an intergalactic record for how long it can balloon its money supply while simultaneously remaining stuck in a zero growth economy.  I have no idea how this country extracts itself from the disaster its ruling class has created; but I suspect there will be a bit of pain.  Unfortunately, that could have an impact on {i} our own growth and {ii} the yen ‘carry trade’ which if unwound at a loss could destabilize securities prices in the US market,

[b] the EU is struggling to get out of recession.  The ECB has stated that it will take whatever measures necessary to avoid another downturn.  While it has some leeway given its current monetary austerity, it is not the economies of the EU that I worry about.  It is the magnitude of the sovereign debts and the overleverage of the banks that hold that debt.  That leaves the ECB walking a tightrope between faltering tax revenues that service the sovereign debt and higher interest rates that would raise the cost of that service.  A failure of either a sovereign to meet a debt payment or a major bank would have negative implications for global securities markets.

[c] China’s economy is slowing while the Bank of China is attempting to rein in rampant speculation in real estate and deal with the resulting mass of unproductive non-income generating assets.  To date, it seems to be following a strategy of letting the markets clear the dead wood.  While I believe that this is the right thing to do, there is nothing pleasant about removing excesses.  Like Japan and the EU, China is a major trading partner of the US which means a potential economic impact from this process.  More importantly for the Markets, there is, like Japan, a very large yuan ‘carry trade’ which appears to be in the initial stages of being unwound.  And like Japan, that process could be extremely painful for US investors.

[d] finally, Ukraine isn’t going away.  Indeed, it seems to be getting worse every day.  I am not so much worried about Russia gaining control of eastern and southern Ukraine {easy for me to say; I am not Ukrainian} or even some sort of armed US/Russia confrontation {Obama doesn’t have the balls}.  I am concerned that {i} Obama will make a misstep and get humiliated on the world stage, {ii} and as part of that, Putin takes steps that spike the price of oil {iii} the whole Benghazi/Syria/Ukraine wimpy foreign policy will leave the US vulnerable to more aggression from those who wish us harm.  None of those will improve long term investor psychology.

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.  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.

           
                               
DJIA                                                   S&P

Current 2014 Year End Fair Value*              11900                                                  1480
Fair Value as of 4/30/14                                  11700                                                  1452
Close this week                                               16361                                                  1863

Over Valuation vs. 4/30 Close
              5% overvalued                                12285                                                    1524
            10% overvalued                                12870                                                   1597 
            15% overvalued                                13455                                                    1669
            20% overvalued                                14040                                                    1742   
            25% overvalued                                  14625                                                  1815   
            30% overvalued                                  15210                                                  1887
            35% overvalued                                  15795                                                  1960
            40% overvalued                                  16380                                                  2032
            45%overvalued                                   16965                                                  2105

Under Valuation vs. 4/30 Close
            5% undervalued                             11115                                                      1379
10%undervalued                            10530                                                       1306   
15%undervalued                             9945                                                    1234

* 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.