An Analysis of Daily Events that Impact Your Money
Wednesday, March 27, 2013
Morning Journal-A primer on derivatives
Economics
This Week’s Data
The
International Council of Shopping Centers reported weekly sales of major
retailers fell 1.7% versus the prior week but rose 1.0% versus the comparable
period last year; Redbook Research reported month to date retail chain store
sales up 2.6% on a year over year basis.
February
durable goods orders were up 5.7% versus expectations of an increase of 3.6%;
ex transportation, the number was up 0.5% versus estimates of up 0.7%.
The
January Case Shiller home price index advanced 1.0%, in line with forecasts.
February
new home sales fell 4.6% versus an anticipated drop of 2.7%.
The
March Conference Board consumer confidence index plunged to 59.7 from
February’s reading of 69.5.
The
March Richmond Fed’s manufacturing index was reported at 3.0 versus
expectations of 5.5.
Weekly
mortgage applications rose 7.7% while purchase applications were up 7.0%.
Other
The
latest from Gary Shilling (medium):
A
primer on the derivatives market (medium and today’s must read):
Global
financial stress rises (short):
***overnight,
Italian industrial and retail sales came in well below expectations.
Politics
Domestic
Update on the
student loan debacle (medium):
The Morning Call--Cyprus: the good, the bad and the ugly
The Morning Call
The Market
Technical
The
indices (DJIA 14559, S&P 1563) had a great day. The Dow finished above its former all time
high (14190) and the upper boundary of its short term uptrend (13803-14492)
while the S&P closed below its comparable levels (1576) and
1508-1582). Both remain within their
intermediate term uptrends (13588-18588, 1438-2032) and their long term
uptrends (4783-17500, 688-1750).
The
important takeaway is that the Averages are still not in sync with the S&P
not confirming the Dow’s break out to new highs. This leaves open the question of whether the
Market is topping or pausing before another upward assault. I continue to believe that (1) stocks are
topping, (2) the S&P can still make a challenge of the 1576 level and (3)
even if it breaks out to the upside, the reward is less than 10% and the risk
is substantial.
Volume
declined; breadth was mixed with the flow of funds and on balance volume
indicators weak. The VIX fell, remaining
within its short and intermediate term downtrends.
GLD
was down, staying within its short term downtrend. However, the developing support level
continues in tact.
Bottom line: as
frustrating as it may be, the indices remain out of sync; and hence, Market
direction is in question.
The
historical performance of stocks in April (short):
Here
is a positive technical indicator (short):
Fundamental
Headlines
Lots
of stats yesterday; and unfortunately, they were not all that great. Durable goods orders were the bright spot
while weekly retail sales, January home prices, February new home sales,
consumer confidence and the Richmond Fed manufacturing index all fell short of
expectations. This is really the first bad data day in a long time; so I see no
reason to get concerned.
This
is a great piece on the good, the bad and the ugly of the Cyprus
solution (medium and a must read):
Nobody
in the EU (except the Germans) is happy with the Cyprus
bail out, especially the capital controls:
The
Cypriot youth:
The French and Spanish:
The
Brits:
But as hinted to
in an earlier link, the Russians seem to be fine. They snuck out the back door (medium):
Satyajit
Das on Cyprus
(medium):
The
problem with the euro in one short, easy lesson (short):
http://www.zerohedge.com/news/2013-03-27/eurozone-east-german-motorcycle
http://www.zerohedge.com/news/2013-03-27/eurozone-east-german-motorcycle
Bottom
line: as dismal as much of the above reading is, US investors were clearly
upbeat. Part of that optimism is
understandable: (1) the uncertainty over depositor insurance and capital
controls will likely drive money to the US
and (2) as long as the EU financial system is in a state of flux, the Fed is
apt to keep the pedal to the metal.
As I indicated
yesterday, I am also encouraged but for somewhat different reasons---though I
do agree that foreign money inflow can
be a positive. I am positive because the
eurocrats have finally taken steps that are half way sensible, i.e. holding
risk takers versus taxpayers responsible for bank defaults. (***in fact, if the
US had handled
its financial crisis using the Cyprus
template, we would have a sounder banking system than we do now.) To be sure, it is not all perfect (capital
controls, not forcing the banks to go through bankruptcy court); but it is a
major step in the right direction.
Yes, there is
going to be pain that likely extends far beyond Cyprus . But there was going to be pain anyway, sooner
or later. In my opinion, anyone who
assumed that after years of totally irresponsible fiscal policies that somehow the
EU ‘muddling through’ scenario would not involve some pain, at times severe, is
suffering from an acute case of naiveté.
So I guess where
I part company with those who were pumping up stock prices yesterday is that I
believe (assuming the EU/ECB doesn’t slap another monetary band aid over the
next sovereign/bank problem but uses the Cyprus template) that the pain will
come near term. True that will mean
flows into the dollar which will be a positive.
But there will still likely be heartburn sufficient enough to sound the
derivative counterparty alarms. Plus Europe
will continue to deteriorate economically and that is not going to help the
profits of US companies. I don’t believe
that this combination of events will play well in an overvalued US
stock market.
The
latest from Nomura (short/medium):
The
latest from Lance Roberts (medium):
Pension
fund rebalancing could be a problem for stocks (medium):
http://www.zerohedge.com/news/2013-03-26/q1-2012-deja-vu-pension-fund-rebalancing-suggests-window-un-dressing-could-hurt-stoc
http://www.zerohedge.com/news/2013-03-26/q1-2012-deja-vu-pension-fund-rebalancing-suggests-window-un-dressing-could-hurt-stoc
Tuesday, March 26, 2013
Teva Pharmaceuticals (TEVA) 2013 Review
Teva
Pharmaceutical Industries is an Israeli based global pharmaceutical company
that develops, manufactures and markets generic and proprietary branded drugs
and active pharmaceutical ingredients.
The company has grown profits and dividends at a 25%+ rate over the last
ten years earning a 14-20% return on equity.
The company was little impacted by the recent recession and should
continue to expand as a result of:
(1) plentiful
growth opportunities in generic drugs.
The company currently has 83 product applications pending before the
FDA,
(2) a
significant and growing branded pharmaceutical business,
(3) the company
has a very successful at resolving patent challenges which is a key part of
generic product selections and development strategy,
(4) it is pursuing
strategic relationships,
(5) a major
R&D effort in the biopharmaceutical and biogeneric markets.
(6) significant
cost reduction program.
Negatives:
(1) the
pharmaceutical industry is very competitive and the generic segment is highly
crowded,
(2) gaining
approval for drugs is becoming more difficult in an increasingly tough
regulatory environment,
(3) weak sales
in the EU.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2003
Debt/ EPS Down Net Value Line
Equity ROE Since 2003 Margin Rating
*many companies in TEVA
industry do not pay a dividend
Chart
Note:
TEVA stock has performed poorly since its
October 2008 low. While it has managed
to trade above the downtrend off its March 2008 high (red line), it is just
barely above it currently. Similarly, the
stock struggled several times with the November 2008 trading high (green line)
and today trades below that level. Long
term, the stock is in a trading range (straight blue lines). Intermediate term, it is a downtrend (purple
lines). The wiggly blue line is on
balance volume. The Aggressive Growth
Portfolio owns a 70% position in TEVA . The upper boundary of its Buy
Value Range Sell
Half Range
3/13
More on Cyprus
Larry McDonald makes a great point---even though the losers in the Cyprus are the risk takers, rightfully so, the politicians are the ones making those decisions not the bankruptcy courts. And that is not positive for investor confidence.
Morning Journal--The American Oligarchy
Economics
This Week’s Data
The
February Chicago Fed National Activity Index came in at .44, up from the prior
reading of -.49.
The
March Dallas Fed manufacturing index was reported at 7.4 versus expectation of
3.4.
Other
The
case for optimism (medium):
Politics
Domestic
The American
oligarchy (medium):
International
In
Japan , things
keep getting nuttier (short):
The Morning Call--Cyprus, it's confusing
The Morning Call
The Market
Technical
The
DJIA (14447) traded back below the upper boundary of its short term uptrend
(13791-14485) yesterday; though it remains well above the former all time high
(14190). Meanwhile, the S&P (1551)
continued to trade below both the upper boundary of its short term uptrend
(1505-1579) and its prior all time high (1576).
The return of
the Dow to the boundaries of its short term uptrend is not that significant;
although that it is a sign of some loss in the Dow’s upward momentum. The more important point is that the S&P
still can’t challenge its all time high and, therefore, it is not confirming
the DJIA’s breakout.
That leaves the
$64,000 question unanswered: is the Market in a topping process or resting for
another move up? As you know, I lean to
the former but I am not overly worried about being wrong because I just don’t
see the upside from either the technical or fundamental standpoint.
Volume rose
slightly; breadth was weak with on balance volume particularly so. The VIX increased though much less than I
would have thought on a day such as yesterday.
GLD was down,
finishing within its short term downtrend but below the lower boundary of that
developing very short term uptrend---suggesting that we need to remain
cautious.
Bottom line: the
indices remain in a condition of nonconfirmation; and until that gets resolved,
there is not much more to say regarding Market direction. Nevertheless, how this gets resolved is
important because if we are in a topping process, then investor emphasis will
shift from chasing performance to preserving capital.
Why
the pain trade is higher (short):
The
last four trading days of March (short):
The
S&P and the 200 day moving average (medium):
First
quarter 2013 versus first quarter 2012 (short):
Fundamental
Headlines
We
got two solid pieces of economic data yesterday: the Chicago
national activity index was up versus estimates of a decline and the Dallas Fed
manufacturing index came in better than anticipated. So far, the US
has escaped any contagion from Europe ; and that is a
positive.
Speaking
of which, Cyprus
continued to dominate the headlines. As
trading began yesterday, hopes were up based on the approved bail out of the
Cypriot banks over the weekend. As I
noted in Monday’s Morning Call, I thought that the terms were better than
anything I had expected; to wit, the bank reorganizations actually were
executed as they should be, if the rule of law is followed---shareholders got
wiped out, then the junior creditors, then the senior creditors, then the uninsured
deposit holders.
That was
completely out of character since the ECB in its infinite wisdom had previously
tried a polyglot of alternative measures as it dealt with Ireland, Greece,
Portugal, Spain and Italy sovereign/bank insolvencies. Unfortunately, the bottom line for most of
those bail outs: bank balance sheets were left relatively untouched, severely
compromised assets (sovereign and real estate debt) remained, carried at or
near par value with no haircuts applied to shareholder equity, creditors and
uninsured depositors while operating loses were covered by the ECB or taxpayers---exactly
the opposite of what is supposed to happen in a bankruptcy.
Suddenly in Cyprus ,
the guys that took the risk (equity and debt holders) are now suffering the
consequences. To which I say hallelujah. The only way the EU financial system returns
to health is cleaning the bank balance sheets of worthless loans and paying for
it with the assets of risk investors.
The catch here
is this bail out was sold by the eurocrats as a one off solution because in
Cyprus’ case so much of the risk capital (large uninsured deposits) was
supplied by those evil, tax dodging, money laundering, Russian oligarchs.
Then the Dutch
finance minister made a mistake. He told
the truth, i.e. Cyprus
would be a template for future EU bank insolvencies. Ooops.
His initial
statement; later recanted (medium):
More:
But
the damage was done. Now everyone with a
large (i.e. uninsured) deposit in another leveraged eurobank was going
hummmmmm, what should I do now? And
visions of bank runs danced in their heads (medium):
In
the meantime, the Russians may have already gotten their money out of Cyprus ;
in which case, the remaining large depositors are totally f**ked.
Thoughts
from Wall Street strategists (medium):
Thoughts
from the former governor of the Cypriot central bank (medium):
What
happens when the Russians leave (medium):
The
euro’s ‘poverty effect’ (short):
Adding
to the confusion created by Cyprus
template/recantation comments, no one seems to know when the banks are going to
open again---and that’s a problem.
And remember
when the banks do open, capital controls will be in place---something else that
scares depositors throughout the EU.
Bottom line: I
made the point last week that how the Cyprus
bail out was conducted was more important than the bail out itself. As I noted above, the ‘how’ was better than
anything I could have expected, i.e. at long last the eurocrats actually
applied the rules as they were originally designed and written. The plan as applied to Cyprus
is, in my opinion, the best path to a sounder EU banking system and a return to
growth---assuming that this will be the template for future actions.
That said, (1)
it is not perfect. Capital controls will
negatively impact depositors in other EU countries and (2) any cure for a
malignant cancer is going to be painful; and that pain---the rebalancing and
cleaning up on bank balance sheets throughout the EU---is what weighed on the Market yesterday.
I am fine with
the latter. The pain needs to be
administered and economies set on a sounder course; and if that means (1) tough
economic times---that is the price you
pay for years of profligacy and
mismanagement and (2) lower stock prices, so what. Stocks are currently overvalued (at least by
our Model). Indeed, one way to raise valuations
to current nominal levels is to improve the long term secular economic global
growth prospects. The Cyprus
bail out template is a first step for the EU in that direction.
I caution that if
Cyprus does become
the template, then our short term ‘muddling through’ scenario may become a bit
more rocky while the long term ‘tail risk’ of an EU collapse lessens. I can handle a tougher short term economic
outlook because that is more easily quantifiable than trying to deal a
situation where a crisis is almost certain, but I don’t have a clue as to when
it occurs or how dire the consequences.
So while a Cyprus
template for the rest of the EU may cause some heartburn short term, it would
be a significant positive long term.
All that said,
the eurocrats could chicken out of the Cyprus
template scenario and go back to their old ways. In which case, ignore everything I just said.
Meanwhile,
keeping the banks closed and providing no guidance as to when they will open is
a problem that will only get worse the longer it is drug out.
The
latest from John Hussman (medium):
The
sunk cost fallacy (short):
What
are bond investors thinking (medium):
Monday, March 25, 2013
Monday Morning Chartology
The Morning Call
The Market
Technical
Monday Morning Chartology
The S&P remains in an uptrend in all three time cycles. On the other hand, it has yet to confirm the Dow’s move above its previous all time high.
GLD seems to be acting a bit better. It continues to trade near the mid point of its short term downtrend. A short term support level and a very short term uptrend continue to develop. Note the improvement in on balance volume (wiggly blue line).
The VIX remains in its short and intermediate term downtrends.
Update
on ‘the best stock market indicator ever’:
Fundamental
Over
the weekend, Cyprus
and the EU came up with a bail out plan in which two large Cypriot banks will
be restructured with the junior and senior creditors taking a hit (this is a
positive because the rule of law has triumphed) along with depositors not
covered by deposit insurance.
All
in all a decent solution as long as you are not a junior/senior creditor or a
large depositor or a bank employee that will lose his/her job. Since the Russians fall in the large
depositor category (rumors are the ‘hit’ will be from 40% to 100% of their
deposits), we are not yet at the final act.
Here
is Goldman’s take (medium):
There
was also some pain in Spain
(medium):
More
on valuation (short):
And:
News on Stocks in Our Portfolios courtesy of
Seeking Alpha
Economics
This Week’s Data
Other
Politics
Domestic
Thought for the
day (short):
International War Against Radical Islam
Fast
pass for Saudi Arabia
(medium):
Saturday, March 23, 2013
Thoughts on Investing
Thoughts on Investing--from
Ivanhoff
20 Truths About the Stock Market
1. Stock prices run in cycles. Periods of re-pricing are usually quick and powerful and then they are followed by trendless consolidation.2. Stocks are very highly correlated during drastic sell offs and during the initial stage of the recovery. In general, correlation is high during bear markets.
3. Bull markets are markets of stocks, where there are both winners and losers. When the market averages consolidate, there are stocks that will break up or down, revealing the future intentions of institutional buyers.
4. In the first and last stage of a new bull market, the best performers are small cap, low float, low-priced stocks.
5. Try to trade in the direction of the trend. It is not only the path of least resistance, but also provides the best profit opportunities. Have a simple method to define the direction of the trend.
6. Traders’ attention (and market volume) is attracted by unusual price moves. Sudden price range expansion from a consolidation is often the beginning of a powerful new trend.
7.
8. Big winners are obvious only in hindsight. Many other stocks shared the same characteristics when they tried to break out. Some failed. Some had a follow through. Being wrong is not a choice. Staying wrong is. You can only control your risk and how long you will ride your winners.
9. The overall market conditions will never be perfect and when they seem so, it is probably a good idea to decrease exposure and take profits. With that in mind, you don’t have to be in the market all the time. When you don’t see good setups, it just makes sense to watch from the sidelines.
10. Big institutions achieve outsized returns by riding strong trends for the long-term (long enough to make a difference). This is the only way for them. They can’t easily and often get in and out due to their size. Establishing small positions does not make sense for them as it would not make a difference for the bottom line. Big winners can make a difference when they are big positions. Big positions take time to accumulate and along the way institutions leave clear traces.
11. Small losses are often better than small gains. If I sell my position every time it shows me a small gain, I would never achieve a return high enough to make a difference and to cover the inevitable losses. Amateurs go bankrupt by not taking small losses. Professionals go bankrupt by taking small gains. It is absolutely true that a large number of consecutive gains could multiply returns substantially. The point is how big should be those gains. 4-5% is not going to help a lot. 15-20% gains is something completely different.
12. Prices change when expectations change, but sometimes expectations change when prices change. In other words, there are different types of catalysts that move stocks. In long-term perspective (years), stocks move based on the underlying social trend and the stage of the economic and liquidity cycle. In medium-term perspective (months), stocks move based on expectations for earnings and sales growth. In short-term perspective (weeks and days), stocks move based on price action primarily.
13. If you understand the incentives of the major market participants, you will be able to predict their likely behavior. Technical analysis is a lot about understanding incentives and recognizing intentions.
14. Your first loss will often be your best loss. No one is right all the time and you don’t have to be. There are market participants that are immensely profitable by being right only 30% of the time. It is good to have conviction in your investment thesis, but discipline should always trump conviction.
15. Optimism and pessimism in the stock market are contagious. Investors’ psychology often loses its logic and become emotional. The news media and the most recent price action play a particularly important role in developing moods of mass optimism or pessimism.
16. Declining stocks often reverse their downtrends near the end of the year, as selling for income tax purposes subsides.
17. Fair value is an illusive concept and hard to calculate. While it is true that you don’t need to know the exact weight of a person to define if he is overweight, applying this philosophy is not going to help you in the stock market. Stocks constantly get overvalued and undervalued. This is the nature of the market. Warren Buffett says that price is what you pay, value is what you get. I believe that value is what you think you get, price is what other people are willing to pay for it. Just as beauty, value is in the eyes of the beholder. (there are universally accepted measures too, of course)
18. Liquidity is cyclical. It constantly expands and contracts. When it contracts, capital flows to perceived safety – U.S. Dollars and Treasuries.
19. Rising P/E is an indicator of rising expectations and confidence in the future of the stock. The P/E ratio reflects the enthusiastic optimism or the gloomy pessimism of investors.
20. When you calculate the
time you need to drive from point A to point B, you should always
take traffic into account. Traffic is like the stock market.
You might pretend that it doesn’t matter, but it will impact you anyway. It
doesn’t matter how smart you are, how ingenious your idea is or how cheap your
stock is – if the market does not agree with you, you will not get paid. Period.
The Closing Bell--3/23/13
The Closing Bell
Note: our daughter gets married next weekend. Mother and daughter have more errands, tasks etc for me to accomplish than
is humanly possible. So Wednesday
morning’s Morning Call will be the last communication till next Monday or
Tuesday.
Statistical Summary
Current Economic Forecast
2012
Real
Growth in Gross Domestic Product:
+1.0-
+2.0%
Inflation
(revised): 2.5-3.5 %
Growth
in Corporate Profits: 5-10%
2013
Real
Growth in Gross Domestic Product +1.0-+2.0
Inflation
(revised) 2.5-3.5
Corporate
Profits 0-7%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 13773-14462
Intermediate Uptrend 13565-18565
Long Term Trading Range 4783-17500
2012 Year End Fair Value
11290-11310
2013 Year End Fair Value
11590-11610
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1504-1578
Intermediate
Term Uptrend 1436-2030
Long
Term Trading Range 688-1750
2012 Year End Fair Value 1390-1410
2013 Year End Fair Value
1430-1450
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 39%
High
Yield Portfolio 42%
Aggressive
Growth Portfolio 40%
Economics/Politics
The
economy is a modest positive for Your Money. It was
a slightly below average week for
economic data flow but the numbers were generally upbeat: positives---February
building permits, weekly retail sales, the March Philly Fed index and February
leading economic indicators; negatives---weekly mortgage and purchase
applications; neutral---February new and existing home sales, weekly jobless
claims and the most recent FOMC decision to leave policy unchanged.
I remain encouraged by our improving economy
albeit at a sub par rate.. Hence the
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 likelihood a rising and potentially corrosive rate of inflation due to
excessive money creation and the historic inability of the Fed to properly time
the reversal of that monetary policy.’
The
pluses:
(1) our improving energy picture.
The US
(2) an improving Chinese economy. This week, Chinese PMI
came in better than expected, keeping alive the hope that the economic strength
there will offset a deteriorating Europe .
The
negatives:
(1)
a vulnerable global banking system. The latest outrage is a series of bills
offered in congress supporting the continuing strategy of the banksters to take
a lot of risk, pay bonuses when it works and let the public pick up the tab
when it doesn’t (medium):
‘My concern here is 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)
the ‘debt ceiling/sequestration/continuing resolution
cliff’ [fiscal policy]. More good news
this week. Drum roll.........the senate
actually passed a continuing resolution and the house followed suit removing
another ‘drop dead’ date from the proximate future. That doesn’t mean the problems of too much
spending and too many taxes have been solved.
But it does buy time for negotiations in a less emotionally charged,
time weighted atmosphere.
We still don’t
know if the recent Obama charm offensive is for real or simply another of His
politically cynical ploys. However, as I
have said, if He means it and that results in a path to a more fiscally
responsible budget, then this would be a major positive and shift fiscal policy
from a negative to a positive in our outlook.
That said, the senate rolled out its
first budget in four years. It included
the elimination of the spending cuts in the sequester and the addition of more
taxes. I am sure [hope?] that this just
a negotiating stance; although clearly there is a long way to go to get to ‘a
more fiscally responsible budget’. Hence,
my hesitancy to get jiggy at this moment.
However, we
still have a problem ...... the potential
rise in interest rates and its impact on
the fiscal budget. As I have noted
previously, the US
So the risk here is two fold: [a] to the
Fed---its balance sheet is levered to the point that Lehman Bros. looks like it
was an AAA credit. So if interest rates
go up {and prices go down}, the very thin equity piece of the balance sheet
would disappear. The Fed would then be
technically bankrupt. and [b] to the Treasury---it must pay the interest
charges. Hence, if rates go up, the
interest costs to the government go up; and if they go up a lot, then this
budget line item will explode and make all the more difficult any vow to reduce
government spending as a percent of GDP .....
(3)
rising inflation:
[a] the potential negative impact of central bank money printing. This
week an official of the Bank of Japan advocated an even easier monetary policy
for that country than already exists.
And at home the FOMC met and left interest rates and QE in place.
As you know, I
don’t believe that the current massive injection of liquidity is going to end
well; and the longer it goes on, the worse that outcome will be.
Of the twin
evils {recession, inflation} that come with the irresponsible expansion of
monetary policy, my bet is that tightening won’t happen soon enough; so the US
economy will sooner or later face soaring inflation [a] Bernanke has already
said {too many times to count} that
when it comes to balancing the twin mandates of inflation versus employment, he
would err on the side of unemployment {that is, he won’t stop pumping until he
is sure unemployment is headed down}.
That can only mean that the fires of inflation will already be well
stoked before the Fed starts tightening and [b] history clearly shows that the
Fed has proven inept at slowing money growth to dampen inflationary
impulses---on every occasion that it tried.
A corollary concern is that all
this money printing increases the potential for a currency war {i.e. this
week’s Chinese reaction}. ‘ an overly easy monetary policy generally
results in the depreciation of the currency of that bank’s country which in
turn improves that country’s trade balance and strengthens its economy. That is great unless its trading partners get
pissed and commence their own ‘easy money/currency depreciation’ effort. At that point, you got yourself a currency
war; and that seems to be the direction that the major economic powers are
headed in.’
[b] a blow up
in the Middle East .
The concern remains that violence could erupt in any of the many flash
points in the region and that would in turn lead to a disruption in either the production
or transportation of Middle East oil, pushing energy
prices higher.
(4)
finally, the sovereign and bank debt crisis in Europe
remains a major [?] risk to our forecast. As you know, this problem wormed its way back
into investor consciousness this week---with Cyprus
as the flash point. Its banks have
assets eight times its GDP and are
insolvent. The ECB agreed to a bail out
with the condition that Cyprus
put up a portion of the funds [E5.8 billion;
oops, it is now E6.7 billion].
The initial solution
that was proposed had several problems: [a] insured deposits were to be ‘taxed’
to get a portion of the E5.8 billion---in other words, confiscation and [b] the
entire burden fell on depositors while the senior creditors {largely EU banks}
were left whole.
But not to
worry, because the Cypriot parliament rejected the plan. It then proposed Plan B [Russian bail out],
that was nixed; then Plan C [‘good’ bank, ‘bad’ bank plus nationalizing state
pension plans], that didn’t work; then the ECB set Monday as a deadline and
upped the amount Cyprus needed to contribute [E5.8 billion to E6.7 billion]
As this is
being written, this situation is changing faster than a runway model, but we
are getting the some of the elements of Plan D---so far there is [a] a plan to
restructure the banks and [b] capital controls.
We don’t know yet about deposit ‘taxes’ and where the senior lenders
stand in the restructuring process.
To be clear,
it doesn’t strictly matter what happens to Cyprus
because its problems are too small to have an impact on the EU much less the
global economy.
However, what could
be important is how the crisis is
resolved. Any solution that: (1) damages the credibility of the
eurocrats to manage the EU sovereign/bank debt crisis (2) impairs depositor
confidence in their home country banks, (3) triggers counterparty risk on
Cyprus debt or (4) creates potential political conflict between Russia and the
EU may likely have ramifications
beyond simply an extremely small island nation going toes up---I will further
deal with this point in the Fundamental section.
Who is next?(
medium):
And
(medium):
Bottom line: the US
economy remains a plus for Your Money. Fiscal
policy may be in transition right now with some probability that our elected
reps will do the right thing, put the budget on a more sustainable path and
turn an economic negative into a positive.
However, I am not altering our Economic Model nor making any bets on the
assumption that this will take place.
Meanwhile, the
Fed policy seems headed to a 2000 or 2007 like end game. I am not smart enough to know when conditions
will start to unravel or the magnitude of the fall out when they do. When it does, I will likely have to alter our
Model.
Finally, the
eurocrats are no closer to resolving the multiple European sovereign/bank
insolvencies than they were a year ago. Nothing
could make this point more obvious than the Cyprus bail out in which they (1)
have proposed and had rejected three solutions and are now working on a fourth
plan and (2) it appears that Plan D will contain capital controls, deposit
taxes and subordination of depositors to senior lenders---are of which are
violations of current EU rules and regulations.
Of course, Cyprus
has a very small GDP and, therefore, any dislocations
in the Cyprus
economy resulting from the bail out/bankruptcy/resolution is unlikely to impact
the EU economy, much less our own. However,
an EU wide loss of investor/voter confidence stemming from that resolution
could negatively influence the European economy with spill over effects in our
own---though I am not yet ready to change our Model to reflect this.
Interview with
the president of the Bundesbank (long):
Fitch puts UK
on negative watch list (medium):
This week’s
data:
(1)
housing: weekly mortgage and purchase applications fell;
February new home sales were up but less than anticipated though building
permits were strong; February existing home sales rose but less than estimates,
(2)
consumer: weekly retail sales improved; weekly jobless
claims rose but less than expected,
(3)
industry: the March Philly Fed index came in much
better than forecasts,
(4)
macroeconomic: the FOMC believes economic conditions
have improved marginally and left policy unchanged; February leading economic
indicators increased more than anticipated.
The Market-Disciplined Investing
Technical
The DJIA (14512)
remains above its previous all time high (14190); and, after a one day retreat
below the upper boundary of its short term uptrend (13773-14462), it ended the week back above that
boundary. It closed within its
intermediate term uptrend (13565-18565) and its long term uptrend (4783-17500).
The S&P (1560)
finished below its previous all time high (1576) and the upper boundary of its
short term uptrend (1504-1578). It is
also within its intermediate term uptrend (1436-2030) and its long term uptrend
(688-1750).
So for the third
week, the Averages remain out of sync and the break out to new highs by the Dow
is not confirmed. That keeps open the
question as to whether we are witnessing a topping process or a consolidation
in preparation for a launch higher. Whichever occurs, the technical guideline
is that the longer this process goes on, the more volatile the directional
break when it finally happens. As you
know, I favor a move to the downside. But
I am not overly concerned if I am wrong because I don’t believe the risk/reward
is that attractive otherwise.
Volume was anemic;
breadth improved. The VIX was down
modestly; and so it remains in both a short term and intermediate term
downtrend---a positive for stocks.
GLD fell but
remained in its short term downtrend. It
continues to develop a support level as
well as a very short term uptrend.
Bottom
line:
(1)
the S&P is trading within its short term uptrend [1504-1578]
while the Dow finished above the upper boundary of its short term uptrend [13773-14462]. They both closed within their intermediate
term uptrends [13565-18565, 1436-2030].
(2) long term, the Averages are in a very long term [80 years] uptrend
defined by the 4873-17500, 688-1750.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (14512)
finished this week about 27.8% above Fair Value (11350) while the S&P (1556)
closed 10.6% overvalued (1406). Incorporated
in that ‘Fair Value’ judgment is some sort of half assed attempt at getting fiscal
policy under control, continued money printing, a historically low long term
secular growth rate of the economy and a ‘muddle through’ scenario in Europe.
The economy is
tracking with our forecast.
The ruling class
continues to honor a cease fire as Obama schmoozes the GOP. Plus congress, with a total absence of
rancor, has passed a continuing resolution.
That doesn’t mean that ideological rigor won’t reassert itself as
negotiations continue on a budget deal---witness the initial senate plan. But there is still room for hope.
The object here
is lower the government’s usurpation of private capital and resources by
putting fiscal policy on a path that will lead to a lower deficit as a percent
of government spending and lower government spending as a percent of GDP ---these
being two of the primary causes of our sub par secular economic growth. Of course, it is much too early to assume our
elected representatives will actually do the right thing. But were it to occur, it would certainly have
a positive impact on our Valuation Model via a rising long term corporate
profit growth rate and a lower discount factor (higher P/E’s).
On the other
hand, nothing can deter the Fed from its drive to deforest America . I acknowledge the point of the deflation
advocates that argue that as long as the country is deleveraging, all those
reserves piled on bank balance sheets remain largely sterilized. However, we know that while the banks aren’t
lending much money, their trading desks are using at least a portion of those
reserves to fund highly risky investments (see JP Morgan/London whale and below). Furthermore, that argument fails to deal with
the ‘when’ factor; that is, when the country ceases to delever, then those
reserves could become more high powered and we will be faced with the same
history---the Fed has never successfully transitioned monetary policy from too
easy to too tight.
Here is where
the risk exists on bank balance sheets (medium and a must read):
As you know, I
have built a rising rate of inflation
into our Economic Model and adjusted the future discount factor in our
Valuation Model. I may be a bit early if
the deflationistas are correct; but I am leaving those assumptions alone
because we have never been in these uncharted waters of monetary expansion before. Indeed, with all the money sloshing around
the global banking system, I may be underestimating the potential inflationary
damage.
Moving on the
Europe---while I am pleased that our ‘muddle through’ scenario continues to
hold in the face of degenerating economic, social and political conditions and weakening
bank balance sheets, the more conditions deteriorate, the more my concern has
grown that our forecast is too optimistic---and of course, the latest mess in
Cyprus only crystallizes that point.
However, to be
clear---the Cypriot government and/or banks going bankrupt are not my
worry. In fact, (1) an EU bankruptcy is
long overdue and (2) if it happens, it will likely drive investors to US markets.
What I fret about is how casually the rule of law has been ignored in this bail out.
At this writing,
the Cypriot parliament is in the process of passing a series of laws (Plan
D). So far they have created a ‘good’
bank/’bad’ bank (though we don’t know the exact terms, especially as they will
apply to senior [bank] lenders) and imposed capital controls (illegal). Yet to be voted on is the depositor
‘haircuts’ (illegal). (Note: Spain
just announced a 2% ‘tax’ on bank deposits.)
That said, I am
really perplexed that no matter how dire the circumstances and no matter how
unsavory the eurocrats’ temporary fixes, the electorates and investors have taken
it all in stride---the Cyprus situation being the latest example. Here we are with regulations either being
violated or likely about to be violated---and the markets are basically flat
for the week with the great unwashed masses of Europe seemingly oblivious to the
fact that capital controls have been enacted and to the risk of their own bank accounts being at least
partially impounded by the ruling class.
I linked to an
article this week which attempted to deal with this muted response of markets
and electorates to the continuing worsening conditions in the EU. Its main thesis was that Europeans are simply
resolved to their fate and no matter how difficult conditions get, they believe
the eurocrats are doing the best that they can and will accept the consequences (did anyone say Neville
Chamberlain?).
The author may
or may not be right; but whatever is happening, I feel completely out of touch. In an investment sense, I suppose I should be
pleased because my ‘muddling through’ assumption has worked out better than I
could have ever hoped. Indeed, if
investors and electorates react as tamely to capital controls, deposit ‘taxes’
and their subordination to the banking class as they have to prior inequities
imposed by the eurocrats, then ‘muddle through’ will remain the default
scenario right up to the point where the
entire electorate is led to the gas chambers---which from an investment
strategy standpoint means the ‘tail risk’ that I have been worried about is
less immediate than I thought.
I honestly don’t
know what to make of this. So at the
moment, I am just mumbling to myself, wondering what the f**k these guys are
thinking about. Let’s see how Europe
deals next week with the reality of capital controls, deposit taxes and the
super majority rights of the banksters.
Perhaps I will receive some clarity.
My investment
conclusion: the economic assumptions in
our Valuation Model are unchanged. The
fiscal policy assumptions are also unchanged but there is some hope of an
improvement---it is simply too soon to tell.
The monetary policy assumptions are also unaltered. However, it seems certain that they will change
and not for the better.
I
am taking a timeout on the EU recession/financial debt problems. Not because they aren’t happening, but
because the Europeans don’t seem to care---and you can’t have crisis if no one
thinks that there is one and everyone is willing to accept the consequences their
misguided leaders’ actions. I need to
think about this some more.
This week, our Portfolios did nothing. I remain concerned enough about monetary
policy and the goings on in Europe that I am not
bothered by our Portfolios’ above average cash positions.
Bottom line:
(1)
our Portfolios
will carry a high cash balance,
(2)
we continue to include gold and foreign ETF’s in our
asset mix because we continue to believe that inflation is a major long term
risk [which is now under review]. An
investment in gold is an inflation hedge and holdings in other countries
provide exposure to better growth opportunities.
(3)
defense is still important.
DJIA S&P
Current 2013 Year End Fair Value*
11600 1440
Fair Value as of 3/31/13 11375 1409
Close this week 14512 1556
Over Valuation vs. 3/31 Close
5% overvalued 11943 1479
10%
overvalued 12512 1549
15%
overvalued 13081
1620
20%
overvalued 13650 1690
25%
overvalued 14218 1761
30%
overvalued 14787 1831
Under Valuation vs.3/31 Close
5%
undervalued 10806 1338
10%undervalued 10237 1268
15%undervalued 9668 1197
* 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.
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