Tuesday, April 30, 2013

One of my favorite technician's outlook

United Technologies (UTX) 2013 Review

United Technologies is an industrial conglomerate which manufacturers and services aircraft engines (Pratt & Whitney), manufacturers heating, ventilating and air conditioning equipment (Carrier), manufacturers and services elevators (Otis), builds helicopters (Sikorsky), manufacturers aerospace and industrial products (Hamilton Sundstrand) and provides security and fire protection services (UTC Fire and Security).  The company has earned an 18-20% return on equity over the last ten years while growing profits and dividends at a 13-15% rate.  While UTX’s businesses are impacted by the global economic activity, the company has grown fairly consistently returned because:

(1)  its main businesses possess a large parts and service component which adds stability to earnings,

(2) the diversity of its product line allows for consistency in revenue and earnings performance,

(3) its strong cash flow allows for further acquisitions and product innovation.


(1) a significant portion of its business is subject to government funding,

(2) its international operations are subject changes in foreign economies growth rates as well as currency fluctuations and government regulations,

UTX is rated A++ by Value Line, its balance sheet carries a debt/equity ratio of  48%, its stock yields 2.6%.

    Statistical Summary

                 Stock      Dividend       Payout      # Increases  
                Yield      Growth Rate     Ratio       Since 2003
UTX           2.6%        10%             36%              10
Ind Ave*

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

UTX          48%           20%           2                 9%           A++
Ind Ave*

*Because the market segments in which these companies operate are so diverse, comparable data would be meaningless.


            Note: UTX stock made good progress off its March 2009 low, quickly surpassing the downtrend off its October 2007 high (red line) and the November 2008 trading high (green line).  Long term, the stock is in an uptrend (straight blue lines).  Intermediate term it is in a uptrend (purple lines).  The wiggly blue line is on balance volume.  The Dividend Growth Portfolio owns an 85% position in UTX.  The upper boundary of its Buy Value Range is $70; the lower boundary of its Sell Half Range is $114.


The stats behind 'sell in May and go away"

Morning Journal--Update on big four economic indicators


   This Week’s Data

            March personal income rose 0.2% versus expectations of an 0.4% increase; personal spending advanced 0.2% versus estimates of +0.1%.

            The April Dallas Fed manufacturing index came in at -15.6 versus forecasts of +5.0.


            Midwest manufacturing continues strong (medium):

            Energy and healthcare (medium):

            Update on big four economic indicators (medium):



Female DNA found on Boston bomb (medium):

            Education spending (short):


The Morning Call---Appropriately enough, it is Kentucky Derby week

The Morning Call


The Market

            The indices (DJIA 14818, S&P 1593) had another great day, finishing within all major uptrends: short term (14220-14902, 1557-1651), intermediate term (13804-18804, 1463-2057) and long term (4783-17500, 688-1750).  In addition, the S&P confirmed its break above its former all time high and moved back in sync with the Dow.

            Volume was abysmal (continuing the unhealthy pattern of up prices on down volume); breadth improved.  The VIX rose fractionally, remaining within its short and intermediate term downtrends.

            GLD was up again, closing within its intermediate term downtrend and its long term uptrend.  However, it is still below the lower boundary of its short term downtrend.

Bottom line:  with yesterday’s close, all signs are ‘go’ with respect to another leg to the upside.  As you know, my best guess (which admittedly hasn’t been worth much lately) is that the upper boundaries of the Averages long term uptrends are a solid barrier.  Certainly, with the trend up, that boundary is going to advance over time.  But at some point, the downside risk has to enter into investor’s risk/reward analysis. 


            Yesterday’s economic news was mixed to negative: March personal income was below expectations though spending came in better than estimates; the Dallas Fed April manufacturing index was terrible.  While disappointing viz a viz our forecast, nobody else in stock land cared.

            Investors were focused on the potential easing by the ECB this week and the formation of a new government in Italy.  Plus the Market’s drive to the hoop is itself increasing becoming the story driving the Market.

Bottom line: ‘central bank monetary expansion seems to be the fuel propelling stock prices higher because I sure can’t justify them on fundamentals.  Being a lousy trader, I am not good at rationalizing prices that are too far divorced from my version of reality.  It is particularly difficult this time around because of the extremes to which the central banks have taken monetary policy and the lack of any sound explanation of how they are going to unwind these measures without causing severe disruptions.

Until someone can ‘splain’ to me a reasonable end game, I am content to under perform as a price to avoid disaster.’
As I have noted endlessly, I am not a trader and do not trade for my own account.  However, for those of you who do trade and want to participate in whatever is left of the up market, I would be looking at underperforming sectors, commodities being the prime example.  After all, if the global economy is going to the moon, commodities should do better.  Two to look at are the Powershares Commodity  ETF (DBC) and Gabelli’s Gamco Natural Resource Gold and Income Trust (GNT).

Another underperforming area is emerging market stocks: Vanguard Emerging Market ETF (VWO), Wisdom Tree High Yield Emerging Market ETF (DEM), S&P Emerging Market Dividend ETF (EDIV).

Tight stops are absolutely essential. 

At some point risk is going to kick in and Ranger Equity Bear ETF (HDGE) might be considered.

            The latest from John Hussman (medium):

            The return of the housing bubble (short but a must read):

            The latest move by the Bundesbank (medium):

            Is a EU QE coming (short/medium)?

            The bank with the largest derivative exposure (medium):

            Italy may have a new government but it still has the same old problems (medium):

            ***overnight EU unemployment rate ticked up again.

            Yesterday, I responded to an article that excused the Fed from a raft of sins.  This article entails considerably more economic expertise than my own.  A must read (medium)

            Inflation and the Fed (short):

      Investing for Survival

            Wall Street is out of control (short):

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

Monday, April 29, 2013

A Reply to Fed (Bernanke) Apologists

Markets worldwide seem intent on ‘not fighting the Fed (all central bank easing)’ to the exclusion of any concern that valuations may be getting out of whack or what the consequences may be of unlimited monetary ease. 

On the first point, in an earlier article “Remember, Buy Low, Sell High”, I presented my arguments for why stocks are in overvalued territory. 

As to the second point, while I am not a trader and, therefore, have a difficult time divorcing fundamentals (overvalued stocks) from current price levels, I do understand the liquidity affects that overly easy central bank monetary policy can have on security prices. 

That said, past periods of excessive Fed supplied liquidity have ended badly; and to date, I haven’t found anyone that has a clear explanation of what will happen when the central banks have to start tightening after this unprecedented expansion in global bank reserves.  Nonetheless, I have a hint.  We know what has happened in the past when the Fed tightened after a period of easy money---100% of the time, it either tightened too quickly and pushed the economy into recession or it waited too long and inflation spiked. 

Unfortunately, this time around the Fed’s balance sheet is exponentially more bloated than it has been in the past.  Hence, it seems like the potential negative consequences in transition to tighter money might also be larger.  I could try to quantify that potential downside by extrapolating into the present the past experiences when monetary policy transitioned from easy to tight.  But I won’t.  I will simply contend that there are risks and that given the extent of money expansion, those risks might be higher than experienced in the past.

What has my dandruff up is the Fed apologists that keep telling me that Bernanke is doing a great job and that there are no monetary related problems about which to be concerned.  I read one such article published on one of my favorite websites yesterday; and after  bouncing off the ceiling a couple of times, I decided to address what the authors entitled ‘Everything You Think You Know About the 'Big Bad Fed' Is Wrong’.  :

                        Here are the ‘misconceptions’ that they attempt to prove wrong. (to be clear, the authors of the aforementioned article are stating that the bold, italicized statements are wrong):  

(1)     ‘printing money increases the money supply’  Well, duh.  Anyone paying attention to the economy and the Fed knows that is not how monetary policy works; and, hence the authors are correct to say that it is wrong.  What is also correct is that the money that the Fed is printing goes into bank reserves; and unfortunately, at the moment those banks are not rushing to lend money (which would create money supply).  So, lots of reserve growth but little money supply growth.  So far, the authors and I are in agreement.

But it stops there.  Because the Fed is increasing reserves with the stated intent of increasing money supply.  That is done by the banks lending its reserves which the Fed believes will speed up economic growth and lower unemployment. The  problem is that to date its policy has been a bust.  However, if we all woke up tomorrow morning and the banks had lent all those reserves overnight, money supply would explode and Bernanke et al would be wee weeing in their whitey tighties and scrambling to withdraw those reserves. 

So it seems to be a bit disingenuous to confuse the result (money printing hasn’t increased money supply---to date) with the intent (printing money increases bank reserves which will hopefully increase money supply).  Yes, there has been no surge in money supply, but not for wont of trying. 

(2)     ‘QE is pumping cash into the stock market’.  OK, not directly.  As you know, most of the QE’s to date have involved the Fed creating money and buying government bonds and mortgages.  The authors argue most of those bonds are bought from banks and a big chunk of that remains as excess reserves.

(a) true technically. But in QEIII, virtually all bonds bought by the Fed come almost dollar for dollar from the Treasury though indirectly (the UST sells the bonds to primary dealers who then sell them to the Fed and make the vig) to finance our on going trillion dollar deficits ($1 trillion, i.e US deficit/12 months = $83,33 billion/month---amazingly close to $85 billion per month wouldn’t you say?).  To be sure, that is not the stock market; but the effect of these purchases are not benign--but that is a whole other issue.  See (3) below.

(b) the authors rightfully point out that much of the positive stock market performance is a derivative of the ‘don’t fight the Fed’ notion; that is, the Fed’s aggressive monetary action theoretically provides a downside to the economy and that is a positive for investor psychology which leads to increased stock investments. 

However, I think psychology is secondary.  The main reason investors are flocking to stocks is that the Fed’s zero interest rate policy isn’t giving them much of a choice. Investors, even conservative fixed income types (seniors), have no other place but the stock market to put their money to earn a return.  So while QE may not be directly pumping money into the stock market, it is forcing money into the stock market via the perversity of zero interest rates.  In the process, it is robbing those conservative investors, enriching the banks and encouraging the misallocation of capital.

(c) if you think the big banks are sitting on all those reserves and not doing anything with them (cough, prop trading, cough), I have a bridge in Brooklyn that I will sell you cheap.

(3)     ‘QE will create runaway inflation’.  I agree with the authors that this is not likely---the runaway part, that is. And they acknowledge that the inflationistas have been lowering their own dire prognostications.  However, that doesn’t mean the economy won’t suffer from another round of Fed induce inflation.  So how about ‘QE may create high inflation’?  I am not arguing Weimar Republic/Zimbabwe level inflation.  But I will argue that based on history, the Fed has never, ever extricated itself from an easy money policy without either (a) starting to tighten too soon which led to an economic slowdown if not recession or (b) waiting too long which led to higher than generally acceptable levels of inflation.  So maybe it should be QE will not create runaway inflation but it will likely lead to either recession or higher inflation’.

The authors pooh pooh the notion that inflation could still occur as a result of current Fed policy.  And you know what?  They could be right.  However, they fail to note that Bernanke has stated that one of the signs that QE is working is.........drum roll---inflation.  Of course, what Bernanke means is just a little bit of inflation.  But what if he is wrong and ‘a little bit’ turns out to be a whole lot.  Assuming the Fed is smart enough to fine tune its results I believe is a dangerous assumption.  As proof I suggest that you check on Bernanke’s statement about the health of the housing market mere months before that bubble blew up.

In other words, what the authors fail to address is that at some point in time, a day, a month, a year, a decade from now, the Fed will have to (a) stop buying $85 billion a month in governments and mortgages, then (b) start removing all those reserves from bank balance sheets.  And what happens then?  To be sure, if the US economy continues to grow at a sub par pace into infinity, the task may be postponed or rendered moot. But that is not the Fed’s stated intent; and assuming that it takes all steps necessary to goose the economy (have banks lend those reserves) and the economy begins to grow, then what happens? 

So, notwithstanding the authors discounting the argument that nothing has happened ‘yet’, in truth ‘yet’ hasn’t happened yet.   But more importantly, they offer no useful explanation of how the reduction of this massive accumulation of reserves is going to be executed without causing problems when, as and if the economy ever picks up steam except to say that investors will ultimately come to understand how the transmission mechanism of monetary policy works.

But I have an add-on question.  How much larger can the Fed balance sheet get before it is forced to do something? After all, if the balance sheet keeps growing, at some point in time even a 5 or 10 basis point move up in rates (down in prices) will destroy the entire Fed highly leveraged equity position.  Now I know that in its infinite wisdom that the Fed has already dealt with the accounting issue, i.e. it excused itself from recognizing capital losses.  But will investors be that forgiving?  I don’t know.  My point is that no one else knows the answers to the above inflation related questions; and that is a problem for which the Fed is directly response.

Furthermore as I noted above, the current QE is basically buying all the new debt issued by the Treasury to finance our deficit.  And that deficit funds what?  Solyndra, Fisker, federal employee salaries and benefits, war, ethanol and other agricultural subsidies.  What do you suppose the inflationary impact is of all that extra inexpensive money courtesy of the Fed being pumped into the economy funding nonessential, inefficient projects, regulations, useless federal employees and defense materiel?

(4)     ‘QE causes high oil prices’.  Hmmm.  I haven’t heard this one; but the authors got me on it anyway.  Technically, they are correct---from the initial date of inception of the QE’s, oil prices may be up a little but not much and nothing about which to complain.  However, check the history of monetary ease, i.e. QE by another name.  Oil and food prices almost always start moving up when the Fed over stimulates or over stays its stimulus policies. 

A big reason this isn’t happening with oil right now is because of the fracking revolution in this country which has added significantly to the supply of oil while the sluggishly growing economy has held back demand.  On  the other hand, have you been to the grocery store lately?

And not to be repetitious, but no one can say definitely what the impact of QE on oil prices will have been until QE is over.

(5)     ‘QE has debased the dollar’.  No, the Fed has debased the dollar and has been doing so since the date of its inception.  Burns, Miller, Greenspan et al, they all did it long before anyone ever heard of QE or Bernanke---he is just the latest.  Sure there have been periods of dollar appreciation, like when Volcker SHRANK money supply (excuse me, bank reserves).  And yes, the dollar is doing fine right now; but more because the rest of the world is such a mess and the US just happens to be the cleanest shirt in the dirty laundry---so funds are flowing into dollar denominated assets. 

In the end, the cold hard facts are that our Fed has a long history of debasing the dollar primary via an overly accommodative monetary policy; and anyone who argues that current Fed policy (QE) is not overly accommodative may need to rethink that position.

The bottom line here is (a) the Fed’s balance sheet is bloated by any measure, (b) that hasn’t had negative effects to date, but not because the Ber-nank isn’t moving heaven and earth in a hopeless attempt to squeeze something positive out a hugely expansionary monetary policy, (c) nobody, including me, knows how this chapter in Fed policy is going to end, because we are in totally uncharted waters, (d) however, a review of monetary history points to numerous examples of easy money leading to economic difficulties (e) nevertheless, I am not arguing that it will end badly, (f) rather I am arguing that current Fed policy has created sufficient potential risks to the economy that it should be held accountable not only for creating those risks but also the consequences of its actions and (g) finally, the history of QE has yet to be written.  I think it unproductive to assume that because nothing untoward has occurred to date as a result of current Fed policy that nothing untoward will ever happen as a result of current Fed policy. 

Monday Morning Chartology---4/29/13

The Morning Call


The Market

      Monday Morning ChartologyThe S&P remains in all major uptrends and finished the week above its prior all time high (1576) for the fourth day.  A close tonight over 1576 will confirm the break.  In addition, that developing head and shoulders pattern has been virtually nullified.

            GLD rallied last week, recovering above the lower boundary of a newly re-set intermediate term downtrend.  It remains below the lower boundary of its short term downtrend and above the lower boundary of its long term uptrend,

            VIX continues its directionless wandering.  It is trading within two downtrends (short and intermediate term); but it is also near its historic low.  If stocks are going to make a new high, one might think that the VIX will see a new low.

            Update on ‘the best stock market indicator ever’:

            The Market at a glance (short):

            The short supply of assets (short):

            Update on this quarter’s earnings and revenue ‘beat’ rates (short):

                The Fed and economic growth (medium and today’s must read):

            The latest from Greece (or what’s left of it):

            And Italy (medium):

     News on Stocks in Our Portfolios courtesy of Seeking Alpha

Chevron (CVX): Q1 EPS of $3.18 beats by $0.11. Revenue of $56.8B misses by $10.07B.

AbbVie (ABBV): Q1 EPS of $0.68 beats by $0.02. Revenue of $4.32B (+3.7% Y/Y).

V.F. Corp (VFC): Q1 EPS of $2.43 beats by $0.24. Revenue of $2.6B (+2% Y/Y) misses by $0.04B.
Altera (ALTR): Q1 EPS of $0.37 beats by $0.05. Revenue of $410.5M (+7% Y/Y) misses by $3.25M.

   This Week’s Data

            EU personal income experiences record drop:


            Reinhart and Rogoff on the Reinhart/Rogoff debate (medium):

            More on the Reinhart/Rogoff debate (medium):

            The latest on the student loan bubble ( a must read):



Eric Holder on immigration (short):

  International War Against Radical Islam

            Investigative points on the Boston Marathon numbers (medium/long):

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

Saturday, April 27, 2013

The Closing Bell-4/27/13

The Closing Bell


Statistical Summary

   Current Economic Forecast


Real Growth in Gross Domestic Product:                      +1.0- +2.0%
                        Inflation (revised):                                                             2.5-3.5 %
Growth in Corporate Profits:                                 5-10%


                        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                                14144-14850
Intermediate Uptrend                              13792-18792
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                                       1550-1624
                                    Intermediate Term Uptrend                       1459-2053 
                                    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                              41%
            High Yield Portfolio                                        42%
            Aggressive Growth Portfolio                           43%

The economy is a modest positive for Your Money.   The economic data was mixed this week: positives---weekly mortgage and purchase applications, weekly retail sales, weekly jobless claims, first quarter GDP and the final April University of Michigan consumer sentiment index; negatives---the Chicago National Activity Index, the Richmond and Kansas City Fed April manufacturing indices and March durable goods orders; neutral---March new and existing home sales.

 This continues the transition in economic measures from a period in which the stats were largely positive to one in which they are much more mixed.  As I noted last week, we have seen this pattern before so I am not presently alarmed about a possible recession.  However, the amber light is flashing and if the data becomes more negative and remains that way for a month or so, then it will likely be a sign that the current economic upturn may be ending.

For the moment, our outlook remains unchanged:

‘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 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. 
(2) an improving Chinese economy. The data out of China was once again disappointing this week: lousy PMI and poor trade numbers.  Another two to three weeks of this news flow and I will remove this as a positive factor.

       The negatives:

(1) a vulnerable global banking system.  This week’s edition [as an aside, isn’t it amazing that virtually every week we get more evidence of bankster malfeasance?] comes from a report on how the Italian bank, Monti dei Paschi got into such deep trouble [this is a must read]:

And this study from the Royal Bank of Scotland on central bank purchases of equities.  Also a must read:

Finally, a look at the health of the Italian banking system (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)   fiscal policy.  Over the last month or so, I have been somewhat upbeat because our elected representatives managed to negotiate some short term solutions to remove a government shutdown as a risk.  Well, politicians will be politicians.  Being so, Obama elected to utilize the sequester to shutdown some of the most economically/politically sensitive government functions in hopes of getting the GOP to back off the cuts and/or agree to new taxes. 

The poster child for this policy was the furloughing of air traffic controllers which in the past week was causing considerable pain.  Fortunately congress  acted to bring some sanity to the budgeting process and addressed the air traffic controller issue in a way that gets them back to work without impacting the spending cuts in sequestration.    

So there is good news [congress acts fiscally responsible] and bad news [Obama again shows His ideological spots and seems intent on making a compromise as difficult as possible].

That leaves me somewhat ambivalent.  I am encouraged by the congress [especially the senate] move to compromise; but I am shocked/amazed/concerned [?] by Obama’s willingness to inflict pain on the electorate [delays in flying] and the economy [lost revenues to airlines, travel related businesses plus added costs to consumers and businesses] to achieve a political goal---which suggests that entitlement cuts/tax reforms may be more difficult to achieve than I had hoped.

My bottom line remains unchanged: if our ruling class can implement meaningful tax reform and reduce government spending and the deficit, that could help get our economy moving back toward its long term secular growth rate.  If that happens, fiscal policy would become a positive. However, if the Administration is willing to sacrifice the economy to forward its political agenda the odds of achieving meaningful fiscal reform may have diminished.

I am also worried about...... the potential rise in interest rates and  its impact on the fiscal budget.  As I have noted previously, the US government’s debt has grown to such a size that its interest cost is now a major budget line item---and that is with rates at/near historic lows.  Moreover, government debt continues to increase and the lion’s share of this new debt is being bought by the Fed. 

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.    The ECB meets next week and investors seem hopeful that there will be some sort of monetary policy easing.

As you know, I don’t believe that the current massive injection of liquidity is not going to end well; and the more players that join in 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 rising 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.
      Granted, the prospect of higher inflation seems out of place in the current environment.  But the stated intent of all this central bank easing is to gun inflation.  I have no idea if they will be successful if ever.  But I can add; and I know that bank reserves [money supply in waiting] are growing daily at an historically rapid pace.

Sooner or later, those bank reserves have to be withdrawn.  It may be in a day, a month, a year, two years or five years.  But whenever that happens, the Fed will have the same problem that it has had every time it has transitioned from easy to tight money; only this time the magnitude of the transition will be exponentially higher than at any time in the past.

The more immediate problem, aside from the fact that this massive injection of liquidity has not accomplished the central bankers’ goal, is that [a] our banks have used this largess for speculative purposes, increasing trading activities and funding the growth of auto and student loan bubbles---and now perhaps a new mortgage bubble and [b] any  new infusion of global liquidity {Japan and perhaps the EU} will likely only exacerbate this problem.

      A corollary concern is that all this money printing increases the potential for a currency war.  ‘ 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 EastSyria returned this week as the regional flashpoint as Obama began rattling His sword.  My worry is that if violence erupts, it may 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.  This week, the evidence continued to come in pointing to a further weakening in the EU economy: record unemployment, reports of wide spread hunger in Greece, losses at Italian banks. 

The problem with a weakening EU economy is that lower economic activity means lower tax receipts which  means wider deficits which means [a] more bail out money is required and [b] the riskier all that sovereign debt on bank balance sheets becomes.  Additionally, lurking in the background is the fallout from the Cyprus crisis, i.e. the introduction of uncertainties about the sanctity of deposit insurance and the imposition of capital controls and along with them the fear that the eurocrats could make another hubris inspired policy mistake but find themselves unable to reverse it as they did in Cyprus.

Germany’s virtuous circle (medium):

The ECB offered a ray of sunshine [?] this week when multiple officials suggested that the EU ditch austerity and join the US and Japan in trying to print their way to prosperity.  To be sure, if that happens, it would likely cement our ‘muddle through’ scenario at least for another year or two.  But as I noted a couple of weeks ago, the EU sovereign economies have survived what seems like the worst of austerity and are healing.  By that I mean their economies are adjusting to smaller governments, reduced cradle to grave social welfare programs, deeply entrenched unions that stifle productivity and less overall government spending.     

So while the ECB switching to an easy money policy has the entire ‘don’t fight the Fed’ world absolutely giddy, I am not sure it is the best policy for the long economic health of the EU.

I include this article less for its market forecast and more for the discussion of      what could be going on in Europe (medium):

   And new poll shows declining support for the EU (medium): 

  Bottom line:  the US economy remains a positive for Your Money, though it appears to be entering a slower growth environment---hopefully only temporarily.  While this could be the precursor to a recession, it is far too early to tell. 

Fiscal policy remains uncertain as Obama appears to have not given up on an ideologically driven political agenda in which He seems prepared to forgo economic growth to achieve it.

Irresponsible Fed policy is being made worse by the triple down, all in, balls to wall Japanese monetary expansion.  Plus this duo may be joined by yet another major central bank---the ECB.  Regrettably,  I am not smart enough to know when Markets will cease to tolerate this irresponsible behavior by the central banks or what the magnitude of the fall out will be when they do.  My guess is that it won’t be pretty and I will likely have to alter our Model.

This week’s data:

(1)                                  housing: weekly mortgage and purchase applications were up; March existing and new home sales advanced but less so than anticipated,

(2)                                  consumer: weekly retail sales were up; weekly jobless claims were quite positive, the final reading of the April University of Michigan index of consumer sentiment was up more than forecast,

(3)                                  industry: March durable goods orders were well below estimates as were the March Chicago Fed National Activity Index and the April Richmond and Kansas City Fed manufacturing indices,      

(4)                                  macroeconomic: the initial first quarter GDP reading was solid though not as strong as expected..

The Market-Disciplined Investing

The indices (DJIA 14700, S&P 1585) ended the week on an up note, closing  within all major uptrends: short term (14142-14850, 1550-1624), intermediate term (13792-18792, 1459-2053) and long term  (4783-17500, 688-1750). However, they remain out of sync on surmounting their all time highs---at least for one more trading day. 

In the past week, the S&P has gone from challenging the lower boundary of its short term uptrend to being on the verge breaking to a new all time high.  Clearly, the bulls are in control and the question as to whether the recent sideways move is a sign that the Market is rolling over or building a base for another leg up is about to be answered.

As I noted in Friday’s Morning Call, assuming the S&P breaks out to the upside, I think that the next most likely resistance occurs at the upper boundaries of the Averages long term uptrends.  Further, I think that these levels will be show stoppers.  That leaves us with an upside of circa 10% following an over 100% run to date.  Playing for that last 10% is something some traders can do with great skill.  I am not one of those guys/gals.  I am quite happy to forego what is left of the upside in order to have my principal protected against any sudden move to the downside.  As always, if one of our stocks hits its Sell Half Range, I will likely act.

Volume on Friday was down---again sustaining the pattern of higher prices on lower volume; breadth was not good.  The VIX fell slightly, finishing within its short and intermediate term downtrends---still a positive for stocks.

GLD was down though it had a pretty good week.  It managed to bounce above the lower boundary of a newly re-set intermediate term downtrend but remained below the lower boundary of its short term downtrend.  I will be watching any new move to the downside to see if the prior low or the lower boundary of its long term uptrend can be held.  If so, our Portfolios will likely start re-building their positions.

            Bottom line:

(1)   the indices are trading within their short term uptrends [14144-14850, 1550-1624] and intermediate term uptrends [13792-18792, 1459-2053]. The S&P appears poised to confirm the DJIA’s breakout above its all time high.

(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 (14700) finished this week about 28.9% above Fair Value (11400) while the S&P (1585) closed 12.2% overvalued (1412).  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 along with first quarter earnings season is tracking with our forecast; although as I noted above, it has been a bit more sluggish in the last three weeks.  We have seen brief patches of weakness in this recovery before; so for the moment, this won’t impact the assumptions our Valuation Model.  Nevertheless, the amber light is flashing. 

Fiscal policy developments this week focused on the politics of sequestration; and it did nothing to encourage me that a responsible budget compromise could be reached.  Nonetheless, I remain open to the notion that some sort of negotiated budget settlement could be reached that would in turn change this factor from a negative to a positive in both our Economic and Valuation Models.  That said, the proof of the pudding is in the eating; and we are not there yet. 

Global monetary policy just gets scarier and more confusing by the day.  It now looks like the ECB could join the money printing extravaganza next week.  We are in the midst of a grand, though I fear very dangerous, experiment.  It is very difficult to make assumptions in our Models when we are going where we have never gone before. 

Moving on to Europe, its economy is worsening but a new easy money policy could produce some short term positive effects and would likely assure that our ‘muddle through’ scenario will be given new life.

My investment conclusion:  the economic assumptions in our Valuation Model are unchanged, though we must remain cognizant of the recent deterioration in the data flow.  The fiscal policy assumptions are also unchanged and Obama is doing nothing to help improve this factor.  The monetary policy assumptions are also unaltered.  However, that is a function of not knowing how to model the current, unprecedented explosive growth in global money supply and not because I have confidence in my assumptions.

         The EU recession/financial debt problems keep getting worse; but the ECB is floating a trial balloon that it believes will fix this problem---easy money.  This would increase our ‘muddle through’ forecast’s half life, though I fear it will simply prolong the agony.
            There isn’t anything that makes me want to chase stock prices further into overvalued territory.  I remain unconcerned by our Portfolios’ above average cash positions.

         This week, our Portfolios Sold two holdings (SCHW, CME) that failed to meet their periodic quality check for inclusion in our Universe. 

       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 4/30/13                                   11400                                                  1412
Close this week                                                14700                                                  1585

Over Valuation vs. 4/30 Close
              5% overvalued                                 11970                                                    1482
            10% overvalued                                 12540                                                   1553 
            15% overvalued                             13110                                                      1623
            20% overvalued                                 13680                                                    1694   
            25% overvalued                                   14250                                                  1765   
            30% overvalued                                   14820                                                  1835
Under Valuation vs.4/30 Close
            5% undervalued                             10830                                                      1341
10%undervalued                                  10260                                                  1271   
15%undervalued                             9690                                                    1200

* 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.