Monday, September 30, 2013

Monday Morning Chartology

The Morning Call


The Market

      Monday Morning Chartology
            The S&P remains in its short and intermediate term uptrends.  It is nearing its 50 day moving average (red line).

            GLD is moving higher slowly, but remains within a very short term, a short term and an intermediate term downtrend.  I continue to avoid.

            The long Treasury continues to drift higher, but remains within a short term trading range and an intermediate term downtrend.

            The VIX was up but is still meandering within a short term trading range.  It is also in an intermediate term downtrend.

            Update on ‘the best stock market indicator ever’:

            How a 2000 year old asset allocation strategy holds up in today’s market (short):

            How Wall Street is looting public pension funds (medium):

            How markets reacted in prior government shutdowns (medium):

     Investing for Survival

            Marc Faber on when the  s**t hits the fan:

   News on Stocks in Our Portfolios

            Boeing’s problems continue (medium):


   This Week’s Data


            Economic pessimism trending down (7 minute video):

            Update on big four economic indicators (medium):



  International War Against Radical Islam

            Saudis upset at Obama overture to Iran (medium):

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Friday, September 27, 2013

The Closing Bell

The Closing Bell


I got a call from a close friend offering a trip to South Bend to watch the Sooners play Notre Dame.  So this note is going early.  See you Monday.

Statistical Summary

   Current Economic Forecast


Real Growth in Gross Domestic Product:                           2.2%
                        Inflation (revised):                                                              1.8 %
Growth in Corporate Profits:                                  16.1%


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

   Current Market Forecast
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Trading Range                      14190-15550
Intermediate Uptrend                              14926-19926
Long Term Trading Range                       4918-17000
                        2012    Year End Fair Value                                     11290-11310

                  2013    Year End Fair Value                                     11590-11610                                          

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                  1669-1823
                                    Intermediate Term Uptrend                       1586-2172 
                                    Long Term Trading Range                         715-1800
                        2012    Year End Fair Value                                      1390-1410

                        2013   Year End Fair Value                                       1430-1450         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                              43%
            High Yield Portfolio                                        46%
            Aggressive Growth Portfolio                           43%

The economy is a modest positive for Your Money.   The economic data was biased to the upside this week: positives---weekly mortgage and purchase applications, August new home sales, weekly jobless claims, the August Chicago national activity index, the September Richmond Fed manufacturing index, August personal income and spending; negatives---September consumer confidence and consumer sentiment and the September Markit PMI manufacturing index; neutral---the Case Shiller home price index, weekly retail sales, the August and revised July durable goods orders and second quarter GDP and corporate profits.

So the numbers remain encouraging.  However, investor attention was elsewhere this week---primarily on the Washington three ring circus surrounding the continuing budget resolution, debt ceiling, sequestration, Obamacare and the Fed’s indecision on whether to taper or not to taper.  If I was going to write a script to make our forecast spot on, I don’t think that I could have done any better.  As you know, I believe that the fiscal issues will be decided by a lot of sound and fury; and in the end, it will be business as usual, i.e. more spending and more taxes.  Monetary policy also is being handled as I expected: ineptly.  The caveat being that the Fed is in uncharted waters and we have no idea what the unintended consequences will be to QEInfinity.  So our outlook remains the same:

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.  If anyone doubted the validity of this concern, it should have been eliminated after this week’s headlines: JP Morgan and 12 other banks are being sued over Libor price fixing; JP Morgan will likely pay in excess of $10 billion to make its mortgage transgressions go away [but no one is going to jail]; Citigroup gets off light with a $395 million fine and the EU reported that its banks need $95 billion to meet Basel III requirements.  For those of you who want to read the gory detail, I have linked to a number of articles:

EU banks need $95 billion in new capital to comply with Basel III agreement (medium):

Stunning Libor fraud admissions (medium):

‘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.  With three days to go until the first deadline, our ruling class is no closer to solutions to any of the issues [the continuing budget resolution {9/30}, the US government hitting its debt ceiling {circa 10/15}, the kick in of 2014 sequestration {9/30} and the implementation of a number of provisions of Obamacare {9/30}]than they were nine months ago---which by the way, is not surprising.  That’s the modus operandi for these yahoos. 

On the other hand, the political rancor in recent years has been especially high; so we can’t rule out the possibility that the pols will do something really stupid especially when the argument involves more than just budget numbers.  This time around, Obamacare is in the mix and that could be the wild card.

That said, in the end, I think that most of the elected folks’ have an acute sense of survival; and they know that the electorate is in no mood at present for an extended government shutdown or a default.  So I expect a lot of huffing and puffing followed by business as usual, meaning some half assed compromise that includes more unnecessary spending, a burdensome and  ineffective tax code and too much government intrusion into our lives and businesses. 

        I include in each Closing Bell a lament regarding the potential impact that higher interest rates [the ten year Treasury pushed through 3% two weeks ago.  It has since retreated but not back to the level from which it spiked---suggesting to me that another move up could take it to the 3.5%+ level] will have on the budget deficit.  Now those risks are upon us:  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)   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. 

With the Ber-nank having weaseled on ‘tapering’ and the rising prospect of super dove Janet Yellen assuming the mantle of Fed chief, I would add another point to the above and that is, the longer money for nothing goes on, the worse the outcome I fear. I know all the arguments that the massive build up in reserves has not resulted in a growth in M2 and therefore a higher risk of inflation. In fact, I acknowledge that they are correct.  However, the Fed apologists skim over the point that all those reserves have to be removed in a way not to cause inflation---and the Fed has never done that before.

They also fail to mention that when the $3 trillion in government bonds are sold or allowed to mature, someone has to either buy the bonds that are sold or the new bonds that replace the cash in the Treasury that paid off the maturing bonds. That is a lot of new buyers and a lot of money; with that much new supply what happens to interest rates? 

They also fail to mention the misallocation of capital, the hardship to savers, the encouragement to speculators that result from artificially low interests  and the distortions those cause to our economy, i.e. slow growth and high unemployment.  In sum, QEInfinity [except for QEI] has done nothing to improve the economy but has created huge inequities and the inefficient employment of capital that will have to be corrected at some time.  The questions are when? and from what level?

      Does this seem like a rational strategy to you (short):

(4)   a blow up in the Middle East.  While the carnage in Syria continues, it is progressing without the active involvement of the US.  That lessens the odds of a wider conflict but at the price of our standing in the world having been diminished considerably.  Good job Mr. O. 

So the negative from an unstable Middle East has now shifted from the risk of becoming embroiled in a conflict in a country in which the US has no strategic interest to situation in which our adversaries test our newly earned status as a weak, bumbling, over the hill power with increasing frequency and ever more provocative incidents.

(5)   finally, the sovereign and bank debt crisis in Europe.  The EU economies continue to improve albeit sluggishly.  This progress likely moderates somewhat the risk of a crisis as rising tax revenue make sovereign debt service more manageable which in turn strengthens bank balance sheets [since a huge percentage of their assets are in their own country’s sovereign debt].

On the negative side, recent stress tests of bank balance sheets reveal that collectively EU need another E95 billion in equity to meet Basil III guidelines. 

In addition, now that the German elections are out of the way, the eurocrats will presumably resume the task of salvaging the economies, governments and banks of southern Europe.  This doesn’t necessarily have to be a negative.  However, it is an unknown which will likely return to the front pages.

In sum, the EU economy appears to be emerging from recession.  That should make dealing with the unhealthy fiscal condition of its southern members a bit easier.  I am not suggesting that all is well; I am suggesting that our ‘muddle through’ forecast has a better chance of being right.

Bank lending rates

Bottom line:  the US economy continues to grow but at a sub par rate.  The primary causes of this below average performance are fiscal and monetary policy.  The former is a mess as it always is around budget and debt ceiling time.  Unfortunately, it is unlikely to change until there is a roll over of our ruling class; and even then, the change could be for the worse.  Monetary policy appears to be going from bad to really bad, what with the Fed’s back pedaling on tapering and super dove Janet Yellen in line to become head of the Fed. 

Europe continues to emerge from a two year recession.  That is a positive in the sense that it increases the probability of our ‘muddling through’ scenario.  However, it remains a long road to unwind the enormous leverage of both sovereigns and banks.

This all fits our Model of a sluggishly growing economy restrained by too much spending, too high taxes, too much regulation and a completely dysfunctional monetary policy that has led to the misallocation of capital, the mispricing of assets and the sacrifice of Main Street savings in favor of bankster speculation.  At the moment, the biggest risk to our forecast is the unintended consequences of this irresponsible Fed policy.

This week’s data:

(1)                                  housing: weekly mortgage and purchase applications rose; August new home sales increased, in line; the Case Shiller home price index advanced less than anticipated,

(2)                                  consumer: weekly retail sales were mixed; both the September consumer confidence and consumer sentiment indices were slightly below estimates; weekly jobless claims fell; August personal income and spending were up and in line,

(3)                                  industry: August durable goods orders were stronger than expected, but the July number was revised down substantially; the August Chicago national activity index rose significantly over the July reading; the September Richmond Fed’s manufacturing index was well ahead of forecasts; the September Markit PMI manufacturing index came in below expectations,

(4)                                  macroeconomic: the revised second quarter GDP was up but a bit less than forecast as were corporate profits.

The Market-Disciplined Investing

The Averages (DJIA 15258, S&P 1691) continues to drift lower following that one day no tapering price spike. The Dow ended in a short term trading range (14190-15550) and below its 50 day moving average.  The S&P closed within its short term uptrend (1669-1823) and slightly above its 50 day moving average.  Short term, the indices are out of sync, leaving the Market directionless.

Both of the Averages are well within their intermediate term (14926-19926, 1586-2172) and long term uptrends (4918-17000, 715-1800).

Volume on Friday rose; breadth was negative.  The VIX was up fractionally; but for all intents and purposes, this indicator has been flat since the first of the year (short term trading range).  Nevertheless, it is also firmly within its intermediate term downtrend.

The long bond was up on Friday and closed within a short term trading range and an intermediate term downtrend.

GLD moved higher but remains within a very short term, short term and intermediate term downtrend.  Nothing to do here.

Bottom line:  the Averages out of sync on a short term basis.  There are questions being raised in the technical community about whether or not the one day no tapering spike was a bull trap.  I am not suggesting that it is; but the thesis has a big enough following to bear mentioning. 

I continue to believe that this is a time to do nothing unless you are skilled trader.  The exception being if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.
   Fundamental-A Dividend Growth Investment Strategy

The DJIA (15258) finished this week about 32.3% above Fair Value (11525) while the S&P (1691) closed 19.0% overvalued (1429).  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.

Most of the assumptions in the above forecast are tracking our expectations. The economy continues to grow sluggishly; but grow nonetheless.  Our elected representatives are once again staging a DC budget melodrama which will likely end with some sort of compromise that keeps the government funded but does so at your and my expense.

Being unconstrained by the electorate, the Fed merrily pursues QEInfinity in spite of a enormous body of evidence that it has been ineffective in attaining the stated goals of the Fed but at the same time causing unhealthy consequences distorting capital investment.  When this travesty ends, I fear the aftermath will be worse than anything I have factored into our Model.

Bottom line: the assumptions in our Economic and Valuation Models haven’t changed.  Economic events appear to be tracking much as we expected with the exception of monetary policy which has become the biggest risk to our forecast.  I remain confident in the Fair Values generated by our Valuation Model---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.

        This week, our Portfolios did nothing.

DJIA                                                    S&P

Current 2013 Year End Fair Value*                11600                                                   1440
Fair Value as of 9/30/13                                   11525                                                  1429
Close this week                                                15258                                                  1691

Over Valuation vs. 9/30 Close
              5% overvalued                                 12090                                                    1500
            10% overvalued                                 12677                                                   1571 
            15% overvalued                             13253                                                      1643
            20% overvalued                                 13830                                                    1714   
            25% overvalued                                   14406                                                  1786   
            30% overvalued                                   14982                                                  1857
            35% overvalued                                   15558                                                  1929
Under Valuation vs.9/30 Close
            5% undervalued                             10948                                                      1357
10%undervalued                                  10372                                                  1286   
15%undervalued                             9796                                                    1214

* 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.

Thoughts on Investing

Thoughts on Investing from David E Hultstrom
• Stocks beat bonds (because they are riskier), but less consistently than you think.
• Value stocks outperform growth stocks (because people like growth stories and overvalue the companies, particularly in the small cap space), but again, less consistently than you would like.
• Simple beats complicated.
• It almost certainly isn’t different this time.
• Study market history.  In particular, read contemporaneous accounts of different periods.  As Mark Twain is reputed to have said, “History doesn’t repeat itself, but it rhymes.”  As Santayana did say, “Those who cannot remember the past are condemned to repeat it.”  And finally, another quote from Mark Twain, “The man who does not read good books has no advantage over the man who can’t read them.”
• Arguably the most valuable function you serve is keeping people on track and not being sucked into the euphoria or panics that periodically seize the market.
• Psychological mistakes are more detrimental than cognitive mistakes.  This applies to your clients and you. Study behavioral finance.
• If you get higher compensation to sell a particular product, it isn’t because it is a better product.  There is a very strong inverse correlation between what is best for clients and what pays the advisor the most.
• You will tend to be swayed toward products where the costs (including your compensation) are less visible to the client.  If you would be uncomfortable disclosing your compensation, avoid the product.
• You have undoubtedly heard and read disclosures that “Past performance is no guarantee of future results.”  I would go further:  Alpha is ephemeral and past performance is not only not a guarantee of future results, it isn’t even a good indicator of them though it certainly makes investors feel better about what are inherently uncertain decisions

The latest from Art Cashin

The Morning Call--The usual DC soap opera

The Morning Call


The Market

            Yesterday, the indices (DJIA 15326, S&P 1698) ended their five day losing streak, but in just as subdued a fashion as the declines themselves.  The Dow remained within its short term trading range (14190-15550) and recovered above its 50 day moving average.  The S&P closed within its short term uptrend (1667-1821).  This leaves the Averages out of sync and Market short term directionless.

            Both of the Averages are well within their intermediate term (14911-19911, 1586-2172) and long term uptrends (4918-17000, 715-1800).

            Volume declined; breadth was mixed.  The VIX rose fractionally, leaving it within a year long plus short term trading range and its intermediate term downtrend.

            The long Treasury fell, finishing within a short term trading range and an intermediate term downtrend.

            GLD moved lower, ending within a very short term, a short term and an intermediate term downtrend.

Bottom line: even though the Markets’ rallied yesterday off a five day downtrend, it was more of a meandering recovery than a strong bounce back---very similar in character as the downtrend that preceded it.  I am not sure if this reflects investor confusion over the current fiscal drama being played out or if they are bored with another soap opera from Washington that generally has the same ending---sound and fury followed by some half assed solution that my seven year old grandson could have fashioned in one tenth of the time.  Barring the politicians doing something incredibly stupid, this is a Market waiting for an event (third quarter earnings?).

Markets aren’t as stupid as politicians (short):

If stocks continue to the upside, our Portfolios will use the advance to lighten up on any stock trading in its Sell Half Range.

            More on sentiment (short):


            Yesterday’s US economic data was mixed: weekly jobless claims were better than expected, second quarter GDP and corporate profits were lightly below estimates and the latest Kansas City Fed manufacturing index was a disappointment.  There is nothing to worry about here, as this week’s stats have been generally upbeat and spot on with our forecast.

            The rest of the day was consumed mostly by (1) political rhetoric on the continuing resolution and the debt ceiling and (2) the ongoing discussions about the real Fed policy---it seems that the more Fed officials speak, the more confused investors become.  However, nothing terribly important on either count.

            You know my take on both; so I am not going to be repetitive.

Bottom line:  the economy continues to meet our Model’s expectations despite the headwinds presented by both fiscal and monetary policy.  We should collectively be grateful for the ingenuity, hard work and creativity of American businesses and workers for the positive results that have occurred. 

Unfortunately, the fiscal story is not likely to change until one party gains full control of the White House and congress.  Too much spending, taxes and regulation will continue to act as a governor to growth.  Monetary policy just keeps getting worse and with it, the odds of a mishap not reflected in our Economic Model.

The good news is that our price discipline has pushed our Portfolios out of mispriced assets and into cash. my opinion, stocks are way over valuing the likely earnings that can be produced from an economy on the current trajectory of the US’.

            Central banks and politics (medium):

            The true cost of QE (medium):

     Investing for Survival

            Governments around the world are starting to adopt the Cyprus ‘bail in’ model, i.e. confiscate depositor funds (medium and today’s must read):

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 Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Thursday, September 26, 2013

McDonald's (MCD) 2013 Review

McDonald’s operates, franchises or licenses more than 34,500 fast food restaurants world wide.  Over the past ten years, the company has grown profits at a 14% pace but dividends at 27% annualized while earning a 25%+ return on equity.  Looking forward, the pace of advance of dividends should slow somewhat although earnings growth is expected to continue at an above average pace as a result of:

(1) global growth not only in the number of restaurants but also in same store sales,

(2) introduction of new higher margin products [McCafe Real Fruit Smoothies, Frappes, Angus snack wraps],
(3) a revitalization program aimed at increasing market share via rising restaurant visits, growing brand loyalty and a new marketing campaign,


(1) rising commodity prices and wage costs,

(2) intense competition,

(3) the potential impact on sales of continuing economic malaise.

MCD is rated A++ by Value Line, carries a 46% debt to equity ratio, has an ongoing stock repurchase program and its stock yields 3.0%.

Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                Yield      Growth Rate     Ratio       Since 2003

MCD         3.0%           10%              55%             10
Ind Ave      2.3*             9*                42               NA  

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

MCD         46%             42%            0                 21           A++
Ind Ave      44                25             NA                9           NA
*over 50% of the companies in this industry don’t pay a dividend


            Note: MCD made great progress off its October 2008 low, quickly surpassing the downtrend off its August 2008 high (straight red line).  Long term, the stock is in an uptrend (blue lines).  Intermediate term, it is in an uptrend (purple lines).  The wiggly red line is the 50 day moving average.  The Dividend Growth and Aggressive Growth Portfolios own a 50% position in MCD, having Sold Half in early 2012.  The upper boundary of its Buy Value Range is $63; the lower boundary of its Sell Half Range is $99.


Peter Orzag--We are doing this to ourselves

Morning Journal--Capital on strike


   This Week’s Data

            August new home sales rose 7.9%, in line with expectations.


            Capital on strike (short):

            Merkel’s victory is not necessarily good news for the EU (medium):

            In EU, bank lending to consumers is down for the 16th month in a row (short):

            Update on household income (medium):



Ann Coulter on mass shootings and their causes (medium):

And Charles Krauthammer (medium):

Where is Obamacare now (medium):

More on the sorry state of our educational system (medium):

  International War Against Radical Islam

            The latest in the Benghazi hearings (medium):