One reminder---under our Buy/Sell
discipline, our Portfolios only Sell one half of their position as long as the
underlying fundamentals meet the criteria for inclusion in our Universe.
The Aggressive Growth Portfolio
Sold Half of its ECL holding in early
2013. The upper boundary of its BuyValueRange
is $48; the lower boundary of its current SellHalfRange
is $85
Oracle develops,
manufactures, markets, distributes and services
database and middleware software, applications software and hardware
systems (computer server and storage devices).
The company has grown earnings at an 18% rate over the last ten
years. It has paid a dividend for only
four years; and that dividend has grown from $.05 per share to $.30 in 2013. ORCL has
consistently earned a 25%+ return on equity.
This outstanding performance should continue as a result of:
(1) its dominant
industry position making it a prime beneficiary of above average industry
growth,
(2) above
average growth in software as service and cloud services,
(3)
acquisitions,
(4) highly
innovative R&D effort,
(5) share
buybacks.
Negatives:
(1) there are
substantial integration costs associated with the recent acquisition on Sun
Microsystems,
(2) its numerous
acquisitions has led to goodwill and intangible assets equaling 40% of total
assets; in addition, integrating these acquisitions are a distraction from its
core business,
(3) intense competition.
ORCL is
rated A++ by Value Line, has a 30% debt to equity ratio and its stock yields 0.7%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2009
ORCL 0.7% 13% 8%
3
Ind Ave 2.0 10* 38 NA
Debt/ EPS Down Net Value Line
Equity ROE
Since 2002 Margin Rating
ORCL 30% 28% 0 35% A++
Ind Ave 18 16 NA 16 NA
*almost no company in ORCL’s industry
pays a dividend
Chart
Note:
ORCL stock made good progress off its March
2009 low, quickly surpassing the downtrend off its August 2008 high (straight
red line) and the November 2008 trading high (green line). Long term the stock is in an uptrend (blue
lines). Intermediate term it is in a
trading range (purple lines). The wiggly
red line is the 50 day moving average.
The Aggressive Growth Portfolio owns a full position in ORCL. The stock is currently on the Aggressive
Growth Buy List; the lower boundary of its SellHalfRange
is $60.
The
FOMC wrapped up its latest meeting yesterday afternoon. The subsequently released statement
discussing policy did not vary that much from its predecessors: economy
continues to improve, inflation is under control, no change in the Fed Funds
rate, no tapering. However, it did
remove the ‘tightening financial conditions’ statement ("but the tightening of financial conditions
observed in recent months, if sustained, could slow the pace of improvement in
the economy and labor market..")suggesting less need for ease---hence, the
market sell off.
The
indices (DJIA 15618, S&P 1763) took a rest yesterday---which is not
surprising given its dramatically overbought condition. Both of the Averages are within their short
term uptrends (15174-20174, 1698-1852), their intermediate term uptrends
(15174-20174, 1615-2197) and long term uptrends (5015-17000, 728-1850).
Volume
was anemic, breadth weak. In a very
volatile session, the VIX finished up fractionally, remaining within its short
term trading range and intermediate term downtrend.
The
long Treasury traded off but closed within its short term trading range and
intermediate term downtrend and continues to build a reverse head and shoulders
pattern.
GLD
declined, but stayed within its very short term uptrend. However, it is also within a short and
intermediate term downtrends.
Bottom
line: the Averages had a rough day, though it was on pathetic
volume; plus they are quite overbought. So the pin action was not that
concerning. However, I repeat my caveat
that the Dow has reversed quickly following the prior two penetrations of
15550.
Barring a
dramatic reversal in the very short term, I view the upper boundaries of the
indices long term uptrends (17000/1850) as the most likely upside
objectives. My technical conclusion is
that the equities could be Bought for a short term trade, but only by the most
skilled of traders and not without the use of tight stops.
That said, my
focus is on our Sell Discipline: if one of our stocks trades into its SellHalfRange,
our Portfolios will act accordingly.
Market
performance following FOMC meetings (short):
Yesterday’s
US economic news was mixed: the ADP private
payroll report was very negative, the September CPI
came in as anticipated and mortgage and purchase applications were up. Investors reacted principally to the ADP
number and sold off slowly in early trading.
In
the early afternoon, the FOMC released the policy description statement
following the close of its meeting. It
wasn’t all that different from its predecessor: economy continues to improve,
inflation is under control, no change in the Fed Funds rate, no tapering. Although a prior comment on tightening
financial conditions (the September pre-tapering sell off) was absent---which
investors interpreted as mildly bearish (i.e. less need to ease). Hence, a more intense round of selling began
in the afternoon.
Nevertheless,
as I noted above, the decline was pretty calm and came from an overbought
condition. So I wouldn’t read too much
into the pin action. On the other hand,
as I discussed in last week’s Closing Bell, one way the transition from easy to
tight money can began is from the Market’s loss of faith that the Fed can
manage it smoothly; so it takes rates up on its own. But we have no idea what would prompt that
loss of faith. I speculated that it
could be the tightening from another central bank (our discussion focused on China). But it could just as easily be investor
exhaustion with the whole process---which is sort of reflective of the Market’s
behavior yesterday.
Or
maybe it comes from the only country printing money faster than the US
(medium):
I
am not trying to make a prediction here.
I am just saying that with monetary policy in Never Never Land, you just
don’t know what will drive the reversal (I’m also clearly talking my book).
The
latest from Paul Singer (medium and today’s must read):
Bottom
line: I remain confident in the Fair
Values generated by our Valuation Model---meaning that stocks are overvalued. And I think that the end of the current up
Market will most likely come from an unraveling of the Fed’s unsuccessful,
dangerously experimental monetary policy.
Hence,
I believe that the equities uptrend is living on borrowed time. The technicals suggest that there could be
one more last blow off; and some traders may want to play it. As a trader, I would keep my stops very tight. But I would prefer to sell calls against my
positions or buy puts on stocks that I wanted to own rather than taking an
outright position.
As an investor,
I would be sure that (1) I had cash reserves, (2) I took advantage of the gift
being given me [i.e. high prices] to sell anything that gives me pause and (3)
our Portfolios continued to follow their Sell Discipline.
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.
Investing for Survival---Behavioral Biases from Capital Spectator
Hubris.This
behavioral bias covers a lot of ground, everything from overconfidence (mistaking
a bull market for genius, for instance) to hindsight (deciding that yesterday’s
uncertainty was predictable after all) to self-attribution (attributing your
successes to superior brainpower and any failures to external forces beyond
your control). That doesn’t mean we should think of ourselves as dummies who
are hopelessly ignorant of the world around us. But there’s a fine line between
recognizing how markets price assets through time (and acting accordingly) and
deciding that we’re smarter than everyone else.
The
International Council of Shopping Centers reported monthly sales of major
retailers declined 0.4% versus the prior week but rose 2.2% versus the
comparable period a year ago; Redbook Research reported month to date retail
chain store sales up 3.6% on a year over year basis.
The
August Case Shiller home price index rose 0.9% versus expectations of up 0.7%.
I understand and
appreciate this author’s concern about how public money is being currently
handled and the impact of not investing in certain sectors of our economy to
insure future growth and prosperity.
However, being focused on deficits in no way negates his arguments for
more intelligent fiscal policy. Indeed
what Obamacare is teaching us is that there are some things the government
simply shouldn’t be wasting time and money on.
The only thing that prevents us from cutting deficits through the
elimination of foolish public policy and directing our resources to the areas
that need attention is the will of our elected representatives. This is not an economics issue, it is a
political issue.
The
indices (DJIA 15680, S&P 1771) had another great day. The Dow confirmed the break through the upper
boundary of its short term trading range.
It now re-sets to a short term uptrend which corresponds to its
intermediate term uptrend (15163-20163) and has come back into harmony with the
S&P. The S&P remains within its
short term uptrend (1696-1850).
Both
of the Averages are well within their intermediate term (15163-20163,
1614-2196) and long term uptrends (5015-17000, 728-1850).
Volume
was down; breadth was up only slightly.
The VIX rose, finishing within its short term trading range and
intermediate term downtrend.
The
long Treasury increased, closing within its short term trading range and
intermediate term downtrend. It
continues to build a reverse head and shoulders pattern.
GLD
declined but finished within its very short term uptrend. It remains within short and intermediate term
downtrends.
Bottom
line: the DJIA confirmed the break out
of its short term trading range, the re-set to an uptrend and the re-syncing
with the S&P. That suggests another
leg up in the Market is in the offing---though I mention one very short term
caveat: the last two times the Dow penetrated 15550, it reversed itself within
two to three days. So if traders want to get jiggy be careful for the next day
or two.
I mentioned two
potential purchase candidates if traders want to play the next move up: the
ishares global multi asset ETF (IYLD) and a more aggressive alternative, the
Russell 2000 growth ETF (IWO). I would
place very tight stops on any purchases.
The question is
now, what is the technical upside? The
obvious candidates are the upper boundaries of the three uptrends. My inclination is to look first at the
boundaries of the longest term uptrend because that is where the most
resistance exists. So the potential
upside for the DJIA is 17000 or 8% and the S&P 1850 or 4.5%. The S&P 1850 level gets some additional
strength in as much as it is also the upper boundary of its short term
uptrend. This limited upside is another
reason to be disciplined with stops.
All that said, as
far as our Portfolios go, if one of our stocks trades into its SellHalfRange,
our Portfolios will act accordingly.
We
received a number of US datapoints yesterday: September PPI was very tame, the
headline September retail sales number was weak, though ex autos and gas, it
was ahead of expectations, the August Case Shiller home price index continued
to rise, August business inventories and sales were up.
The only real
disappointment was the October consumer confidence reading which was well below
estimates. As you know, I am watching
the impact of our recent fiscal policy fiasco on both business and consumer
confidence as a tell on future economic activity. In this light, this number was really
bad. That said, this confidence has to
in turn impact the economy for my point to be valid. So we need to watch the October/November
datapoints closely.
In total, ex my
personal concern about sentiment, these stats were clearly upbeat and that
helped investor psychology yesterday.
Prices also got a helping hand from an announcement by IBM
that is was starting a major stock buy back.
Other than that,
investors were still mainly focused on the current FOMC meeting which will end
today. Euphoria continues as expectations
are for QEInfinity to last at least through the first quarter 2014. (***overnight, the Chinese bank rates are
streaking higher)
Bottom
line: 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.
However,
as I noted above, technically the Market has re-set to an uptrend. So the odds of another leg up are
sufficiently high, that I wouldn’t argue with a trader increasing his/her
Market exposure; although I would urge very tight stops on any new
positions. Other strategies worth
considering is (1) selling any losers or disappointments in your portfolio, (2)
writing call options against holdings that are near or making all time highs
and (3) for those far more sanguine, selling put options on companies that you
would love to own.
All that said, I
am not a trader, I love my cash and won’t be chasing stocks up; though I will
be checking call option pricing on those stocks that are near their SellHalfRange.
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.
One reminder---under our Buy/Sell
discipline, our Portfolios only Sell one half of their position as long as the
underlying fundamentals meet the criteria for inclusion in our Universe.
The Dividend Growth Portfolio
Sold Half of its Brown Forman holding in early 2012. The upper boundary of its current BuyValueRange
is $33; the lower boundary of its current SellHalfRange
is $58.
Home Depot
operates a chain of retail building supply/home improvement stores in the US,
Canada, Mexico
and China. The company has grown profits and dividends
at a 7-20% pace over the past 10 years earning 14%+ return on equity. HD experienced difficulties in the 2007-2008
economic downturn; however, the company took steps that have led to improvement
in its profitability. This trend should continue as a result of:
(1) altered its
in-store focus designed to maximize profitability and to make them simpler,
more customer friendly,
(2) the
company’s size and dominant market position in a highly fragmented industry
allows it to achieve economies of scale in purchasing products and to develop
exclusive brands with selective suppliers giving it a competitive advantage,
(3) improving
housing market,
(4) share
buybacks.
Negatives:
(1) it is in a
highly competitive industry,
(2) a high
unemployment rate will keep a damper on consumer discretionary spending,
(3) its
international exposure increases the risk of losses from currency fluctuations.
Home Depot is
rated A++ by Value Line, carries a 43% debt to equity ratio and its stock
yields 2.1%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2003
HD 2.1% 16% 46% 8
Ind Ave 1.4 13 37 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2003 Margin Rating
HD 43% 45% 3 7% A++
Ind Ave 34 26 NA 7 NA
Chart
Note:
HD stock made great progress off its March 2009 low, quickly surpassing the
downtrend off its July 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 an uptrend (purple lines). Short term it is in a trading range (brown
line). The wiggly blue line is on
balance volume. The Dividend Growth and
High Yield Portfolios own full positions.
The upper boundary of its BuyValueRange is $41; the lower boundary of
the SellHalfRange is $117.
For those who
missed the latest news on Obamacare.
Could this be part of a gift, that is, are we proving beyond a
reasonable doubt that government is not the answer?
The
indices (DJIA 15568, S&P 1762) had a calm but mixed day (Dow down, S&P
up). Still the DJIA finished above the
upper boundary of its short term trading range (14190-15550) for the second
day. Under our time and distance
discipline, a close above 15550 tonight will confirm the break. The S&P remains within its short term
uptrend (1696-1850).
Both of the
Averages are well within their intermediate term (15152-20152, 1614-2196) and
long term uptrends (4918-17000, 715-1800).
Volume
declined; breadth was poor. The VIX was
up, finishing within its short term trading range and intermediate term
downtrend. Our internal indicator is a
bit more positive. However, at the close
last night, only 63 stocks in our Universe of 149 stocks were making new highs.
The
long Treasury rose, staying within its short term trading range and
intermediate term downtrend. It
continues to build a reverse head and shoulders pattern.
GLD
was up, closing within a very short term uptrend. It is still within a short and intermediate
term downtrends.
Bottom
line: if the DJIA remains above 15550
thru the close today, it will have successfully challenged its short term
trading range. With the indices back in
sync, traders may want to increase their equity exposure on a trading
basis. A conservative way to trade this
would be the global multi asset ETF (IYLD).
A choice with a bit more beta would be the Russell 2000 growth ETF
(IWO).
Odds of a solid
year end Market performance (short):
As far as our
Portfolios go, if one of our stocks trades into its SellHalfRange,
our Portfolios will act accordingly.
Fundamental
Headlines
As
the pin action suggested, yesterday was a pretty ho hum day. We did get three US
economic datapoints: September
industrial production as well as capacity utilization were both ahead of
expectations, September pending home sales were a disappointment and the
October Dallas Fed business activity index was well less than anticipated
although the manufacturing sector remained strong. The most important of these was the
industrial production number; so I maintain my confidence in our forecast.
Investors
spent the rest of the day discussing the FOMC meeting which starts today. The central point, as you might expect, was
the timing of tapering. At the moment,
there seems to be a contest for who can forecast the latest date for its
implementation---which, of course, plays into the Market theme of all news, is
good news as long as the Fed keeps pumping.
Bottom
line: 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.
However,
as I noted above, technically the Market appears to be setting up for another
leg up---although to be clear, I am not a trader and won’t be chasing stocks
up.
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.
