Thursday, October 31, 2013

Stocks I am Selling or have already Sold

Stocks I am selling or have already sold

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 Buy Value Range is $48; the lower boundary of its current Sell Half Range is $85



Oracle (ORCL) 2013 Review

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 Sell Half Range is $60.



10/13

Morning Journal--More government overreach

  News on Stocks in Our Portfolios

Suncor EPS of C$0.95
Suncor (SU): Q3 EPS of C$0.95 vs. C$0.84 last year.

|7:08 AM|
ConocoPhillips beats by $0.02
ConocoPhillips (COP): Q3 EPS of $1.47 beats by $0.02.

|7:04 AM|
Murphy Oil misses by $0.12
Murphy Oil (MUR): Q3 EPS of $1.34 misses by $0.12.

|5:59 PM|
 
Economics

   This Week’s Data

            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.

            Weekly jobless claims fell 10,000 versus expectations of a 15,000 decline.

   Other

Politics

  Domestic

Martin Feldstein on Obamacare (medium):

            If you thought you had seen the low in the big government takeover of the economy.......................watch this (2 minute video and a must watch):

            The GOP embraces the welfare state (long):

 

The Morning Call---Probably more upside; but be careful

The Morning Call

10/31/13

The Market
           
    Technical

            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 Sell Half Range, our Portfolios will act accordingly.

            Market performance following FOMC meetings (short):

            Three facts about the current Market (medium):

            More on Market sentiment (short):

            Citi warn of Market disconnects (medium):

            More on Puerto Rican debt (medium):

            Slowdown in the emerging markets? (medium):

            Update on sentiment (short):

            Most over extended stocks (short):


    Fundamental
    
     Headlines

            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.

Wednesday, October 30, 2013

Investing for Survival

  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 latest from Bill Gross

Morning Journal--Citi's economic surprise index

News on Stocks in Our Portfolios
 
Automatic Data beats by $0.02, misses on revenue
·                                 Automatic Data (ADP): FQ1 EPS of $0.68 beats by $0.02.
·                                 Revenue of $2.8B misses by $0.01B.-

Praxair misses by $0.01
·                                 Praxair (PX): Q3 EPS of $1.51 misses by $0.01.
·                                 Revenue of $3.01B (+9% Y/Y) misses by $0.02B.
|6:06 AM|
Ecolab beats by $0.01, misses on revenues
·                                 Ecolab (ECL): Q3 EPS of $1.04 beats by $0.01.
·                                 Revenue of $3.48B (+15% Y/Y) misses by $0.06B.

Economics

   This Week’s Data

            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%.

            August business inventories increased 0.3%, in line; business sales were up 0.4%.

            The Conference Board’s October index of consumer confidence came in at 71.2 versus estimates of 75.0 and September’s reading of 79.2

                Weekly mortgage applications increased 6.4% while purchase applications were up 2.0%.

            The October ADP private payroll report showed a 130,000 rise in jobs versus consensus of 138,000 and September’s number of 166,000.

            The September consumer price index was up 0.2% in line; ex food and energy, it was up 0.1% versus forecasts of +0.2%.

   Other

            Citi’s economic surprise index (short and a must read):

            Europe’s deflation challenge (medium):

            And (medium):

            Update on the yen carry trade (short):

            China’s hidden debt (medium):

Politics

  Domestic

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.

            More DC hijinks (medium):

            Republicans may propose raising medicare costs on the wealthy (medium):

The Morning Call--We are having fun now

The Morning Call

10/30/13

The Market
           
    Technical

            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 Sell Half Range, our Portfolios will act accordingly.

            Breadth by market capitalization (short):

            The Market’s historical performance in November (short):

    Fundamental
    
     Headlines

            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 Sell Half Range.

            Update on this earning season (short):
            http://pragcap.com/q3-earnings-bleh

            The latest from Kyle Bass (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.

Tuesday, October 29, 2013

Stocks I am Selling or have already sold

Stocks I am selling or have already sold

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 Buy Value Range is $33; the lower boundary of its current Sell Half Range is $58.


Home Depot (HD) 2013 Review

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 Buy Value Range is $41; the lower boundary of the Sell Half Range is $117.




10/13

Morning Journal--What did Obama know and when did He know it?

News on Stocks in Our Portfolios


Cummins misses by $0.17, misses on revenues
·                                 Cummins (CMI): Q3 EPS of $1.94 misses by $0.17.
·                                 Revenue of $4.27B (+4% Y/Y) misses by $0.11B.


Occidental Petroleum beats by $0.09
·                                 Occidental Petroleum (OXY): Q3 EPS of $1.97 beats by $0.09.
·                                 Revenue of $6.45B beats by $0.06B.

 
Economics

   This Week’s Data

            September industrial production was up 0.6% versus expectations of +0.4%; capacity utilization came in at 78.3 versus estimates of 78.0.

            September pending home sales fell 5.6% from its August reading.

            The October Dallas Fed business activity index was reported at 3.6 versus forecasts of 9.0; however, manufacturing remained strong.

                September producer price index fell 0.1% versus consensus of +0.2%; ex food and energy, it was up 0.1%, in line.

            September retail sales declined 0.1% versus expectations of being flat; ex autos and gasoline, the number was up 0.4% versus estimates of +0.3%.

   Other

            Abenomics one year later (medium):

Politics

  Domestic

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 Morning Call--Dow getting close

The Morning Call

10/29/13

The Market
           
    Technical

            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 Sell Half Range, 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.

            The latest from John Hussman (medium):

            The odds of high returns continuing (short):

            Five signs that the Market is getting expensive (medium):

            A somewhat different take on Fed policy and the stock market (medium):

            From JP Morgan---the most extreme liquidity bubble (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.