The
indices (DJIA 16272, S&P 1854) traded up yesterday. The Dow finished with its short
((15330-16601) and intermediate (14696-16601) term trading ranges. The S&P closed above the upper boundary
of its short term trading range (1746-1848---I know I have been carrying this
as 1858. Apparently, sometime in the
past I transcribed the number and then subsequently didn’t catch my
error). That starts the clock on our
time and distance discipline which requires the S&P to remain above this
level until the close next Wednesday. As
you can see, even if the break is validated, it would leave the Averages out of
sync on their short term trends---which would leave the Market in a no man’s
land with respect to its short term trend.
Intermediate
term, the S&P is in an uptrend (1721-2501).
Both of the Averages are above their 50 day moving averages and are in
long term uptrends (5050-17400, 736-1910).
Volume
was flat; breadth improved. The VIX fell
leaving it within a short term trading range and an intermediate term downtrend
and below its 50 day moving average.
Finally, I checked out our internal indicator at yesterday’s close. In a Universe of 155 stocks, 43 finished either
at or above their all-time highs, 112 did not.
Clearly this is not supportive of an upside breakout.
The
long Treasury moved up, staying within its short term trading range (indeed it
is nearing the upper boundary of that range) and its intermediate term downtrend.
GLD
bounced back, finishing within a very short term uptrend but also a short and
intermediate term downtrend. This puppy
just doesn’t want to correct.
Bottom
line: the fourth time was a charm for
the S&P---it closing above its all-time high. There are a number of caveats to this action:
(1) volume was puny, (2) out internal indicator was hardly supportive, (3) if confirmed,
this will leave the Averages out of sync---which leaves the Market trendless
and (4) under our time and distance discipline, this challenge won’t be
confirmed until next Wednesday [time] or the S&P advances to 1885 [distance]
whichever comes first.
Meanwhile, there
is really not much to do save using any price strength that pushes one of our
stocks into its Sell Half Range and to act accordingly.
Another good
investing lesson from Todd Harrison (short):
We
finally got a data day that could be characterized as mixed (I can’t remember
the last time that I was able to make that characterization): January durable
orders were down less than anticipated, though December orders were revised
lower; the February Kansas City
manufacturing index came in better than expected; but weekly jobless claims
were above estimates. I don’t want to
get too jiggy about a single mixed day, but at least we finally have some positive
datapoints.
In
other US news, Yellen testified before the senate yesterday, but little new
came from it. Two minor points: (1) she
did acknowledge that the economic data has been a bit weaker than expected but attributed
much of it to the weather---hence, expect no near term action from the Fed
stemming from the economy and (2) she gave no further guidance on the expected
changes in forward guidance.
Overseas,
the Chinese yuan continued to push lower---a major negative for the carry trade---and
the tension in Ukraine remained at a high pitch. On the latter point, I am not so much worried
about what occurs internally or any spillover economic impact on the rest of
the world (Ukraine is small, poor and its debt is not widely held) as I am
about the risks of some kind of international showdown between the US and
Russia. To be clear, I don’t think that there
will be shots fired; no what worries me is that Obama and/or Kerry draws
another line in the sand; and Putin just doesn’t push back but creates a crisis
from which Obama/Kerry have no choice but to back down and the US loses face
big time. I don’t think that would be
good for investor morale.
Bottom line: the
S&P unquestionably took out its old high, although not dramatically so. On the one hand, there were a number of non-supportive
technical factors which I listed above.
On the other hand, the advance was in the face of rising tensions around
Ukraine and Yellen sticking with tapering.
So at the moment, I have every reason to believe that the current
challenge has as strong a likelihood of being confirmed as any other. The one thing that has to happen is that
breadth has to catch up to price; but again there is no reason at the moment to
assume that it won’t.
If the Averages
do take out their highs, then the next target is the upper boundaries of their long
term uptrends. However, those levels are
so close that I don’t see a lot of reward for spending cash reserves; and when I
compare it to the downside risk due to significant overvaluation, there is no
incentive for me to get off the sidelines.
I
can’t emphasize strongly enough that I believe that the key investment strategy
today is to take advantage of the current high prices to sell any stock that
has been a disappointment or no longer fits your investment criteria and to
trim the holding of any stock that has doubled or more in price.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
It
is a cautionary note not to chase a rally if it occurs.
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.
Canadian
National Railway operates Canada’s
largest railroad system spanning the East/West width of the country plus a
North/South axis that runs through the US mid West to the Gulf of Mexico.
The railroad has grown its profits and dividends at a 16-20% pace over
the past 10 years earning a 14-18%+ return on equity. Going forward, earnings should increase at an
above average pace as result of:
(1) volume
growth and improved pricing that accompanies [a] the new Prince Rupert
Intermodal Terminal, a new container terminal that provides the fastest and
most cost effective route between Asia and the interior of North America, [b]
increased resource demand particularly in thermal coal and grains and [c]
rising demand for metals and fertilizer,
(2) aggressive
productivity improvement such as the SmartYard technology, precision
engineering, shop consolidation, train length, car velocity, fuel productivity,
extended sidings and yard integration,
(3) cost control
measures.
(4) an ongoing share repurchase
program.
Negatives:
(1) intense
competition,
(2) the company
is unionized and therefore subject to strikes, work stoppages, etc.
(3) it is
subject to the volatility in currency and fuel prices.
The company is
rated A by Value Line, has a debt/equity ratio of approximately 34% and its
stock yields 1.5%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2004
CNI 1.5% 14% 27% 9
Ind Ave 1.8 13 27 NA
Debt/ EPS Down
Net Value Line
Equity ROE Since 2004 Margin Rating
CNI 34% 22% 1 25% A
Ind Ave 43 17 NA 16 NA
Chart
Note:
CNI stock made great progress off its March 2009 low, quickly surpassing the
downtrend off its May 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 an uptrend (purple lines). The wiggly red line is the 50 day moving
average. The Dividend Growth Portfolio
owns a 75% position in CNI---having Sold Half in mid-2011 and benefitted from
subsequent higher prices. The upper
boundary of its Buy Value Range is $31; the lower boundary of its Sell Half
Range is $62.
Yesterday
the indices (DJIA 16198, S&P 1845) were quiet and fractionally up, closing
within their short term trading ranges (15330-16601, 1746-1858), though the
S&P challenged its upper boundary for the third day in a row and failed. The Dow closed within its intermediate term
trading range (14696-16601) and closed above its 50 day moving average, while
the S&P is in an intermediate term uptrend (1721-2501) and above its 50 day
moving average. Both are in long term
uptrends (5050-17400, 736-1910).
Volume
was flat; breadth recovered slightly.
The VIX was up 5%---a little unusual for a slow day. It finished within its short term trading
range and its intermediate term downtrend.
The
long Treasury rose, staying within a short term trading range and an
intermediate term downtrend. With this
positive close, the head and shoulders formation has been negated.
GLD
fell noticeably---one of the few times in the current very short term
uptrend. Perhaps this is the beginning
of a test of this trend; something that I have been waiting for. It remains in a short and intermediate term
downtrend and above its 50 day moving average.
Bottom
line: the S&P made a third challenge
on its all-time high in as many days and failed again. Nevertheless, the subsequent sell off was not
indicative of major failure; indeed, given the magnitude of the Markets
overbought condition, it is surprising that prices haven’t backed off more than
they have. In short, the bulls are alive
and well.
So I remain on
watch. If the past three days are a
prelude to a more furious/successful assault on 1858, then the next stop is
likely the upper boundaries of the Averages long term uptrends. If they are forming a triple top, then the
lower boundary of the S&P’s intermediate term uptrend becomes the focus.
Meanwhile, we
have a Market in a trading range; so there is really not much to do save using
any price strength that pushes one of our stocks into its Sell Half Range and
to act accordingly.
We
got two housing related indicators yesterday: weekly mortgage and purchase
applications were down while January new home sales were surprisingly
strong. Bear in mind that for seasonal
reasons January is not a good month to judge the housing market and that new
home sales are roughly one tenth of existing home sales. However, good news is still good news
whatever its form; so I don’t want to discount this number too much.
Overseas,
there was a single data point worth reporting---French unemployment hit an all-time
high.
In
politics, (1) the risk of additional violence in Ukraine is growing and (2) in
the US, the house is working on a tax reform bill which has already been
declared DOA by much of the ruling class and the media.
Bottom line: I
am not sure what to make of investor response to yesterday’s news flow. The biggest item was the very positive January
new home sales. Initially, stocks
rallied, suggesting that the goldilocks scenario was in play (i.e. the perfect
outcome, balancing economic progress, the impact of weather and Fed
policy). However, the uptrend didn’t
last long and, most important, the S&P couldn’t hold above its all-time
high which at least raises questions about the depth of confidence in the
goldilocks scenario. On the other hand,
as I said above, the Market is extremely overbought, so some backing and
filling should be expected. In addition,
Yellen is testifying before the senate today and investors may have wanted to
be cautious ahead of that event.
All that said, equity
valuations are near historic highs on numerous measures irrespective of even
the most favorable outcome of economic growth, the impact of weather and Fed
policy.
I
can’t emphasize strongly enough that I believe that the key investment strategy
today is to take advantage of the current high prices to sell any stock that
has been a disappointment or no longer fits your investment criteria and to
trim the holding of any stock that has doubled or more in price.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
James
Montier on the Case Shiller CAPE ratio (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 Investing For Survival is to help other investors build wealth and
benefit from the investing lessons he learned the hard way.
3.
Synch your time horizon with your risk profile.
It’s critical to know why you’re entering a
trade and equally important to understand how long you intend to hold the risk.
While these are often mutually exclusive thoughts, they are interdependent when
it comes to the execution of your strategy.
4. Play within your zone.
There are different strokes for different folks
and your trading style should be an extension of your personality. If
you’re risk-averse, you should play smaller in size and tighter on price
parameters. If you’re more aggressive, you can loosen your grip as long as you
remember the next rule
·Expeditors International of
Washington, Inc. (EXPD): EPS of $0.41misses by $0.06.
·Revenue of $1.63B (+6.5%
Y/Y)beats by $50M.
Economics
This Week’s Data
The
International Council of Shopping Centers reported weekly sales of major
retailers down 0.6% versus the prior week but up 1.4% on a year over year
basis; Redbook Research reported month to date retail chain store sales up 2.9%
versus the comparable period a month ago and up 2.9% versus the similar
timeframe last year.
The
November Case Shiller home price index rose 0.8% versus expectations of up
0.6%.
The
indices (DJIA 16179, S&P 1845) had a dull day remaining within their short
term trading ranges (15330-16601, 1746-1858), though the S&P challenged its
upper boundary for the second day in a row and failed The Dow closed within its intermediate term
trading range (14696-16601) and closed above its 50 day moving average, while
the S&P is in an intermediate term uptrend (1719-2499) and above its 50 day
moving average. Both are in long term
uptrends (5050-17400, 736-1910).
Volume
was off considerably; breadth deteriorated.
The VIX fell, somewhat surprisingly for a down price day. It closed within its short term trading range
and intermediate term downtrend and below its 50 day moving average.
The
long Treasury rose, leaving it within a short term trading range and an
intermediate term downtrend. Its move up
was sufficient that a close at current levels today will invalidate the head
and shoulders formation.
GLD
increased again, finishing within a very short term uptrend but also in a short
and intermediate term downtrend.
Unfortunately, I am still waiting for a correction before considering
nibbling again.
Bottom
line: the S&P made a second
challenge on its all-time high in as many days and failed again; though
yesterday’s volume much less impressive than Monday’s. On the other hand, the news continues
bleak---so a two point decline on the S&P should be viewed as a moral
victory for the bulls.
I don’t think
that the pin action gave us any hint on the odds of a successful challenge on
the Averages all-time highs. So I remain
on watch. If the past two days are a prelude to a more furious/successful assault
on 1858, then the next stop is likely the upper boundaries of the Averages long
term uptrends. If they are forming a
triple top, then the lower boundary of the S&P’s intermediate term uptrend
becomes the focus.
Meanwhile, we
have a Market in a trading range; so there is really not much to do save using
any price strength that pushes one of our stocks into its Sell Half Range and
to act accordingly.
The
US economic news remains concerning: weekly retail sales were mixed, February
consumer confidence was below expectations and the Richmond Fed’s February
manufacturing index was negative. There
was one positive report---the November Case Shiller home price index rose
0.8%---the operative word being ‘November’.
Overseas,
Chinese corporate debt hit record highs while Ukraine is suffering a run on its
banking system---neither apt to brighten the global economic outlook.
China’s
corporate debt hits all time high (short):
Bottom line:
there is nothing inspiring by the economic data flow save that (1) its
disappointing nature lifts investors’ hopes that the Fed will keep the monetary
spigots open for as far as the eye can see.
That may occur although that is not what the Fed stated clearly in its
last FOMC minutes, or (2) it can be totally discounted as weather related which
may be the case. But that is a risky
bet, in my opinion.
Equity
valuations are near historic highs on numerous measures. They can, of course, become more overvalued. Indeed, that is exactly what has occurred
over the last year. However, like
Russian roulette, that is a game I can choose not to play.
I
can’t emphasize strongly enough that I believe that the key investment strategy
today is to take advantage of the current high prices to sell any stock that
has been a disappointment or no longer fits your investment criteria and to
trim the holding of any stock that has doubled or more in price.
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.
Kinder Morgan
Energy Partners is the US largest master limited partnership. It owns and operates petroleum product
pipelines in the US. It owns 54,000 miles
of pipelines and 180 terminals used in transporting gasoline, jet fuel, diesel
fuel, natural gas liquids, coal and carbon dioxide. This Master Limited Partnership has grown
cash flow (the basis for dividend payments) and dividends at an 8-10% rate over
the past 10 years earning approximately 15-20% return on partnership
capital. Future growth will come from:
(1) its focus on
fee based and diversified businesses that allow the company to spread its risks
and provide stable and steadily growing earnings stream,
(2) the growth
in natural gas shale plays,
(3) KMP’s continued aggressive investment in new
organic projects that will enhance the company’s long term growth prospects,
(4) an active
acquisition program [latest---Tennessee Gas Pipeline, El Paso Natural Gas].
Negatives:
(1) it is vulnerable to the volatility in crude
oil and natural gas prices,
(2) it huge
capital expenditure budget could impact the growth of distributions.
KMP is rated B+ by Value Line, carries a 51% debt
to equity ratio, is expected to increase its dividend between 6-7% annually in
the future which when combined with a 6.8% dividend yield, offers an attractive
total return
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio* Since 2004
KMP 6.8% 7% 92% 10
Ind Ave 6.2 7 78 NA
Debt/ EPS Down Net
Value Line
Equity ROE Since 2004 Margin Rating
KMP 51% 17% 3 21% B+
Ind Ave 52
16 NA 15 NA
*this ratio is the dividend to
cash flow
Chart
KMP
stock made great initial progress off its March 2003 low, quickly surpassing
the downtrend off its May 2008 high (straight red line) and the November 2008
trading high (green line). KMP stock
broke below its long term uptrend in early 2013 and also traded below the lower
boundary of its Buy Value Range. In the
latter case, it was Removed from the High Yield Portfolio’s Buy List. It is currently trading in an intermediate
term trading range, though the stock got whacked hard yesterday as a result of
a negative article in Barron’s. The
critical price at the moment is the Stop Loss Price which is $70. As long as KMP remains above this level, the
High Yield Portfolio will continue to Hold it.
A trade below that level will result in the elimination of this position.
