Saturday, January 31, 2015

The Closing Bell

The Closing Bell


Statistical Summary

   Current Economic Forecast


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

            2014 estimates

                        Real Growth in Gross Domestic Product                   +1.5-+2.5
                        Inflation (revised)                                                          1.5-2.5
                        Corporate Profits                                                            5-10%

            2015 estimates

Real Growth in Gross Domestic Product                   +2.0-+3.0
                        Inflation (revised)                                                          1.5-2.5
                        Corporate Profits                                                            5-10%

   Current Market Forecast
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 16502-19278
Intermediate Term Uptrend                      16536-21691
Long Term Uptrend                                  5369-18960
                   2014    Year End Fair Value                                   11800-12000                                          
                        2015    Year End Fair Value                                   12200-12400

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     1915-2296

                                    Intermediate Term Uptrend                       1742-2456
                                    Long Term Uptrend                                    783-2083
                        2014   Year End Fair Value                                     1470-1490

                        2015   Year End Fair Value                                      1515-1535        

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          49%
            High Yield Portfolio                                     54%
            Aggressive Growth Portfolio                        53%

The economy is a modest positive for Your Money.   The US economic data this week was mixed and weighed ever so slightly to the negative side: positives---December new home sales, the November Case Shiller home price index, January Chicago PMI, January consumer confidence, weekly jobless claims; negatives---the advanced estimate of fourth quarter GDP, weekly mortgage and purchase applications, December pending home sales, December durable goods orders and the January Dallas Fed manufacturing index; neutral---weekly retail sales, January consumer sentiment, the January Richmond Fed manufacturing index and the January flash services PMI.  

As you can see, the stats were very evenly divided.  However, the primary indicators were negative: new home starts being the positive and December durable goods and fourth quarter GDP estimate, the negatives.  The good news is that the disappointing earnings/guidance announcements mellowed out a bit this week, ending with a balance of disappointing and encouraging reports/guidance from the largest players in the major industries.  Nevertheless, 2015 S&P earnings estimates have gone from plus mid-single digits to flat; and that keeps me worried that this trend could be a warning of rough macroeconomic data to come.

Another important item---the FOMC met.  In its subsequent press release, it (1) left the wording of its policy unchanged, (2) upgraded its assessment of the economy but (3)  included international economic concerns for the first time on its list of worries.  As you know, this has been on our list of risks for months.  Indeed, it is numero uno.  The Fed isn’t quite there yet; but it makes official that the current global economic weakness could impact the US.

The other noteworthy news was the triumph of the Syriza (anti-austerity) party in the Greek elections.  While government representatives initially did the usual mewing about cooperating with the EU bankers, (1) the first policy actions were to dismantle austerity measures imposed during prior debt refinancing and (2) as the week wore on, its rhetoric became more confrontational.  We can’t know how much of that is posturing for upcoming debt negotiations.  But it appears that those talks will be a good deal rougher than in prior instances and it could mean that the odds of a Greek default and/or exit from the eurozone have increased.

All that said, nothing has yet impacted US macroeconomic data.    Hence for the moment, our outlook remains the same but with a bit less conviction (flashing yellow light) and the primary risk (the spillover of a global economic slowdown) remains just so.

Our forecast:

 ‘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, the weakening in the global economic outlook, 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.  Oil took another leg down this week (though it bounced hard on Friday).  Still we have little indication that it is impacting our economy save specific problems one would expect to occur in the oil and oil service industries.

Nevertheless, I remain concerned about the magnitude of subprime debt from the oil industry on bank balance sheets and the likelihood of a default.  Here too there is nothing substantial; just speculation about the potential danger.  That said until we can definitely say that lower oil prices are bad for the economy overall, I am leaving this factor as a positive. 

       The negatives:

(1)   a vulnerable global banking system.  We actually made it a whole week without news of bankster allegations, misdeeds and fines.  However, the risks remain of [a] too much exposure to derivatives and the carry trade, [b] a default in the oil patch, [c] disruptions in the EU financial system most immediately from the inability of the new Greek government to come to terms with the ECB/IMF over the austerity program imposed under existing loans and a rescheduling {read haircuts} of future debt repayments.  To be sure, the new government has demurred over cooperating with the banking powers that be; however, they have already began reversing some austerity measures and made it clear that, if forced, it will withdraw from the Eurozone and default on {some of} its debts.

 ‘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.  The Senate passed the Keystone Pipeline Bill Thursday night.  It will now go to a conference committee to iron out the differences with the house version.  The point though is that Obama is likely to veto it and that could raise the entertainment level out of DC.  In addition, it is a clear signal that there will be no real budget, tax and regulatory reform; and hence, the US economy will likely continue to struggle to regain its past rate of secular growth.

(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. 

Little new this week other than Singapore and Russia joining the QE parade.  I believe that makes approximately 31 countries that are now firmly pursuing money pumping, currency depreciating ‘beggar thy neighbor’ policies including most of the largest central banks [US, EU and Japan].  Of course, the Fed currently looks like a paragon of virtue in this motley crew since has given up the ‘money pumping’ and is ‘only’ holding interest rates at an artificially low level.  However, that doesn’t alter the fact that save for QEI, its ‘money for nothing’ policy did little for the US economy. And that judgment is bolstered by the reality that QE has also done nothing for any of the other participants either.

                              And this stunner from Philly Fed chief Plosser (short):

(4)   geopolitical risks.  Violence in Ukraine continued this week but at a reduced level. The point here being that this situation contains potentially explosive elements that could suddenly have negative global geopolitical implications.

(5)    economic difficulties, overly indebted sovereigns and overleveraged banks in Europe and around the globe. This week S&P lowered Russia’s credit rating to junk stats,  Chinese industrial profits declined and the government dropped their 2015 GDP growth expectations and both Germany and the EU reported that their respective CPI’s fell [that is deflation, folks].  In short, the global economy continues to show signs of weakening, massive QE notwithstanding.

Moreover, [a] as I noted above, oil prices fell further keeping alive worries regarding their ultimate impact on the global economy and [b] subsequent statements and actions by the winning party in the Greek elections suggest that these guys mean business: [a] unwinding austerity measures imposed as conditions on past loans and [b] making it clear that Greece can’t meet its current debt obligations.  This situation may ultimately prove a tempest in a teapot; but it is a risk that can’t be ignored.

Who has the exposure to Greek debt (medium)?

My point in all this is that the aggregate risks incorporated in a faltering global economy I believe is the biggest threat to our own economic health. 

Bottom line:  the US economic news this week was generally supportive of our forecast; though the lower than anticipated GDP number is a little concerning (what, what?  I thought declining oil prices were an unmitigated positive for the economy).  The string of disappointing corporate earnings reports plateaued this week; but I still view it as a potential threat to our outlook.  The question remains, is this the first sign of negative fallout from a slowing world economy?  I am not going to say yes; but I am getting close. 

The QE cheerleaders received more good news this week from Singapore and Russia; though I continue to see little reason for all the giddiness---economically speaking (I do understand more booze in the punchbowl).  Indeed, the more QE quest goes on, the more likely it is for disruptions in global trade and/or the financial system.

Given the initial anti-austerity moves by the new Greek government, I don’t think that we can dismiss their rhetoric out of hand as political posturing.   That doesn’t mean that that is not.  I am just saying the current consensus thinking that the Europeans will somehow muddle through may not be as pat a position as might have seemed last week.

This week’s data:

(1)                                  housing: December new home sales were quite strong but December impending home sales were down; the November Case Shiller home price index was up more than expected; weekly mortgage and purchase applications were down,

(2)                                  consumer:  weekly jobless fell more than forecast; weekly retail sales were mixed; January consumer confidence was much better than estimates while consumer sentiment was flat,

(3)                                  industry: the January Dallas Fed manufacturing index was much worse than anticipated as was December durable goods orders; the January Richmond Fed manufacturing index was slightly ahead of consensus, likewise the January flash services PMI, the January Chicago PMI was above forecast,

(4)                                  macroeconomic: the advance estimate for fourth quarter GDP was very disappointing.

The Market-Disciplined Investing

            The indices (DJIA 17164, S&P 1994) had another highly volatile week, finishing firmly to the downside.  Both traded below their 50 day moving averages.  The Dow took out its mid-December low twice, ending below it.  Further both are approaching their 200 day moving averages (17085, 1974).  Nonetheless, they managed to remain well within their uptrends across all timeframes: short term (16502-19278, 1915-2296), intermediate term (16536-21691, 1742-2456) and long term (5369-18860, 783-2083). 

Yesterday carried a bit more significance, technically speaking, than just a lousy day at the office.  It was the last trading day of January which means the January barometer has now been set; and it was negative.  It joins the Santa Claus rally as an ill wind blowing for 2015 stock market performance.  Here are the stats from Stock Traders’ Almanac on the effectiveness of the January barometer predicting full year pin action:

Volume jumped on Friday; breadth was terrible. The VIX advanced 12%, closing above its 50 day moving average and within its short term trading range and intermediate term downtrend---although it is quite close to violating the upper boundaries of both of these trends. 

The long Treasury soared, finishing within the uptrends across all timeframes and well over its 50 day moving average.  This chart is telling us that either some serious shit lies ahead (recession/geopolitical event) or TLT is getting way overextended.

GLD made a big comeback.  While it could not regain the lower boundary of its former very short term uptrend, it did remain above the upper boundary of its short term uptrend, within its intermediate term trading range and well above its 50 day moving average.  GLD’s volatility is driving me nuts; but our Portfolios will add to their position on the open Monday.

Bottom line: there are times the Market makes it easy to follow its actions and times when it gets too complex.  That is where we are now.  Whether it presages a major move one way or the other---or not---this is a time for only the most nimble and talented trader. I am neither.  So I am sticking with watching the major trends and staying on the sidelines.

On the other hand, the message from bonds and GLD is a lot clearer.  Bonds are yelling that something is amiss.  I can guess what it might be; but you never know from which direction you are going to get hit.  In any case, our ETF Portfolio owns a full position in bonds so I am loving the pin action.  GLD’s chart is not quite as well defined as TLT; but it has overcome a number of technical hurdles and it could very well be sending the same message as the bond Market.  At the moment, our Portfolios have a small position in gold and it will get bigger on Monday.  However, I want to emphasize that GLD’s volatility scares me so further steps will be done with caution.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (17164) finished this week about 43.8% above Fair Value (11933) while the S&P (1994) closed 34.4% overvalued (1483).  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, Japan and China.

This week’s data/events have not improved the overall investment picture.  While the reported economic data overall was mixed, the big shortfall in fourth quarter GDP does not inspire confidence.  On the other hand, it perfectly fits our description of the US economy: sluggish improvement.  

The lousy earnings reports among major companies in key industries continued though admittedly this week witnessed more balance between disappointing and upbeat announcements. Nevertheless, despite this less negative flow of profit reports and a positive tilt to the number of earnings ‘beats’, the Market’s consensus 2015 S&P earnings forecast has gone from up mid-single digits to zero---illustrating I believe that it is the big boys that are getting hurt.   The question is, are these earnings misses due principally to a strong dollar---companies and investors alike are clinging to this as the proximate cause---or do they also include lower revenues due to a poor global economic environment.  The answer is likely to weigh heavily on investor psychology.

Overseas, it was business as usual, which is to say, more dismal economic stats.  On the economic/political front, the new Greek government made its first policy moves which was to reverse austerity measures imposed on the prior government by the EU bankers---a good indication that any solution to that country’s debt problem will not be under the old formula of new loans to pay off old loans and more austerity.  In addition, the new Greek PM penned an open letter to the Germans.  (I linked to it in Friday’s Morning Call; and if you didn’t read it, you should).  In it, he basically said ‘no mas’ to austerity.  All this suggests a turbulent negotiations process to deal with upcoming Greek debt payments---which is not to say, a mutually agreeable outcome can’t be worked out.   But the process may cause some investor heartburn.

QE received another boost this week.  This time from Singapore and Russia which joined the others on the yellow brick road.  However, the most significant item was the mention of concern about international developments in the latest FOMC statement.  I suggest that the Fed making official its worries about global growth a week after numerous central banks dogpiled onto QE is not an endorsement of QE success.  My guess is that these guys are scared shitless that (1) competitive devaluations do what they have always done and that is disrupt international commerce and (2) that recession hits the US before it ever has the chance to raise interest rates, leaving it with almost no policy levers to soften its blow.

Bill Gross on lousy fed policy and likelihood of low market returns (medium) new

Does QE breed stability or instability? (medium):

Bottom line: the assumptions in our Economic Model haven’t changed though the yellow light is flashing.  In addition, the risk to our global ‘muddle through’ scenario is  greater than ever as a result of the continuing decline in oil prices, disruptions in the global monetary system and a potential Greek default/exit from the EU.

The assumptions in our Valuation Model have not changed either.  I remain confident in the Fair Values calculated---meaning that stocks are overvalued.  As a result, our Portfolios maintain their above average cash position.  Any move to higher levels would encourage more trimming of their equity positions.

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.

DJIA                                                   S&P

Current 2015 Year End Fair Value*              12300                                                  1525
Fair Value as of 1/31/15                                  11933                                                  1483
Close this week                                               17164                                                  1994

Over Valuation vs. 1/31 Close
              5% overvalued                                12529                                                    1557
            10% overvalued                                13126                                                   1631 
            15% overvalued                                13722                                                    1705
            20% overvalued                                14319                                                    1779   
            25% overvalued                                  14916                                                  1853   
            30% overvalued                                  15512                                                  1927
            35% overvalued                                  16109                                                  2002
            40% overvalued                                  16706                                                  2076
            45%overvalued                                   17302                                                  2150
            50%overvalued                                   17899                                                  2224

Under Valuation vs. 1/31 Close
            5% undervalued                             11336                                                      1408
10%undervalued                            10739                                                       1334   
15%undervalued                            10143                                                  1260

* 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.

Friday, January 30, 2015

The Morning Call---Yellen crawfishes again

The Morning Call


The Market

The indices (DJIA 17416, S&P 2021) snapped back sharply yesterday, remaining within uptrends across all timeframes: short term (16493-19269, 1914-2895), intermediate term (16507-21662, 1742-2456) and long term (5369-18860, 783-2083).  The Dow recovered nicely back above its mid-December support low (17288).

            Volume fell; breadth improved.  The VIX dropped 8%, finishing within a short term trading range, an intermediate term downtrend and above its 50 day moving average. 

            What the Dow Transports are telling us (short):

            The long Treasury declined, closing for the second day back above the lower boundary of that very short term uptrend which it broke Tuesday.  I am waiting another day before re-setting that trend call.  TLT remained above the upper boundaries of its short and intermediate term uptrends and its 50 day moving average.  The bond guys continue to tell us that deflation or some negative geopolitical event are in the offing.

            GLD really got whacked, ending below the lower boundary of its very short term uptrend; a close there today will confirm the break.  It remains above the upper boundary its short term uptrend, within an intermediate term trading range and above its 50 day moving average.  Clearly, GLD’s consolidation has turned a lot more volatile than TLT’s, which is not all that surprising.  Its volatility is the reason our Portfolios initial position was small---allowing the room to average down, which our Portfolios will do, assuming GLD holds the 50 day moving average and the short term uptrend.

Bottom line:  yesterday’s bounce in prices is not unexpected given the shellacking stocks took in the prior two days.  It was clearly a positive that the Dow rebounded off its mid-December low.  The question will be how it and the S&P handle resistance.

At this point, GLD’s chart remains solid enough that my thoughts are to Add to this holding, assuming it doesn’t self-destruct as it did late last year.

            The latest from Stock Traders’ Almanac (short):


            Two economic stats were released yesterday: weekly jobless claims were much lower than anticipated while pending home sales were discouraging.  This mixed performance fits with the week’s marginally upbeat data flow and our forecast.

            It was a generally positive day for earnings announcements from market leaders of major industries.  That helps to change the trend from down to erratic---which relatively is a plus.  But it doesn’t dispel my concern that it is a sign that global economic weakness is starting to impact our economy.

            Another plus on the day was an apparent re-thinking of the narrative on Wednesday’s FOMC message from ‘the Fed is worried about international concerns’ (read recession) to ‘the Fed assures us that it will be patient (read no rate increases in sight) in spite of its upgraded analysis of the economy’.  Of course, this flip flop was helped along by some dovish comments by Yellen to congressional leaders.  (Ever notice how the Fed always assuages the speculators when they ‘misinterpret’ Fed language?) 

Yesterday’s narrative was yet another chapter in the never ending effort to tip toe through the tulips.  And while it may have generated some positive vides in the pin action, it doesn’t alter the fact that the Fed is in an increasingly untenable position (justifying ‘money for nothing’ when the economy has repeated surpassed its employment objectives) and is undoubtedly scared as shit that a move to right the economy (raise interest rates) will destroy the Markets---juiced up as they are by speculators, hedge funds and carry traders using free money to create asset bubbles.

            David Stockman on the futility of QE (medium and today’s must read):

            The futility of EU QE (medium):

Across the pond, Germany reported December CPI down 0.5%---providing yet another piece of evidence of global economic weakness.

            ***overnight, Eurozone January CPI fell 0.6%.  Does this mean more EU QE?

            In addition, Russia joined the easy money parade, cutting key interest rates.

            In addition, the pissing contest between Greece and the EU ramped up another notch as (1) Greek leaders are questioning additional economic sanctions being planned for Russia and the (2) Russian finance minister volunteered that his country would be open to providing economic assistance to Greece---rumors of Russia’s demise may be true but they are not likely to go down without a fight.

Greece seeks financial aid from Russia (short):

            ***overnight, the EU ‘unanimously’ agreed to extend Russian sanctions but did add to them.  It apparently didn’t tell the Greeks that it was unanimous.

            An open letter from Syriza to the Germans (medium and an absolute must read):

Bottom line: yesterday’s rebound notwithstanding, (1) the Fed confessing that it is worried about the global economy in the face of massive central bank easing remains the principal takeaway from the FOMC statement, (2) the recent ‘less bad’ trend in the earnings of US corporate giants doesn’t change the fact that 2015 profit estimates are now at zero growth and (3) the apparent conviction that the Greek government will get muscled into another trade off that keeps it in the Eurozone and avoids haircuts for the EU banks doesn’t mean that it will be so. 

Of course, none of the above means that the QE fever is dead or dying or that investors won’t choose to remain oblivious to the growing economic risks.  However, I am not smart enough to play this current game of stock market roulette.

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.



      Thoughts on Investing from Jeremy Grantham

Eight lessons from investing.

1) Inside advice, legal in those days, from friends in the company is a LEARNED: particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm;
2) Always diversify, particularly for your pension fund;
3) Fraud, near-fraud, or colossal incompetence can always strike;
4) Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index;
5) Investing when young will start your brain turning on things financial;
6) Painful errors teach you more than success does;
7) Luck helps; and finally,
8) Have a convenient mother to be the fall guy.
      News on Stocks in Our Portfolios
·         AbbVie (NYSE:ABBV): Q4 EPS of $0.89 beats by $0.03.
·         Revenue of $5.45B (+6.7% Y/Y) beats by $90M.

Altria (NYSE:MO): Q4 EPS of $0.66 misses by $0.01.
·         C.R. Bard (NYSE:BCR) Q4 results ($M): Net Sales: 867.2 (+9.6%); Vascular: 244.6 (+19.5%); Urology: 217.8 (+7.6%); Oncology: 237.5 (+7.8%); Surgical Specialties: 145.0 (+3.1%); Other: 22.3 (-3.9%).
·         Net Income: 134.2 (-79.9%); EPS: 1.72 (-79.2%); Non-GAAP EPS: 2.29 (+40.5%).


   This Week’s Data

            December pending home sales fell 3.7% versus expectations of a 0.9% increase.

                Revised fourth quarter GDP came in up 2.6% (annualized rate) versus estimates of up 3.2% and the initial report of 5.0%.





            A pessimist’s outlook on Greece (medium):

Thursday, January 29, 2015

The Morning Call--The Fed sneaks in a surprise

The Morning Call


The Market

The indices (DJIA 17191, S&P 2002) took in the chops again yesterday but remained within uptrends across all timeframes: short term (16464-19236, 1911-2892), intermediate term (16493-21648, 1737-2451) and long term (5369-18860, 783-2083).  The Dow finished below its most recent support level (17288), although the S&P is still above its comparable level.

            Volume fell; breadth was lousy, again.  The VIX climbed 18% finishing within a short term trading range, an intermediate term downtrend and above its 50 day moving average. 

The latest from TraderFeed (short and a must read):

            The long Treasury jumped, closing above the lower boundary of its very short term uptrend which it broke Tuesday.  I am going to retreat on that confirmed break and await another day or two before re-setting a trend call.  It remained within its uptrends across all the remaining timeframes and above its 50 day moving average.  This pin action keeps TLT’s chart quite strong.

            GLD fell, ending right on the lower boundary of its very short term uptrend, above the upper boundary its short term uptrend, within an intermediate term trading range and above its 50 day moving average.  It also keeps GLD in consolidation.  Let’s see if it follows TLT recent pattern.

Bottom line:  clearly the Yahoo and Apple news weren’t enough to keep the sellers at bay.  The good news is that the Averages remained within all uptrends.  The bad news is that the Dow broke its recent the mid December support lows (17288).  In addition, the above comments from TraderFeed on Market breadth suggests that more weakness may lie ahead.  So the focus is on the S&P mid-December low and the lower boundaries of the Averages’ uptrends.

            Only one secondary datapoint yesterday---mortgage and purchase applications fell.  Not great but so far this week’s stats have been upbeat.
            On the earnings front, after a terrible Tuesday, I think most investors hoped that the after-hours report from Apple would presage a better day on Wednesday; and we did get a great announcement from Boeing which help start the day on an upbeat note.  However, after the close, Qualcomm reported and lowered its guidance; investors made their displeasure known.  In any case, this keeps the trend of disappointing profit reports/guidance from major players in significant industries alive and well.

            To be fair, looking at total earnings announcements to date, 70% have beat expectations, 10% have been right on and 19% have been below estimates.  However, (1) a number of the negative surprises that we have received have been from guidance not the actual profit report and (2) the misses that we are getting have all been from large players.  In other words, companies that represent a disproportionally large part of total corporate earnings.  To quantify that a bit, in December, 2015 S&P earnings guidance was for growth in the mid-single digits.  Now it is zero.

            The big news of the day was the release of the statement of the January FOMC meeting which contained one surprise to the Market.  For the first time, the Fed included the weak international economy as one of its concerns---better late than never I guess.  This seem to be the proximate cause for the sudden precipitous decline in stock prices and a jump in the long Treasury bond price. 

            How long it takes for investors to tie poor US corporate profits with something more than a strong dollar, to wit, poor international demand, is only a guess.  I have been pounding on this theme for months.  Not that it will even prove correct ultimately.  But, investors have had their collective heads in the sand on the issue for too long.  For it to take a Fed statement to bring this development as a potential risk to the forefront of their consciousness only supports the notion that these guys have been in serious denial.  To be clear, I am still not convinced that the weak international economy is finally starting to lap our shores; but it has been a risk and perhaps yesterday is a sign that it is now getting priced into stocks.

Overseas, reports are out that China will lower its 2015 growth forecast---not helpful to those unconcerned about slowing international growth.  In addition, Singapore initiated its own QE policy.  This only reinforces my worry that when everyone is trying to ‘beggar they neighbor’, no one does; it just makes matters worse.

                ***overnight, German CPI fell 0.5%.

Bottom line: the risks of slowing US corporate profit growth and weakening international economies impacting our economy are at last impinging on investor’s alternate reality.  If these problems remain on the front page, then my thesis that stocks are overvalued will likely get a solid test.  In the meantime that means the risks of more downside have probably increased---whether or not my thesis is proven correct.

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.

       Investing for Survival

            The problem with leverage (short):

      Company Highlight

Qualcomm Inc. develops, markets and licenses cutting edge integrated circuits used primarily in wireless applications, provides data and positioning services for transportation applications, develops content management technologies and provides a platform for wireless application development.  QCOM has grown profits at a 23% annual rate over the last 10 years; and has raised its dividend per share from an initial $.19 in 2004 to $1.54 in 2014.  It has done this while earning a 15-20% return on equity.  The company future appears equally promising as a result of:

(1) it is a major beneficiary of the growth in 3G/4G wireless technology,

(2) it is the established technological leader in global wireless baseband chipset market with 200+ royalty bearing licenses,

(3) new product development [next generation processors and Wi-Fi chipsets],

(4) acquisitions [Black Sand Technology plus 1400 patents from Hewlett Packard.


(1)   the current global economic malaise could impact demand,

(2)   it is in a highly competitive industry,

(3)   it is facing anti-trust problems in China, regulatory investigations in the US and Europe and several patent infringement suits.

The company is rated A++ by Value Line, has no debt but a huge cash position and its stock yields 2.3%.

        Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                Yield      Growth Rate     Ratio       Since 2005

QCOM       2.3%           13%            31%             10
Ind Ave      2.2               7**            37               NA 

                Debt/                      EPS Down       Net        Value Line
               Equity         ROE      Since 2005      Margin       Rating

QCOM       0%            23%            1                34%           A++
Ind Ave     25               14             NA              11              NA

**most companies in QCOM industry do not pay a dividend


            Note: QCOM stock made good progress off its November 2008 low, quickly surpassing the downtrend off its August 2008 high (straight red line) and the November 2008 trading high (green line).  Long term it is in a trading range (blue lines).  Intermediate term, it is in an uptrend (purple lines).  Short term it is in a downtrend (brown line).  The wiggly red line is the 50 day moving average.  The Dividend Growth Portfolio owns an 80% position and the Aggressive Growth Portfolio owns a 100% position in QCOM.  The upper boundary of its Buy Value Range is $30. The lower boundary of its Sell Half Range is $123.


      News on Stocks in Our Portfolios
·         Sherwin Williams (NYSE:SHW): Q4 EPS of $1.37 misses by $0.01.
·         Revenue of $2.57B (+4.5% Y/Y) misses by $30M.
·         Occidental Petroleum (NYSE:OXY): Q4 EPS of $0.72 beats by $0.04.
·         Revenue of $4.31B (-15.3% Y/Y) in-line.
·         Colgate-Palmolive (NYSE:CL): Q4 EPS of $0.76 beats by $0.02.
·         Revenue of $4.22B (-3.2% Y/Y) misses by $10M.
·         ConocoPhillips (NYSE:COP): Q4 EPS of $0.60 beats by $0.01.
·         Qualcomm (NASDAQ:QCOM): FQ1 EPS of $1.34 beats by $0.09.
·         Revenue of $7.1B (+7.3% Y/Y) beats by $160M.
·         Expects FQ2 revenue of $6.5B-$7.1B and EPS of $1.28-$1.40 vs. a consensus of $6.74B and $1.28.
·         Expects FY15 revenue of $26B-$28B and EPS of $4.75-$5.05 vs. a consensus of $27.81B and $5.21.
·         270M FQ1 MSM chip shipments, at the high end of guidance of 250M-270M. 220M-240M expected in FQ2.


   This Week’s Data

            Weekly jobless claims fell 43,000 versus expectations of down 7,000.

            A closer look at the employment data (medium and today’s must read):

            The FOMC finished its January meeting yesterday afternoon: (1) the policy language wasn’t adjusted at all---so the Fed will ‘remain patient’ as it looks toward rate modification, however, (2) it did raise its qualitative assessment of virtually every sector (wages, consumer spending, fixed investment, inflation) of the economy except housing and (3) added its concern about the international economy.    


            QE is not the solution (medium):

            The 1% updated (short):

            China, the next Japan? (short):



  International War Against Radical Islam

            Former DOD chief of intel blasts Obama policy (medium):