Thursday, March 31, 2016

The Morning Call--The afterglow of a smack down

The Morning Call

3/31/16

The Market
         
    Technical

The indices (DJIA 17716, S&P 2063) had another good day with both resetting very short term uptrends.  Volume remained low but breadth improved.  The VIX (13.5) fell 2%, resetting a very short term downtrend that it voided Monday.  While it remains well below its 100 day moving average and within a short term trading range, it is nearing the 10-12 attractive price range.

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term a trading range {15431-17758}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5471-19343}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term trading range {1867-2081}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {800-2161}. 

The long Treasury fell 1%, but remains above a Fibonacci support level and continues to form a very short term uptrend.  

GLD declined 1 ½ %, trading back below a key support level and re-opening the possibility of more consolidation.

Bottom line:  the bulls remain in control, though the volume and breadth may not be as strong as they would like.  Nonetheless, they drawing closer to the upper boundaries of their recent consolidation range.  My assumption, at this point, is that there is a strong probability that those boundaries will be successfully challenged which would clear the way for a run at their all-time highs.

            IPO market looks like 2009 (short):

    Fundamental

       Headlines

            Yesterday’s economic stats were mixed: weekly mortgage and refi applications were down but the more important purchase applications were up, the March ADP private payroll number was less than expected.  So far this week’s numbers have been mixed to positive; but Friday is a big data day and will likely determine the trend for the week.

            Overseas, Japanese February industrial was down big; and the Asian Development Bank lowered its forecast for Chinese GDP growth for 2016 and 2017.

            ***overnight, March EU inflation declined 0.1%; S&P lowered China’s credit rating and March German unemployment was unchanged from February.

            Bottom line:  the main theme of the day was the wonderment over the Yellen hawk smack down.  What nobody talked about was why she did it and what its practical implications are, to wit, if she is concerned enough about the global economy to aggressively rule out a 25 basis point rate hike, shouldn’t somebody be worried about what that means for corporate profits with stock prices inches from their all-time highs?   

            Yellen’s gamble on inflation (medium):

In my opinion, the current rally represents an excellent opportunity to raise cash reserves by selling either a portion of your profitable investments and/or sell your losers.

    

       Investing for Survival
   

    News on Stocks in Our Portfolios
 
·         Paychex (NASDAQ:PAYX): FQ3 EPS of $0.50 in-line.
·         Revenue of $752.6M (+6.9% Y/Y) beats by $1.4M.
           


Economics

   This Week’s Data

            Weekly jobless claims rose 11,000 versus expectations of up 1,000.

   Other

            US housing is 14% overvalued, so says BofA (medium):

Politics

  Domestic

  International War Against Radical Islam

Putin apparently lied about withdrawing from Syria (medium):

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Wednesday, March 30, 2016

The Morning Call---Yellen throws hawks under the bus

The Morning Call

3/30/16

The Market
         
    Technical

The indices (DJIA 17633, S&P 2055) bolted higher on Yellen’s comments, though volume remained low; and while breadth improved, it was still mixed.  The VIX (14) fell 9%, coming close to resetting the very short term downtrend that it voided Monday.  While it remains well below its 100 day moving average and within a short term trading range, it is nearing the 10-12 attractive price range.

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term a trading range {15431-17758}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5471-19343}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term trading range {1867-2104}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {800-2161}. 

The long Treasury jumped 1%, remaining above a Fibonacci support level and is starting to form a very short term uptrend.  

GLD rallied almost 2%.  It has risen enough that it likely takes further weakness off the table.

Bottom line:  the indices closed near the upper boundary of their recent consolidation range.  Given how well they handled their overbought condition amidst negative Fed and economic news, the spark provided by Yellen’s comments is likely to push them to another high and possibly a run at their all-time highs.

            Stock performance in April (short):

    Fundamental

       Headlines

            Yesterday’s US economic data was positive: month to date retail chain store sales advanced versus the prior week, March consumer confidence came in ahead of forecasts and the January Case Shiller home price index was higher than expected.  Of course, the latter could be interpreted positively (improving economy) or negatively (higher inflation), although, given Yellen’s comments, she apparently is not that worried about inflation.

            And yes, Janet spoke yesterday.  Anyone following the Market over the past seven years would know by the pin action that her speech was dovish, even if they hadn’t seen or heard any part of it.  I had three major takeaways:

(1)   she, in line with the Fed’s Bugs Bunny communication strategy, cut the legs out from underneath all the hawkish talk last week,

(2)   she hinted that the December rate hike may have been a mistake,

(3)   she is more worried about growth [lack thereof] than inflation, especially as it relates to the global, in particular the Chinese, economy---which goes along with the Mauldin thesis I elaborated on previously.

Goldman’s take (medium):

                  The whole speech if you want to read it:

                  More on negative interest rates (medium):

            Overseas, in testimony to how well QE and negative interest rates impact an economy, Japan reported that February retail sales fell 2.3%.

            ***overnight, February Japanese industrial output fell 6.2%.

Bottom line: the dovish/hawkish dialectic is alive and well and living in the Eccles Building; and its spokesperson is Bugs Bunny.  No matter, Yellen et al seem to remain bullet proof no matter how clueless they sound or act.  I remain convinced that ultimately either the Fed will lose its credibility or investors will recognize that higher stock prices in the face of lower corporate profits doesn’t make sense; but until that occurs, the pattern is that dovish commentary equals higher equity prices.  

In my opinion, the current rally represents an excellent opportunity to raise cash reserves by selling either a portion of your profitable investments and/or sell your losers.

            The latest from Doug Kass (medium):

            More on Market direction (medium):

       Investing for Survival
   
            You may be a better investor than you think.

    News on Stocks in Our Portfolios
·         Hormel Foods (NYSE:HRL) declares $0.145/share quarterly dividend, in line with previous. (Split Adjusted)
·         Forward yield 1.31%
  

Economics

   This Week’s Data

            Month to date retail chain store sales were stronger than the prior week.

            The January Case Shiller home price index rose 0.8% versus expectations of up 0.7%.

            March consumer confidence came in at 96.2 versus estimates of 94.0.

            Weekly mortgage applications fell 1.0%, purchase applications increased 2.0%.

            The March ADP private payroll report showed jobs advancing by 200,000 versus forecasts of up 203,000; the February number was revised lower.

   Other

            Investor denial about China (medium):

            China’s gift to us (medium):

            Stephen Roach on China’s current problem (medium):

            Labor market rigidity and disaffection of muslim youth (short but a must read):

            Does the Saudi pricing strategy for oil make sense? (medium)

Politics

  Domestic

Democratic socialism (short):

This on Hillary from my favorite liberal blog (medium):

Fitch downgrades rating on Chicago (medium):

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Tuesday, March 29, 2016

The Morning Call--Will Yellen add to the confusion?

The Morning Call

3/29/16

The Market
         
    Technical

The indices (DJIA 17535, S&P 2037) lifted slightly yesterday, but, again on very low volume and mixed breadth.  The VIX jumped 3.4%, voiding a very short term downtrend; however, it remains well below its 100 day moving average and within a short term trading range.

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term a trading range {15431-17758}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5471-19343}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term trading range {1867-2104}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {800-2161}. 

The long Treasury moved up again, remaining above a Fibonacci support level.  It continues to support the notion that its recent decline is over and is now consolidating.

GLD was up.  While it remains within a short term uptrend and above its 100 day moving average, it is still above visible support.  So some further weakness is possible.

Bottom line:  ‘the indices continue their solid performance given how over extended they were and the amount of negative news they have had to overcome this (last) week.  True low volume and mixed breadth are not helpful.  Plus both voided very short term uptrends.  That said, they have plenty of near end support.  So my assumption remains that they challenge their all-time highs until/unless they negate the aforementioned support levels.’


    Fundamental

       Headlines

            Yesterday’s economic news was generally mixed though somewhat upbeat: the March Dallas Fed manufacturing index was down but better than anticipated, February personal income was better than expected but spending and the PCE deflator were in line, the January trade deficit was lower than forecast; however, both exports and imports were down and February pending home sales were better than projected.  Overall, this was an improvement from last week.  However, it was Monday of a week that includes lots of data and a speech by Yellen.

            Personal spending and income review (short):

            My favorite optimist’s take on the last weekend’s corporate profits release.  As you read, remember the phrase ‘it’s different this time’ (medium):

            A bit more pessimistic view from John Hussman (medium):

            Overseas, the Chinese government released a strong February corporate profit report; on the other hand, an independent organization which compiles the Chinese equivalent of the Fed Beige Book stated that capex spending was at the lowest level in its five years of recording data and employment was at a four year low.

            ***overnight, February Japanese retail sales fell 2.3%.

            In addition, Libya, Iraq and Iran have indicated that they won’t attend the April OPEC meeting; and, of course, the US won’t be there.  What possible meaning could any proposed freeze have?

Bottom line: after a dovish statement following the FOMC meeting week before last, then three Fed chiefs sounding the hawkish trumpet last week, the $64,000 question is what will Yellen do this week?  Will she keep the Fed’s Bugs Bunny routine going and hop back to a dovish tone or will she really tighten investors’ sphincters and go along with the possibility of an April tightening?   My opinion is that it doesn’t matter because whatever she says, it will only further enhance the notion that the Fed is clueless.

In the meantime, the economic data both here and abroad is telling us that there is little to no growth out there and that corporate profitability is declining.  And all the while, the Averages are within a short hair of all time high valuations. 

There is something wrong with this picture.  In my opinion, the current rally represents an excellent opportunity to raise cash reserves by selling either a portion of your profitable investments and/or sell your losers.

            Oil rally led by short covering (medium):
         

       Investing for Survival
   
            The single entity risk problem.

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            February pending home sales rose 3.4% versus expectations of up 1.5%.

            The March Dallas Fed manufacturing index came in at -13.6 better than the anticipated reading of -31.8.

   Other

            The Atlanta Fed lowered its first quarter GDP growth estimate to +0.6% from +1.4%.

            Year to date bankruptcy filings hit post 2009 high (short):

Politics

  Domestic

More on student loans (short):

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Monday, March 28, 2016

Monday Morning Chartology

The Morning Call

3/28/16

The Market
         
    Technical

       Monday Morning Chartology

            The S&P sold off but not that much---given the extreme overbought condition at the end of last week.  That is good news along with the facts that it (1) has busted above numerous resistance levels and remains above visible support [100 day moving average and a Fibonacci support level.  The bad news is that most of the advance was on low volume and not particularly great breadth.  Plus, very short term, it has voided an uptrend.  The assumption has to remain that it will challenge its all-time high until/unless it negates the aforementioned support levels.



            The long Treasury acted very well this week.  It stabilized after a six week decline, voiding a very short term downtrend and holding above a key Fibonacci support level---not the kind of pin action you would expect in a week in which three Fed officials trumpeted the need for additional rate hikes.



            GLD underwent more consolidation this week.  It remains well within a short term uptrend and above its 100 day moving average.  However, there is no visible near in technical support, so there could be more downside.



            The VIX basically supported the above observations on the S&P.  It could not rally sufficiently to void a very short term downtrend.  Any move to the 10-12 level would represent an opportunity to buy portfolio insurance inexpensively.



    Fundamental

            ***overnight, China reported an increase in industrial profits in February; however, the New York based China Beige Book reported capex at its lowest level in the history of the survey (five years) and employment at a four year low.

            Update on Buffett indicator (short):

       Investing for Survival
   
            Investor self-deception.

    News on Stocks in Our Portfolios
 
AT&T (NYSE:T) declares $.48/share quarterly dividend, in line with previous.
Forward yield 4.94%

Economics

   This Week’s Data

            The January US trade deficit was $60.0 billion versus expectations of -$62.5 billion.  However, its makeup was not so hot: exports were down 2.9% while imports were down 1.5%.

            February personal income rose 0.2% versus estimates of up 0.1%; spending was up 0.1%, in line; the PCE deflator was -0.1%, also in line.

   Other

            Here is a breakdown of the fourth quarter GDP number reported Friday morning (medium):

            Another thought on the trade deficit (short):

Politics

  Domestic

The GOP governors at a brokered convention (medium):

Another Obama false equivalency (medium):

The absurdity of feigned offense has reached a new high (medium and a candidate for Monday morning humor if it weren’t so tragic):

  International War Against Radical Islam

            Marines enter combat in Iraq (short):

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Friday, March 25, 2016

The Closing Bell

The Closing Bell

3/26/16

Statistical Summary

   Current Economic Forecast
           
            2015 estimates

Real Growth in Gross Domestic Product (revised)      -1.0-+2.0%
                        Inflation (revised)                                                          1.0-2.0%
                        Corporate Profits (revised)                                            -7-+5%

2016 estimates

Real Growth in Gross Domestic Product                     -1.25-+0.5%
                        Inflation (revised)                                                          0.5-1.5%
                        Corporate Profits (revised)                                            -15-0%

   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Trading Range                       15431-17758
Intermediate Term Trading Range           15842-18295
Long Term Uptrend                                  5471-19343
                                               
                        2015    Year End Fair Value                                   12200-12400

                        2016     Year End Fair Value                                   12600-12800

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Trading Range                          1867-2104
                                    Intermediate Trading Range                        1867-2134
                                    Long Term Uptrend                                     800-2161
                                               
                        2015   Year End Fair Value                                      1515-1535
                       
2016 Year End Fair Value                                      1560-1580          

Percentage Cash in Our Portfolios

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

Economics/Politics
           
The economy maybe providing a temporary upward bias to equity valuations.   The stats this week remained on the negative side of the ledger:  above estimates: month to date retail chain store sales, the February Markit flash services index, the March Richmond Fed manufacturing index and fourth quarter GDP; below estimates: February existing home sales, February new home sales, weekly mortgage and purchase applications, February durable goods orders, the February Chicago Fed national activity index, the March flash manufacturing PMI, the March Kansas City Fed manufacturing index and weekly jobless claims; in line with estimates: none.

Likewise the primary indicator were downbeat: fourth quarter GDP (+), February existing home sales (-), February new home sales (-) and  February durable goods orders (-)  For those keeping a running score, in the last 29 weeks, six have been positive to upbeat, twenty two negative and one neutral.  Finally, the Atlanta Fed revised its first quarter GDP estimate down to 1.4%.  This is the second downgrade in as many weeks.  Clearly these numbers support my recent recession call, although I am still not dismissing the recent two week run of upbeat stats. 

In addition, oil prices started to retreat again.  It is too soon to know if this is just some consolidation after the recent gains or a realization that OPEC is just jerking the world off with its on-again, off-again oil production freeze meetings. As I have oft repeated of late, (1) every statistic and analysis of the oil market that I have seen is unsupportive of the notion that the supply and demand of oil will be in balance anytime soon and (2) history and politics suggest that OPEC will not freeze or lower output; and if it does, the cheating will be so rampant as to make the freeze irrelevant.  The point here is less about the actual price of oil and more about its impact on the financial condition of both oil companies and the banks that lend to them---lower oil prices meaning the increased likelihood of impaired balance sheets.

Another big story of the week was the seeming walk back of the dovish tone coming out of last week’s FOMC meeting.  As I reported, three regional Fed heads spoke this week in which they adopted a much more aggressive stance towards a possible rate hike.  Indeed, the impression was that an increase could come as soon as April. 

I covered this subject in our Morning Calls; but to reiterate the bottom line: (1) nothing in the data provides any reason for the dramatic shift in the Fed narrative; indeed, as noted above, things have only gotten worse [see the newly revised Atlanta Fed first quarter GDP forecast above], (2) continuing this back and forth, on again, off again rate hike dialectic is likely to destroy what little credibility the Fed still has left and (3) if the Mauldin thesis that I introduced last week is correct, then this latest Fed speak is all bulls**t.

Just ask the Chinese (short):

Theft by government fiat (medium and a must read):

On the international economic front, the numbers, what there was of them, were mixed, leaving the current trend in global stats even worse than our own.  Hence, there is nothing here to qualify as a positive for our economy.

In summary, the US economic stats this week were negative again while the international data sparse and mixed.  Meanwhile, the Fed is doing its utmost to confuse and confound.

Our forecast:

a recession or a zero economic growth rate, caused by too much government spending, too much government debt to service, too much government regulation, a financial system with conflicting profit incentives and a business community hesitant 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 negatives:

(1)   a vulnerable global banking system.  This week, we received two pertinent news items:

      [a] Moody’s put Deutsche Bank on its watch list for a credit downgrade,

[b] Canadian bank regulators have determined that their banks are woefully under reserved.  Immediately on the heels of that news, a Canadian oil company declared bankruptcy after its bank called its loans.   And to put a cherry on top, Canadian regulators are proposing to make depositors of any bankrupt bank take equity in the bank {versus their deposit}.

I am not going to jump up and down on either of the above points {although the Canadian equity cram down could severely impair the banks} except to say that global banks are overleveraged with sufficient levels of nonperforming assets to keep us all up at night.  The above are but examples thereof.


(2)   fiscal/regulatory policy.  With the election season now in full swing, we are likely to get no new developments by way of fiscal/regulatory policy [except for more empty promises] until at least early 2017.  Along those lines, it appears that republican leaders have decided not to challenge Obama’s FY2016 budget in any meaningful way.  Shameful.

The eight biggest barriers to economic growth (medium):

(3)   the potential negative impact of central bank money printing:  The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn’t been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.  

With the completion of last week’s central bank trifecta, we were thankfully blessed with little more cognitive dissonance from those yahoos.  ‘Little’ being the operative word, because the Fed did manage to confuse its own rate hike policy when three governors commented in speeches that the economy was sufficiently strong to handle another rate hike, possibly as soon as April---this but one week after the ultra-dovish statement and Yellen press conference following the FOMC meeting. 

I have railed against this ‘on the one hand, on the other hand’ crap that we have been fed for far too long.  In my opinion, this is another perfect example that the Fed has painted itself into a box, it knows it and is trying to buy time by blowing smoke our skirts in the hopes that some miracle will bail them.

The inexorability of the numbers (medium):

In the meantime, the Japanese yield curve is doing its best impression of the  wave, demonstrating that the Fed is not the only central bank that is in a corner and doesn’t know how get out.  Even worse, on Thursday, there was an unsubstantiated report that Japan will unveil its version of ‘helicopter’ money [checks to poor citizens that can’t be deposited, ergo, must be spent].   What could possibly go wrong with that?

You know my bottom line: sooner or later, the price will be paid for asset mispricing and misallocation.  The longer it takes and the greater the magnitude of QE, the more the pain. 

(4)   geopolitical risks: the terrorists’ bombing in Brussels clearly added to the concerns about radical islam whether in the Middle East or closer to home.   As I noted last week, all this takes is one final explosive event to turn propel this risk to center stage.

This is an excellent article on the danger posed by the willful ignorance of islam by western leadership (medium and a must read):

(5)   economic difficulties in Europe and around the globe.  The international economic stats released this week were sparse and mixed:  February Chinese auto sales plunged 44%; the March EU Markit composite PMI came in better than anticipated while UK inflation was reported at zero; and German business confidence rose, though I suspect the Brussels bombing will negate that.

In other news, (1) Greece and its creditors were still unable to reach an agreement on a third bailout and (2) Iran said that it would consider joining in an oil production freeze ‘at a later time’.  I have no idea what that means and it is likely that neither do all those folks who were making bets on it.

The bottom line: what data we got was not encouraging.  The global economy remains a major headwind.
           
Bottom line:  this week’s US data points toward a recession, though I continue to stew over whether I acted too quickly in making that call.  The global economy did nothing to brighten the outlook.    Meanwhile, the global central banks are doing everything possible to confuse and confound the Markets in hopes that a miracle allow them to exit QE without much damage.

A deteriorating global economy and a counterproductive central bank monetary policy are the biggest economic risks to our forecast. 


This week’s data:

(1)                                  housing: February existing home sales was down twice what was expected while new home sales were less than projected; weekly mortgage and purchase applications declined,

(2)                                  consumer: month to date retail sales grew more than in the prior week; weekly jobless claims increased more than consensus,

(3)                                  industry: February durable goods orders were down, ex transportation, they were especially disappointing; February Chicago Fed national activity index was extremely poor; the March flash manufacturing PMI was below estimates, however the services PMI was better than projected; the March Richmond Fed manufacturing index was much better than anticipated while the Kansas City Fed index was much worse,

(4)                                  macroeconomic: the final revision of fourth quarter GDP was reported at +1.4% versus consensus of +1.0.

  The Market-Disciplined Investing
         
  Technical

The indices (DJIA 17515, S&P 2035) churned in place Thursday, again on very low volume and mixed breadth.  The VIX was off fractionally, but continues to support high and rising equity prices.

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term a trading range {15431-17758}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5471-19343}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term trading range {1867-2104}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {800-2161}. 

The long Treasury moved up again, voiding a very short term downtrend and remaining above a Fibonacci support level.  After a six week period of consolidation, this may be a sign that the recent decline is over.

GLD was lower.  While it remains within a short term uptrend and above its 100 day moving average, it is still above visible support.  So more consolidation seems likely.

Bottom line:  the indices continue their solid performance given how over extended they were and the amount of negative news they have had to overcome this week.  True low volume and mixed breadth are not helpful.  Plus both voided very short term uptrends.  That said, they have plenty of near end support.  So my assumption remains that they challenge their all-time highs until/unless they negate the aforementioned support levels.

Broadest index hitting resistance (short):

The latest from Doug Kass (medium):

Fundamental-A Dividend Growth Investment Strategy

The DJIA (17515) finished this week about 41.2% above Fair Value (12399) while the S&P (2035) closed 32.5% overvalued (1535).  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.

The US economic data this week was again quite negative, putting that recent two streak of upbeat numbers further behind us.  Clearly, the more poor stats we get, the stronger my case for recession. 

Not helping matters, oil prices reversed their recent strong uptrend.  This may be just some consolidation after a big run up; but if it is more than that, then the lack of financial viability of many oil companies and the banks that serve them is back on the table.  And as I have noted several times, there is currently little evidence to support higher oil prices. 

In sum, if our forecast is anywhere near correct, most Street forecasts for the economy, corporate earnings and, hence, stock valuations are too high. 


As always, Fed policy will play a role in Street formulations.  Last week, the central banks delivered what investors wanted in the form of triple down, QE forever policies---which in turn helped stocks continue to rally.  As you know, I think that that game will be over when investors finally realize that QE (except QE1) hasn’t, isn’t and likely won’t do anything to improve the outlook for the economy or corporate profits.  Clearly the operative word in that statement is ‘when’.  Based on my record of late, I don’t have a clue ‘when’ is.  I only note that the more the Fed pursues this dovish/hawkish double talk, the more likely the ‘when’ is sooner rather than later.  Unfortunately, as long as investors’ ill-conceived euphoria lasts, mispriced assets will remain in nosebleed territory. 

When it ends, I believe that the cash generated by following our Price Discipline will be welcome as investors wake up to the Fed’s (and other central bank) malfeasance because I suspect the results will not be pretty. 

The Fed’s impact on stock valuation (medium and a must read):

A bunny market (short):

Net, net, my two biggest concerns for the Markets are (1) declining profit and valuation estimates resulting from the economic effects of a slowing global economy and (2) the unwinding of the gross mispricing and misallocation of assets following the Fed’s wildly unsuccessful, experimental QE policy.

Bottom line: the assumptions in our Economic Model are unchanged.  If they are anywhere near correct, they will almost assuredly result in changes in Street models that will have to take their consensus Fair Value down for equities. 

The assumptions in our Valuation Model have not changed either; though at this moment, there appears to be more events (greater than expected decline in Chinese economic activity; turmoil in the emerging markets and commodities; miscalculations by one or more central banks that would upset markets; a potential escalation of violence in the Middle East and around the world) that could lower those assumptions than raise them.  That said, our Model’s current calculated Fair Values under the best assumptions are so far below current valuations that a simple process of mean reversion is all that is necessary to bring Market prices down significantly.

I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of any further bounce in stock 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; but 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 2016 Year End Fair Value*              12700             1570
Fair Value as of 3/31/16                                  12399            1535
Close this week                                               17515            2035

Over Valuation vs. 3/31 Close
              5% overvalued                                13018                1611
            10% overvalued                                13638               1688 
            15% overvalued                                14258               1765
            20% overvalued                                14878                1842   
            25% overvalued                                  15498              1918   
            30% overvalued                                  16118              1995
            35% overvalued                                  16738              2072
            40% overvalued                                  17358              2149
            45% overvalued                                  17978              2225

Under Valuation vs. 3/31 Close
            5% undervalued                             11779                    1458
10%undervalued                            11159                   1381   
15%undervalued                            10539                   1304



* 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. 

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 47 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.