The Morning Call---Will this earnings season be different?

The Morning Call

1/17/14

The Market

           

     Technical

            The indices (DJIA 16417, S&P 1845) sank yesterday; the S&P was unable to remain above its former all time high.  This has the makings of a double top, but it is far too soon to make that call.  More likely, it was just consolidation after a big two day run.  The Averages closed within major uptrends across all timeframes: short term (15790-20790, 1792-1945), intermediate term (15790-20790, 1685-2266) and long term (5050-17400, 728-1900).

            Volume fell; breadth softened.  The VIX rose but remains near the lower boundary of its short term trading range.  It is also in an intermediate term downtrend.

            The long Treasury was up, finishing within a short term trading range and an intermediate term downtrend.

            GLD was higher, closing within short and intermediate term downtrends.  GLD is currently struggling (so far unsuccessfully) to penetrate its 50 day moving average.  If that occurs, it would add another plus to GLD’s technical picture.  If not, this will remain an ugly chart.

            http://www.zerohedge.com/news/2014-01-16/precious-metals-manipulation-worse-libor-german-regulator-says

Bottom line:  the S&P couldn’t hold its new all time high; hence, no follow through, at least for now.  This pin action supports the notion of a schizophrenic Market; and as I noted above, it sets up a possible double top.  It is far too soon to make that call; and indeed, it would not be confirmed until/unless it closes below the 1815 level at the very least and more importantly the lower boundary of its short term uptrend (1792). 

So for the moment, we await either an assault on the upper boundaries of the Averages long term uptrends or a significant enough follow through to the downside to break the long term upward momentum. 

If one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            More on the January barometer (medium):

            http://blog.stocktradersalmanac.com/post/Dont-Settle-for-711-By-Ignoring-January-Barometer-SPX-SPY

    Fundamental

    

     Headlines

            Yesterday’s US economic news remained generally positive: December CPI was in line, weekly jobless claims fell slightly and the Philly Fed manufacturing index was a bit stronger than expected.         Overseas, the EU inflation rate declined.   Hence, no surprises.

            What got the Market off on the wrong foot were disappointing earnings report from Best Buy, Goldman and Citi.  I thought this was significant in that:

(1)   the Best Buy number adds to this week’s confusing retail data.  As you know, I was not nearly as impressed with those December retail sales figures reported on Tuesday as the rest of the Market because [a] the November data was revised down big and [b] the earnings reports and forward guidance on enough retailers were mixed---providing little support for the December data.  The Best Buy report reinforces than notion,

(2)   earnings season is just starting.  If investor reaction to every earnings miss mirrors yesterday’s pin action, the next couple of weeks could be rough.

Bottom line:  yesterday’s pin action raises the question of whether this earnings season might be more volatile than investors have gotten used to.  That would fit with the schizophrenia scenario.  However, volatility is not necessarily synonymous with down.  Though it could be, given the current degree of stock overvaluation.  Whether or not it does is to be determined.  Either way, we are still left facing either a prolonged period of Market stagnation or a correction.   

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.

            The other side of stock buybacks (short and a must read):

            http://www.zerohedge.com/news/2014-01-16/corporations-have-record-cash-they-also-have-record-er-debt-net-leverage-soars-15-hi

            The latest from GMO (medium):

            http://www.zerohedge.com/news/2014-01-16/gmo-market-commentary-ignore-common-sense

            Thoughts on efficient markets (medium):

            http://www.zerohedge.com/news/2014-01-16/howard-marks-views-when-markets-will-be-efficient-hint-never

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.

Sonoco (SON) 2014 Review

Sonoco Products Co is a leading producer of paper-based tubes and cores, flexible packaging, rigid plastic containers, cylinder paperboard, composite cans, protective partitions, wire and cable reels and point of purchase displays.  The company has grown profits and dividends at a 3-4% pace over the last ten years earning a 13-15% return on equity.  The company should improve its earnings growth rate as a result of:

(1)    new product innovation.  SON has raised the amount of capital spending dedicated to new product opportunities,

(2)   sales are leveraged to an improving US economy,

(3) its ongoing restructuring efforts to reduce costs and improve productivity,

(4) debt reduction.

Negatives

(1) rising costs of raw materials,

(2) weak EU economy,

Sonoco is rated A by Value Line, has a 37% debt to equity ratio, has raised its dividend for 27 consecutive years and its stock yields 3.0%.

   

        Statistical Summary

                 Stock      Dividend         Payout      # Increases  

                Yield      Growth Rate     Ratio       Since 2004

SON          3.0%          8%               51%             10

Ind Ave      1.9             11                34                NA 

                Debt/                        EPS Down       Net        Value Line

                Equity         ROE      Since 2004      Margin       Rating

SON         37%            16%             4                 5%           A

Ind Ave     52               18               NA               6            NA

     Chart

            Note: SON stock made great progress off its March 2009 low, surpassing the downtrend off its July 2007 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).  Short term, it is in an uptrend (brown line).  The wiggly red line is the 50 day moving average.  The High Yield Portfolio owns a 50% position in SON.  The upper boundary of its Buy Value Range is $22; the lower boundary of its Sell Half Range is $48.

   

http://finance.yahoo.com/q?s=SON

01/14

Morning Journal---US now 12th place in economic freedom

News on Stocks in Our Portfolios

BlackRock, Inc. beats by $0.59, beats on revenue

·         BlackRock, Inc. (BLK): Q4 EPS of $4.92 beats by $0.59.

·         Revenue of $2.77B (+9.1% Y/Y) beats by $80M.

Kinder Morgan Energy Partners beats by $0.04, beats on revenue

·         Kinder Morgan Energy Partners (KMP): Q4 EPS of $0.83 beats by $0.04.

·         Revenue of $3.47B (+38.2% Y/Y) beats by $130M.

 

Economics

   This Week’s Data

            The Fed released its latest Beige Book report which read very much like its predecessors---the economy is gradually improving.  If there was any difference, I would say that it was ever so slightly more upbeat.

            http://www.zerohedge.com/news/2014-01-15/beige-book-saw-moderate-expansion-despite-harsh-weather-ongoing-obamacare-concerns

            Weekly jobless claims fell 2,000 versus estimates of down 3,000.

            December CPI was up 0.3%, in line; ex food and energy, it was up 0.1%, also in line.

   Other

            Macro markets risk index (short):

                http://www.capitalspectator.com/archives/2014/01/macromarkets_ri_22.html#more

            Will corporate profit margins contract (short)?

            http://pragcap.com/when-will-corporate-profit-margins-contract

            The US drops to 12^th place in economic freedom---just below 11^th place Estonia.  Hats off to our political class (short).

            http://www.zerohedge.com/news/2014-01-15/level-economic-freedom-united-states-all-time-low

            Housing providing support to the economy (medium):

            http://advisorperspectives.com/dshort/guest/Chris-Puplava-140115-Housing-Tailwind.php

            How corporations are spending their money (short):

            http://blog.yardeni.com/2014/01/companies-spending-plenty-on-r-and.html

Politics

  Domestic

Demagoguing income inequality (medium):

http://news.investors.com/ibd-editorials-on-the-right/011414-686320-income-inequality-focus-unfair-to-most-productive.htm

Downsizing the government (3 minute video):

http://www.aei-ideas.org/2014/01/cato-project-its-time-to-downsize-the-federal-government/

The Club for Growth on the appropriations bill (short):

http://www.clubforgrowth.org/perm/?postID=16245

Quote of the day (short):

http://cafehayek.com/2014/01/bonus-quotation-of-the-day-23.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29

  International

            Another delightful tirade from my favorite eurocrat (3 minute video):

            http://www.zerohedge.com/news/2014-01-15/nigel-farage-booms-europe-now-run-big-banks-big-business-and-big-bureaucrats                   

            Here is a summary of the senate report on the attack on the Benghazi embassy (medium):

            http://www.zerohedge.com/news/2014-01-15/summary-senates-report-benghazi-embassy-attack

The Morning Call---S&P makes a new high. Will it follow through?

The Morning Call

1/16/14

The Market

           

    Technical

            The bulls held sway again yesterday as the indices (DJIA 16481, S&P 1848) continued their move up (the S&P making an all time high), closing within major uptrends across all timeframes: short term (15776-20776, 1789-1942), intermediate term (15776-20776, 1684-2265) and long term (5050-17400, 728-1900).

            Volume was up slightly; breadth was mixed.  The VIX was unchanged, leaving it near the lower boundary of its short term trading range and within its intermediate term downtrend.

            More weak technical indicators:

            http://chartsetcetera.blogspot.com/2014/01/putcall-ratio-at-very-low-level.html

            And:

            http://shortsideoflong.com/2014/01/equity-market-breadth/

            The long Treasury was off fractionally, finishing within a short term trading range and an intermediate term downtrend.

            GLD traded down, finishing within short and intermediate term downtrends.  It needs more follow through from the double bottom and penetration of the very short term downtrend before I will ready to make a commitment.

Bottom line:  the Averages are fighting to make new highs (S&P si, Dow nada) despite the divergences that I keep documenting.  Of course, there is no hard rule  about how long those divergences exist before the indices and stocks as a whole are back in sync.  However, there is precedent that they don’t go on forever.  Sooner or later, the Averages decline or the rest of the Market rallies.  Given the current significant overvaluation (as computed by our Model), my money is on the former.

However, until the bears can develop any kind of sustained momentum, my underlying assumption for this Market remains that it is going higher.   As you know, my current target is the upper boundaries of the Averages long term uptrends (17400/1900).

However, if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Update on sentiment (short):

            http://www.bespokeinvest.com/thinkbig/2014/1/16/bullish-sentiment-declines.html

    Fundamental

    

     Headlines

            Yesterday’s US economic news was generally upbeat: both mortgage and purchase applications were up; the January NY Fed manufacturing index came in well above expectations; while December PPI was in line.   The only negative stat was PPI, ex food and energy, which was much hotter than anticipated.      This data does nothing to disturb our forecast. 

            The Fed released its most recent edition of its Beige Book which read largely as did its predecessor---the economy improving at a slow but steady pace.

            One data point from overseas: German real GDP slowed slightly.  Since Germany is the bell cow of EU economic recovery, that is not exactly great news.  However, it is a single number and most of the data flow in recent weeks have been positive.  So I am treating this as an outlier until or if more weak data emerges.

Bottom line:  the economy continues to track our forecast.  Fiscal policy is more confusing than it is terrible, though it still has the potential to be just that.  Monetary policy is the most likely source of future trouble should the Fed bungle the transition to tighter money---on which it has a 100% track record of failure.

However, even if I make the most positive assumptions within reason on the economy and all facets of government policy, I still can’t get equity valuations close to current levels.  Hence, I believe that we are faced with either a prolonged period of Market stagnation or a correction.   Either way, 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.

            Great bull/bear debate on market valuation (4 minute video):

            http://finance.yahoo.com/blogs/daily-ticker/imagaining-a-perfect-scenario-for-stocks-in-2014--and-an-end-to-the-great-valuation-debate---160153020.html

            Stocks versus commodities (short):

            http://www.zerohedge.com/news/2014-01-15/most-important-chart-albert-edwards

            More on valuation (medium):

            http://advisorperspectives.com/dshort/guest/Shedlock-140115-Bubble-Valuation-Blues.php

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.

Thoughts on Investing---More wisdom from Peter Lynch

Thoughts on Investing---20 insights from Peter Lynch (11-15)

11. THE CYCLICALS

A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion. In a growth industry, business just keeps expanding, but in a cyclical industry it expands and contracts, then expands and contracts again. The autos and the airlines, the tire companies, steel companies, and chemical companies are all cyclicals. Even defense companies behave like cyclicals, since their profits’ rise and fall depends on the policies of various administrations.

Coming out of a recession and into a vigorous economy, the cyclicals flourish, and their stock prices tend to rise much faster than the prices of the stalwarts. This is understandable, since people buy new cars and take more airplane trips in a vigorous economy, and there’s greater demand for steel, chemicals, etc. But going the other direction, the cyclicals suffer, and so do the pocketbooks of the shareholders. You can lose more than fifty percent of your investment very quickly if you buy cyclicals in the wrong part of the cycle, and it may be years before you’ll see another upswing.

12. Boring is good

A company that does boring things is almost as good as a company that has a boring name, and both together is terrific. Both together is guaranteed to keep the oxymorons away until finally the good news compels them to buy in, thus sending the stock price even higher. If a company with terrific earnings and a strong balance sheet also does dull things, it gives you a lot of time to purchase the stock at a discount. Then when it becomes trendy and overpriced, you can sell your shares to the trend-followers.

13. Who are the winners in a cyclical recovery?

Depressed enterprises on the edge of disaster can become very big winners on the rebound. It happens again and again in the auto, chemical, paper, airline, steel, electronics, and nonferrous metals industries. The same potential exists in such currently depressed industries as nursing homes, natural gas producers, and many retailers. What you want, then, is a relatively high profit-margin in a long-term stock that you plan to hold through good times and bad, and a relatively low profit-margin in a successful turnaround.

14. Embrace market corrections

It is not entirely clear what causes deep market corrections (a clear prove that markets are irrational), but without them many of the best performing long-term investors would have never achieved their spectacular returns.

15. Hunting for bargains

There are two particular periods when great bargains are likely to be found. The first is during the peculiar annual ritual of end-of-the-year tax selling. It’s no accident that the most severe drops have occurred between October and December. It’s the holiday period, after all, and brokers need spending money like the rest of us, so there’s extra incentive for them to call and ask what you might want to sell to get the tax loss. For some reason investors are delighted to get the tax loss, as if it’s a wonderful opportunity or a gift of some kind— I can’t think of another situation in which failure makes people so happy. Institutional investors also like to jettison the losers at the end of the year so their portfolios are cleaned up for the upcoming evaluations. All this compound selling drives stock prices down, and especially in the lower-priced issues, because once the $ 6-per-share threshold is reached, stocks do not count as collateral for people who buy on credit in margin accounts. Margin players sell their cheap stocks, and so do the institutions, who cannot own them without violating one stricture or another. This selling begets more selling and drives perfectly good issues to crazy levels. If you have a list of companies that you’d like to own if only the stock price were reduced, the end of the year is a likely time to find the deals you’ve been waiting for. The second is during the collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years. If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says “sell,” you’ll find opportunities that you wouldn’t have thought you’d ever see again. Professionals are often too busy or too constrained to act quickly in market breaks, but look at the solid companies with excellent earnings growth that you could have picked up in the latest ones.

Byron Wien on the Market

Morning Journal---The latest from Reinhart and Rogoff

News on Stocks in Our Portfolios

Fastenal misses by $0.02, misses on revenue

·         Fastenal (FAST): Q4 EPS of $0.33 misses by $0.02.

·         Revenue of $813.76M (+7.5% Y/Y) in-line.

Linear Technology Corporation beats by $0.06, misses on revenue

• Linear Technology Corporation (LLTC): Q3 EPS of $0.51 beats by $0.06.
• Revenue of $334.6M misses by $0.15M.

Economics

   This Week’s Data

            The International Council of Shopping Centers reported weekly sales of major retailers fell 1.0% versus the prior week but up 1.3% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales were up 2.9% on a year over year basis.

            November business inventories rose 0.4% versus expectations of +0.3%; even better, sales were up 0.8%.

            Weekly mortgage applications were up 11.9% while purchase applications increased by 12.0%

            December PPI came in +0.4%, in line with consensus; ex food and energy, it was up 0.3% versus estimates of +0.1%.

            The New York Fed’s January manufacturing index was 12.51 versus forecasts of 3.30.

   Other

            The Baltic dry index continues to plunge (short):

            http://www.zerohedge.com/news/2014-01-14/baltic-dry-continues-collapse-worst-slide-financial-crisis

            More fallout from QEInfinity (medium):

            http://www.nakedcapitalism.com/2014/01/wolf-richter-feds-wealth-effect-quack-medicine-hurts-renters-consumption.html

            The latest from Reinhart and Rogoff (medium and a must read):

            http://www.zerohedge.com/news/2014-01-14/guest-post-europe%E2%80%99s-future-inflation-and-wealth-taxes

            The latest from Dallas Fed chief Fisher (long but a must read):

            http://www.zerohedge.com/news/2014-01-14/feds-fisher-says-investors-have-beer-goggles-liquidity-joins-goldman-stock-correctio

            Why Italian and Spanish bonds are at record low yields (short):

            http://www.zerohedge.com/news/2014-01-14/why-italian-and-spanish-bonds-are-near-record-low-yields-one-greater-fool-chart

            For the economic bears (10 charts):

            http://advisorperspectives.com/dshort/guest/Ted-Kavadas-140115-Disturbing-Charts.php

Politics

  Domestic

  International War Against Radical Islam

            Confusion over the new nuclear deal between Iran and the major powers (medium):

            http://www.latimes.com/world/worldnow/la-fg-wn-iran-nuclear-side-deal-20140113,0,4116168.story#axzz2qPOZwfCF

            Presented without comment (short):

            http://www.zerohedge.com/news/2014-01-14/us-foreign-policy-hits-new-lows-after-israel-mocks-john-kerry