All American Investor

Subscriber Alert-Averaging down

2012-05-25T12:18:00.001-04:00

SUBSCRIBER ALERT
5/25/12

Checking the cash levels in our Portfolios, they have grown as a percentage of the total value as the total value as declined in recent weeks. I don’t really want a larger cash position, so our Portfolios are going to nibble in order to bring the percentages back to those levels reflected in our Closing Bell (Dividend Growth 31%, High Yield 34%, Aggressive Growth 35%). Our purchase candidates include both stocks on our Buy Lists and those in which we had earlier made trading sales at prices higher than those at present.

In the Dividend Growth Portfolio: Tiffany, Paychex, Occidental Petroleum.

In the High Yield Portfolio: Caterpillar, NuSkin Enterprises, Amerigas, Western Gas Ptrs.

In Aggressive Growth Portfolio: Fastenal, Quality Systems, Oracle, Tim Horton.

The Morning Call--Good vs Bad Austerity

2012-05-25T08:42:00.002-04:00

The Market

Technical

The indices (DJIA 12529, S&P 1320) had another schizophrenic day---down early, then rallying late in the day. They remain well within their intermediate term uptrends (11686-16686, 1226-1793) and closed for the second day above their very short term downtrends. The longer the Averages remain above 12344, 1292, the more authority this level gains as the lower boundary of the short term trading ranges.

Volume was down, as was breadth. The VIX fell and while it is well above the lower boundary of its intermediate term trading range, it finished below the former upper boundary of its short term trading range---adding to the overall confusion in the Market.

GLD declined fractionally, remaining above the lower boundary of its intermediate term trading range.

Bottom line: yesterday’s pin action didn’t do a lot to reduce my confusion; although it seems that while investors are nervous about Europe (stocks trade down early in the day), they don’t want to be short over night (stocks rally late in the day)---apparently because they think (hope?) that the eurocrats will do something to prevent a disaster. Could be; but I would like more clarity before taking any action.

Bullish sentiment increases (short):
http://pragcap.com/bullish-sentiment-rebounds-5

Fundamental

Headlines

The economic data yesterday were not that positive: weekly jobless claims were flat while durable goods orders were lousy. However, there was nothing here to warrant even considering altering our forecast.

The other domestic item worth noting was the new Obama line that spending during His administration has grown slower than any other since Eisenhower. When I first heard it, I nearly broke my arm falling out of my chair laughing. Then I checked the TV dial to be sure I wasn’t watching a parody piece from Stephen Colbert or Jimmy Kimmel. No. This Guy has the balls to stand in front of the American people and assume they are too stupid not to believe Him. It is so comical that I have to let Ann Coulter do her usual caustically humorous analysis.
http://www.anncoulter.com/

But never mind because all eyes remain on Europe. We started the day with some rough economic data: EU PMI’s across the board were lower and Spain announced it had more debt than last reported. That coupled with the general uncertainty over Greece pushed stock prices down in early trading.

But later in the day, equities rallied as the notion that the eurocrats would somehow come up with a ‘fix’ for their sovereign and bank debt problems gained some momentum. In their defense, as this crisis has progressed, the eurocrats have always come up with some measure to paper over the emergency (however, half assed and short term the fix may be). So I can see the rationale for subscribing to that belief. In addition, it makes sense to assume that the more time that passes, the more all the negative scenarios will get aired and hashed out in the media---and hence discounted in stock prices. Indeed, I think that risk that the eurocrats do something sensible and in response, stock stage the mother of all rallies is rising. I just have no feel for the magnitude of that risk.

Europe is likely only near the end of Act 1 (medium):
http://advisorperspectives.com/commentaries/wharton_52412.php

Bottom line: the problem for me is that this time around the EU crisis issues are more threatening (bank runs, social unrest, revolt against austerity [which in my opinion has to play a significant role in any workable long term solution]), the fix requires more participants compromising on more complex issues and the price of success is considerably higher than anything that has been done previously (indeed, I wonder if there are sufficient resources even if universal agreement can be reached). Of course, all of this is being considered in ‘aired and hashed out in the media’ process. So on the one hand, if the euros do the right thing, we have the potential for a stunning rally. On the other hand, given the magnitude of the downside if the worse case occurs and the proximity of a resolution to the Greek chapter to this horror story, if Europe implodes, there will be no place to hide. In the end, the level of uncertainty is so high that I think that discretion is presently the better part of valor.

Thoughts on Investing--New Rules of Money courtesy of Forbes

#16 Always Keep Some Powder Dry--Hold Cash

If the market meltdown of 2007-09 taught investors anything, it is that leverage has a very ugly side in declining markets. If you like to sleep at night, forget about margin buying and keep a healthy portion of your holdings in cash. From 10% to 40% is not uncommon.

Economics

This Week’s Data

Other

Good and bad austerity (medium and today’s must read):
http://scottgrannis.blogspot.com/2012/05/good-and-bad-austerity.html

The bull case on the economy (medium):
http://scottgrannis.blogspot.com/2012/05/slow-progress-but-not-recession-and.html

More on the US energy revolution (medium):
http://mjperry.blogspot.com/2012/05/shale-gas-boom-slashes-co2-emissions.html

More indication of the decline in inflationary pressures (short):
http://mjperry.blogspot.com/2012/05/bppmit-annual-inflation-falls-below-2.html

Politics

Domestic

International War Against Radical Islam

What Iran’s rulers want (medium):
http://www.nationalreview.com/articles/300864/what-iran-s-rulers-want-clifford-d-may

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 Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

Morning Journal-More government shenanigans

2012-05-24T08:46:00.001-04:00

Economics

This Week’s Data

April new home sales rose 11,000 versus expectations of a 7,000 increase.
http://www.ritholtz.com/blog/2012/05/housing-permits-starts-completions-2/

Weekly jobless claims came in flat as anticipated.
http://www.calculatedriskblog.com/2012/05/weekly-initial-unemployment-claims_24.html

April durable goods orders rose 0.2% versus estimates of up 0.5%; ex transportation, they fell 0.6% versus forecasts of an increase of 0.7%.

Other
Leading economic indicators in other countries (short):
http://mjperry.blogspot.com/2012/05/leading-economic-indicators.html

The latest from Charles Biderman (4 minute video):
http://www.zerohedge.com/news/biderman-bad-data-and-chinas-recession

Politics

Domestic

The debate over Romney’s record on ‘jobs’ (medium):
http://www.nationalreview.com/author/56454/latest#

More government shenanigans (medium):
http://michellemalkin.com/2012/05/23/jaczko-the-jerk-harry-reids-sexist-crony-gets-the-boot/

And (short):
http://www.powerlineblog.com/archives/2012/05/obama-administration-ignores-its-own-warnings-opens-up-to-hollywood-on-bin-laden-raid.php

Tax cuts for the rich (medium):
http://townhall.com/columnists/thomassowell/2012/05/23/a_book_for_republicans

News on Stocks in Our Portfolios

Tiffany reported quarterly earnings per share at $.68 versus expectations of $.69.

The Morning Call + Subscriber Alert + OK, I am confused

2012-05-24T08:37:00.001-04:00

The Market
Technical

The indices (DJIA 12496, S&P 1318) pin action the last two days has been about as confusing (to me) as it could be. Before going into that, it is important to note that they remain well within their intermediate term uptrends (11668-16668, 1226-1793).

As for the short term, recall that Tuesday, the Averages traded above the descending very short term downtrend, then failed to hold. I concluded that pin action pointed to more downside. And yesterday the trading for the first 75% of the day confirmed that with the indices falling big time, trading down to the lows of last Friday (12344, 1292). Then late in the day, they bounced hard and finished the day over that very short term downtrend (12489, 1315).

So it would seem that (1) the 12344, 1292 level gained some strength as a new support level for the short term trading range while (2) the very short term downtrend lost strength. However, the dramatic intraday reversals of the last couple of days gives those conclusions an ‘iffy’ feel. Nevertheless, in a broader sense, the current level has apparently become the battleground for the bulls and bears.

Volume rose; breadth recovered somewhat though to add to the current lack of technical clarity, the flow of funds indicator continues to get whacked. Likewise, the VIX closed down on the day but remains above the lower boundary of its intermediate term trading range.

GLD experienced a big intraday flush but rallied and closed down just slightly, remaining well above the lower boundary of its intermediate term trading range (148.20).

Bottom line: at the close Tuesday, I thought that I had the technical picture all worked out. With the surprising pin action yesterday, I am humble. As the old saw goes---the Market always acts to make the greatest number of investors wrong. With that in mind, I am going to back off for the moment and wait for more technical clarity.

The latest from Trader Mike:
http://www.stocktradingtogo.com/2012/05/23/market-recap-2011-all-over-again-gold-update/

And from Stock Traders Almanac:
http://blog.stocktradersalmanac.com/post/DJIA-Still-Technically-Broken

The chart on copper (short):
http://www.thereformedbroker.com/2012/05/23/what-is-this-copper-breakdown-telling-us/

Fundamental

Headlines

Yesterday’s economic news was mixed (as usual): mortgage applications were up but the more important purchase applications were down; April new home starts came in ahead of expectations. Not much Market moving in this data.

There was one other tidbit. The congressional budget office issued its long awaited assessment of the impact of expiration of the Bush tax cuts and the spending sequestration on 1/1/13---and it wasn’t pretty. Although any sixth grader that can add and subtract already knew that. So it is not news. However, it does force the issue onto the headlines and into the electorate/investor awareness.
http://www.cbo.gov/publication/43262

I have opined that nothing will likely get done to address the potential negative economic consequences of these events until after 1/1/13--which means that as 1/1/13 approaches the heat level will almost surely increase. The good news is that the elections will hopefully clarify the higher taxes versus lower spending issue which is at the heart of the inability of our political class to reach a compromise. Irrespective of which side wins those elections, a resolution will likely be forthcoming when the newly elected officials take their seats and fix it to their satisfaction. You or I might not like the results; but the point is that this fiscal cliff will dealt with before the negative consequences described above occur.

In the meantime, this is probably going to have a big impact on psychology, meaning with the uncertainty posed by this potential problem, consumers and businesses alike will be circumspect about their spending and that in turn keeps our economy in a slow, sluggish rate of growth---sort of like our forecast.

As usual, Europe ruled the day. Early on, investors were nervous about Greece going under and problems in the EU banking system, resulting in some severe whackage. Later on, these investors decided that the eurocrats would once again snatch victory from the jaws of defeat and come up with a plan to ease Greece out of the euro, bestow bond issuing (money creating) capacity on the ECB, institute a deposit insurance program and implement a program for growth. Notice (1) they managed to bet money on two contradictory scenarios on the same day but just sequentially rather than simultaneously and (2) ‘come up with’ implies a bit of wishful thinking---since nothing was announced.

That said, bear in mind that unless something gets done very quickly and the Greeks (Spanish, Portuguese, Italians) continue to pull money out of their banks, none of the above matters because the banks will collapse. Then the fat lady will have sung and the bad news scenario will be upon us.

***over night EU PMI’s were reported down, below 50.0, meaning economic contraction; a German newspaper announces that the Greek exit is a ‘done deal’; and Spain ‘discovered’ that its debt to GDP was much higher than had been originally estimated (oooopps).

Bottom line: so yesterday’s confusing technical performance was simply reflective of severe schizophrenia among investors. I appreciate that because the economic implications of a Greece defaults/Europe ‘muddles through’ scenario versus one in which the PIIGS default resulting in social strife and extreme financial uncertainty are radically different, wild swings in investor sentiment is to be expected as one alternative or the other gains favor. . However, appreciating investors’ dilemma provides no insight as to what will actually occur. And to be sure, we are getting nothing concrete from the eurocrats. Common sense says the eurocrats will surely do the right thing. But unfortunately the history books tell us that the euros are not good at making inclusionary decisions that while clearly in the best interest of all in the long term involved too much pain short term. So until we see the whites of their eyes being on the sidelines is the safer strategy. Nevertheless. we must in the meantime have a list of both Buy and Sell candidates, so that when clarity arrives we can act immediately.

A review of Europe’s choices (medium):
http://www.forbes.com/sites/briandomitrovic/2012/05/22/its-time-for-europe-to-learn-from-its-past/

An interesting article on the Greek dilemma and game theory (medium):
http://www.zerohedge.com/news/beware-proud-greeks-and-ultimatums

JP Morgan’s addiction to gambling (long but a must read):
http://www.ritholtz.com/blog/2012/05/jpmorgans-addiction-to-gambling-on-derivatives/

And speaking of Wall Street greed, here is a PBS video (20 minutes) on the rise and fall of MF Global:
http://www.zerohedge.com/news/frontline-mf-globals-six-billion-dollar-bet

Subscriber Alert

The stock price of Western Gas Partners (WES-$44) has traded below the upper boundary of its Buy Value Range./ Accordingly, it is being Added to the High Yield Buy List. No shares will be bought at this time.

Morning Journal - The Philly Fed ADS Business Conditions Index

2012-05-23T08:45:00.002-04:00

Economics

This Week’s Data

The International Council of Shopping Centers reported weekly sales to major retailers down 1.7% versus the prior week but up 3.8% versus the comparable period last year; Redbook Research reported month to date retail chain store sales up 2.7% on a year over year basis.

April existing home sales rose 3.4% versus expectations of an increase of 2.6%.
http://scottgrannis.blogspot.com/2012/05/more-signs-of-housing-upturn.html
http://www.ritholtz.com/blog/2012/05/existing-home-sales-without-forclosures-prices-pop-10-1/

The May Richmond Fed manufacturing index came in at 4.0 versus estimates of 11.0 and April’s reading of 14.0.

Weekly mortgage applications rose 3.8% but purchase applications once again fell (-3.0%).

The Philly Fed ADS business conditions Index (short):
http://advisorperspectives.com/dshort/updates/Philly-Fed-ADS-Index.php

Politics
Domestic

Tax rates under Clinton (short):
http://gregmankiw.blogspot.com/2012/05/faulty-memories.html

Shameless liars (medium):
http://townhall.com/columnists/thomassowell/2012/05/22/big_lies_in_politics

More government shenanigans (medium):
http://www.jewishworldreview.com/cols/will051912.php3

News on Stocks in Our Portfolios

Hormel reported quarterly earnings per share of $.48 versus expectations of $.41.

The Morning Call + Subscriber Alert + A pretty pathetic rally

2012-05-23T08:39:00.001-04:00

The Market

Technical

After spending most of the day in plus territory, the indices (DJIA 12502, S&P 1316) finished flat on the day. They both (1) remain well within their intermediate term uptrends (11664-16664, 1225-1792) and (2) continue to probe for a lower boundary to their short term trading ranges (?-13302, ?-1422).

In addition, they both challenged the very short term downtrend (12513, 1320) and failed to hold above those resistance points.

Volume weakened, as did breadth. The VIX rose above the upper boundary of its short term trading range. As you know in yesterday’s Morning Call, I reversed/delayed a call regarding the confirmation of the violation of that boundary. Yesterday’s pin action seemed to re-confirm that break---not good for stocks.

GLD got whacked but remained above the lower boundary of its intermediate term trading range. However, yesterday’s very weak trading may indicate that we are in for another challenge to that lower boundary (148.20).
http://blog.stocktradersalmanac.com/post/Is-This-The-Year-DJIA-Beats-GLD

Bottom line: yesterday’s unsuccessful challenge by the Averages of the very short term downtrend suggests that Monday may have been little more than a relief rally and that the pressure remains to the downside. While stocks may once again challenge near in resistance, the pin action prompts me to chip away at technically broken stocks.

Leading indicators of a Market top. The longer term trend is positive; but that doesn’t mean, stocks won’t test 11651, 1224. (medium)
http://www.marketwatch.com/story/leading-indicators-of-a-market-top-2012-05-22?link=home_carousel

Are the bond markets sending us a warning (short):
http://www.ritholtz.com/blog/2012/05/gayedare-markets-in-a-crash/

The panic/euphoria model (short):
http://pragcap.com/the-return-of-fear

Fundamental

Headlines

Yesterday’s economic news was neutral: existing home sales-positive; weekly retail sales-mixed; the Richmond Fed manufacturing index-negative. However, neutral was good enough to get stock prices moving up in the absence of news out of Europe. Then the inevitable occurred---news out of Europe; the former Greek Prime Minister was quoted as saying that the probability of Greece leaving the euro was high (well, duh), casting doubts that anything can be accomplished in the big EU pow wow today; and that little bit of patently obvious news was enough for stocks to quickly give up all the gains earned earlier.

Greek bonds crashing (even further) (medium):
http://www.zerohedge.com/news/new-greek-bonds-crash-all-time-lows-negative-pledge-fears-emerge-portugal-case

The latest from David Rosenberg (medium):
http://www.zerohedge.com/news/growing-tensions-spreading-global-downturn-and-dead-end-greek-resolution

The suicide watch in Europe is not over (medium):
http://www.telegraph.co.uk/comment/columnists/borisjohnson/9278862/Europe-is-driving-full-tilt-foot-on-the-pedal-into-a-brick-wall.html

And speaking of suicide, which I wish that I wasn’t (4 minute video):
http://www.zerohedge.com/news/nigel-farage-europes-economic-suicide

Bottom line: with our economy continuing to stumble forward, Europe poses the major problem to our economic outlook and stock valuations. There, of course, is some probability that the worse case is largely reflected in current prices, especially since they have traded down of late. However, in my opinion, it is less than many hope.

At the moment, lines are being drawn in the sand: Germany has said no more money; and since they are the only Europeans that have any, that is significant; Greece has said no more austerity. This is like the gunfight at OK corral. Everyone is going to lose something; the only question is, how much. And yet nobody is doing anything to attempt to find the least painful alternative (Greece leaves the euro and Germany/ECB helps ease it through the transition). It may happen at the last minute, but (1) there is no sign of it, (2) the more time that lapses, the greater the chances that events could spin out of control and render it impossible to implement and (3) there are so many alternative scenarios to this ‘least painful’ course that potentially hold much greater negative consequences, that I just don’t believe are being discounted. Cash is a comfort.

The cure for JP Morgan and our banking system (medium):
http://www.nakedcapitalism.com/2012/05/for-starters-reinstate-glass-steagall.html

Subscriber Alert

Given the failure of yesterday’s rally, I am assuming that we are in for more downside. Today at the open, the following actions will be taken on stocks that have experienced a technical breakdown.

In the Dividend Growth Portfolio, a small portion of Qualcomm will be Sold.

In the High Yield Portfotio, a small portion of Sanofi Aventis will be Sold.

Morning Journal-Smaller government and the political class

2012-05-22T08:37:00.001-04:00

Economics

This Week’s Data

Other

Chinese buyers defaulting on commodity shipments (medium):
http://www.zerohedge.com/news/chinese-buyers-defaulting-commodity-shipments-prices-plunge

Weekly gasoline update (short):
http://advisorperspectives.com/dshort/updates/Gasoline-Update.php

Vehicle miles driven (short):
http://advisorperspectives.com/dshort/updates/DOT-Miles-Driven.php

Politics

Domestic

More on the tax math of ‘ex-patriot’ Facebook founder (short):
http://www.powerlineblog.com/archives/2012/05/punitive-liberalism-updated.php

The congressional threat to us all (medium):
http://www.ritholtz.com/blog/2012/05/congressional-threat-to-every-investor-business-owner-and-citizen/

Smaller government and the political class (medium):
http://www.zerohedge.com/news/guest-post-americans-want-smaller-government-and-lower-taxes

News on Stocks in Our Portfolios

More earnings per share reports:

Reported Expected

Lowe’s $.44 $.41
Medtronic .99 .98

The Morning Call--Use this rally to Sell broken stocks

2012-05-22T08:31:00.001-04:00

The Market

Technical

The indices (DJIA 12504, S&P 1315) finally rallied, remaining within their intermediate term uptrend (11651-16651, 1224-1791). However, they are searching for a lower boundary to their short term trading range (?-13302, ?-1422).

Yesterday had all the feel of a relief rally/short covering; and we could very well witness some follow through before stocks again resume their search for a short term lower boundary. The key levels to watch as price rise are 12548, 1329---which are the upper boundaries of their very short term downtrends.

At the moment, I don’t believe that Friday’s low will prove to be the new lower boundary (12344, 1292). That said, there were a number of our stocks that bounced off easily defined support levels---hinting that there is some outside chance that equities have found a bottom; hence I am not totally ruling them out as new lower boundaries

As a reminder, the other support levels that I am watching (1) their 200 day moving averages [12198, 1277], (2) the neckline of the reverse head and shoulders pattern [12287, 1266] and (3) the old resistance/support level [11741, 1230].

Volume was down; breadth snap back solidly. The VIX plunged and closed right on the upper boundary of its short term trading range. You will remember that in Saturday’s Closing Bell, I moved forward the call for a break above this boundary based primarily on the distance element of our time and distance discipline. Yesterday, the VIX recouped the entire distance; so I am going to hedge a bit and re-open the confirmation period for at least another day.

GLD moved up slightly, remaining above the lower boundary of its intermediate term trading range.

Bottom line: at the moment, I am operating on the thesis that the current decline isn’t over; that the either the aforementioned upper boundaries of the very short term downtrends or the former 12744, 1338 resistance levels will hold; and when that occurs, our Portfolios will lighten up on some technically broken stocks.

If I am wrong and 12344, 1292 prove the bottom, then there are plenty of stocks on our Buy Lists to Add to.

Corrections take time (short):
http://www.chrisperruna.com/2012/05/20/corrections-take-time-be-patient/

Trader Mike on yesterday’s pin action (short):
http://www.stocktradingtogo.com/2012/05/21/market-recap-rebound-begins-education-tips-apple-and-facebook-updates/

Fundamental

Headlines

No economic news yesterday. In addition, there was little out of Europe over the weekend. The focus of investor/media attention was the disappointing trading in Facebook after its equally disappointing Friday offering. That it didn’t have any impact on the rest of the Market was somewhat surprising. But I think that only reaffirms that all eyes are on Europe and with no new bad news, there was a sigh of relief.

***over night, Germany said ‘no way, Jose’ to ECB issued bonds and the OECD
said Europe is now in recession.

A vision of the Greek endgame (medium and today’s must read):
http://www.zerohedge.com/news/forget-bazookas-here-come-tomahawks-and-howitzers-r-rated-walk-thru-greek-endgame

Will a eurozone crisis lead to another Lehman moment (medium):
http://www.nakedcapitalism.com/2012/05/could-the-eurozone-crisis-cause-another-lehman-moment.html

And:
http://www.minyanville.com/special-features/random-thoughts/articles/todd-harrison-todd-harrison-minyanville-todd/5/21/2012/id/41085

More on potential bank runs (medium):
http://www.zerohedge.com/news/elephant-room-european-capital-outflows-and-another-%E2%82%AC215-billion-spanish-deposit-flight

Bottom line: if investors were buying stocks just because there was no bad news out of Europe, I believe that they will be very unhappy with their purchases. Now perhaps the buying was because all the bad news from Europe was reflected at 12344, 1292. I doubt it; but it can’t be ruled out.

This is one of those times where the technicals guide my action. 12344, 1292 are either the bottom or they are not; we just have to wait for the Market to reveal its wisdom.

The latest from John Hussman (medium):
http://www.hussman.net/wmc/wmc120521.htm

Tuesday morning humor (3 minute video):
http://www.zerohedge.com/news/blast-past-snl-explains-wall-street

Carbo Ceramics (CRR) 2012 Review

2012-05-21T13:00:00.000-04:00

Carbo Ceramics Inc manufactures and sell ceramic and resin coated sand propellants designed for hydraulic fracturing of oil and natural gas wells. The company has grown profits and dividends 13-14% over the last ten years earning a 15-20% return of equity. This performance should continue because:

(1) because its propellants are needed in oil as well as gas plays, the shift in exploration for liquids should not impact the company’s growth,

(2) its move into spill prevention and containment solutions should accelerate growth as environmental concerns get more attention,

(3) acquisitions.

Negatives:

(1) the recent decline in capital spending from major customers,

(2) a decrease in drilling activities in less productive basins.

CRR is rated A by Value Line, has no debt and its stock yields 1.0%

Statistical Summary

	Stock Yield	Dividend Growth Rate	Payout Ratio	# Increases Since 2002
CRR	1.0%	10%	13%	10
IND	1.7	8*	13	NA

	Debt/Equity	ROE	EPS Down Since 2002	Net Margin	Value Line Rating
CRR	0%	26%	2	22%	A
IND	23	17	NA	13	NA

*over half of all companies in CRR’s industry do not pay a dividend

Chart

Note: CRR stock made great progress off its March 2009 low, quickly surpassing the downtrend off its September 2008 high (red line) and the November 2008 trading high (green line). Long term the stock is in an up trend (straight blue lines). Intermediate term, it is in an down trend (purple line). The wiggly blue lines are Bollinger Bands. The Aggressive Growth Portfolio does not own a position in CRR. The upper boundary of its Buy Value Range is $44; the lower boundary of its Sell Half Range in $138.

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

The Morning Call + Subscriber Alert + A classic Dow Sell signal

2012-05-21T08:38:00.006-04:00

The Market
Technical

Monday Morning Chartology

As you can see, the S&P is approaching a range with multiple support levels. With this kind of congestion, I expect a slow down in the rate of decline and, hopefully, the establishment of a new lower boundary of its short term trading range.

GLD makes a great rebound. Notice the similarity to the late December/early January sell off and bounce.
http://www.zerohedge.com/news/why-has-gold-fallen-price-and-what-outlook

The VIX soared again on Friday. While it has not quite met the time element of our time and distance discipline, it has more than satisfied the distance element, thus confirming the break above the upper boundary of its short term trading range. This is not a positive for stocks.

We now have a classic Dow sell signal (short):
http://blog.stocktradersalmanac.com/post/DJIA--DJT-Breach-Recent-Lows-Trigger-Dow-Theory-Sell-Signal

Fundamental

The latest from David Rosenberg (medium):
http://www.zerohedge.com/news/david-rosenberg-despair-begets-hope

Subscriber Alert

The following stocks have traded below the upper boundary of their Buy Value Range and are, therefore, being Added to their respective Buy Lists. Our Portfolios own shares in all these stocks. None will be Bought today.

In the Dividend Growth Portfolio: United Parcel Services (UPS-$74)

In the High Yield Portfolio: United Parcel Services (UPS-$74) Kinder Morgan Energy Ptrs (KMP-$77)

In the Aggressive Growth Portfolio: Blackrock (BLK-$172), Staples (SPLS-$13)

Economics

This Week’s Data

Other

US manufacturing continues to improve (short):
http://mjperry.blogspot.com/2012/05/future-of-american-manufacturing-looks.html

US debt and economic growth (5 minute video):
http://www.zerohedge.com/news/biderman-malinvestment-and-diminishing-returns-intervention

Is the Fed already in the midst of Twist 2 (medium):
http://www.zerohedge.com/news/time-operation-twist-1-over-fed-will-have-quietly-completed-40-operation-twist-2-well

Politics

Domestic

Missile defense for wimps (medium):
http://www.nationalreview.com/articles/300198/missile-defense-wimps-clifford-d-may

The Closing Bell-It ain't over, till it's over

2012-05-19T08:52:00.003-04:00

Statistical Summary

Current Economic Forecast

2011

Real Growth in Gross Domestic Product: +1.5- +2.5%
Inflation: 2-3 %
Growth in Corporate Profits: 7-12%

2012

Real Growth in Gross Domestic Product (revised): +1.0- +2.0%
Inflation (revised): 2.5-3.5 %
Growth in Corporate Profits (revised): 5-10%

Current Market Forecast

Dow Jones Industrial Average

Current Trend (revised):
Short Term Trading Range (?)-13302
Intermediate Up Trend 11641-16641
Long Term Trading Range 7148-14180
Very LT Up Trend 4187-14789

2011 Year End Fair Value 10750-10770

2012 Year End Fair Value 11290-11310

Standard & Poor’s 500

Current Trend (revised):
Short Term Trading Range (?)-1422
Intermediate Term Up Trend 1223-1790
Long Term Trading Range 766-1575
Very LT Up Trend 644-2000

2011 Year End Fair Value 1320-1340

2012 Year End Fair Value 1390-1410

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 31%
High Yield Portfolio 34%
Aggressive Growth Portfolio 35%

Economics

The economy is a modest positive for Your Money. The data this week were weighted to the plus side: positives--mortgage applications, housing starts, homebuilders confidence, April retail sales, industrial production, business inventories, CPI and the NY Fed manufacturing index; negatives--purchase applications, the leading economic indicators and the Philly Fed manufacturing index; neutral--weekly retail sales and weekly jobless claims. Clearly, they support our economic outlook:

‘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 along with the likelihood a rising and potentially corrosive rate of inflation due to excessive money creation and the historic inability of the Fed to properly time the reversal of that monetary policy.’

As for the risks facing this forecast:

(1) a vulnerable banking system. As you know, this concern surfaced last week with the JP Morgan loss. My worry is not the announced deficit; it can easily be absorbed by JPM. Rather it is [a] if the premier risk manager in the industry could sustain such a loss unknowingly, how much more damage lies on the balance sheets of lesser banks. Indeed, as a sign of this problem, the loss at JP Morgan grew this week from $2 billion to a rumored $5 billion---so the bank doesn’t even have a handle on its own problem, [b] as a corollary, it speaks to the lack of effective regulatory oversight. Even if this latest incident is a one off occurrence, what happens next time when mismanagement is systemic, and [c] how much additional risk exists in the form of counterparty risk to EU banks if the s**t hits the fan across the pond.

Until something is done by the legislative/regulatory powers to deal specifically with prop trading and the use of derivatives, I believe that our financial system will be hostage to the hubris and greed of the banking class.

(2) oil prices remain at elevated levels, though they continue to creep downward. The risk here is that high energy prices stifle consumer spending and shrink corporate profit margins. However, the longer the decline in energy prices is in place, the less negative this factor becomes to the economy; and as I noted last week, at some point it starts transitioning from being a negative to a positive. We are not there yet; but the trend is certainly going our way.

That said, a blow up in the Middle East could change that in an instant.

(3) the ECRI weekly index was up modestly this week. While it was down the prior three weeks, it had been up the preceding two and a half months. So it is small wonder that I remain somewhat skeptical of the validity of its latest recession call. Nevertheless, I am keeping it on our list of risks because of [a] its track record for calling economic downturns and [b] the adamancy of its founder regarding this particular call---which he reiterated again last week. Furthermore, it has a long time horizon; so until the founder cries ‘uncle’, I leave it as a risk to our outlook.
http://advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php

(4) finally, the sovereign and bank debt crisis problems in Europe remain the biggest risk to our forecast. This week, [a] the Greek political parties were unable to form a working coalition; so there will be another round of elections mid June, if the country can hold on that long, [b] Moody’s downgraded the credit ratings of both the Spanish and Italian banks and [c] worse of all, bank runs appeared to be occurring in Greece and Spain.

***over night Spain announced that its budget deficit had grown from 8.5% of GDP to 8,9%

It is this latter that really has me worried. Bank runs in general end badly; but when accompanied by political paralysis [which I have been yelping about for the last couple of weeks], there is little to moderate the damage.

Not to pile it on, but don’t forget about Portugal and Ireland (medium):
http://www.zerohedge.com/news/ireland-and-portugal-resume-their-places-among-europes-dominos

As always I enter the caveat that the eurocrats could wake and devise a plan to [a] at least lessen the damage from a Greek exit of the euro which at the moment seems inevitable or [b] provide temporary support to the Greek/Spanish banking systems if a full fledged bank run begins. But their silent inaction speaks volumes. Moreover, when, as and if they do arise from their stupor, events may have already progressed to the point where any measure will prove inadequate.

The questions then are [a] how bad is it going to get? For that I have no answer. There are simply too many policy {and their consequences} unknowns and [b] how much of all this is the price of stocks? I do have an answer there; and it is ‘probably not nearly enough’. So while I can’t quantify any new assumptions that would reflect a scenario worse than our current ‘muddle through’, I can judge that our Portfolios need a substantial safety net until we know the extent of the impending carnage in Europe.
http://www.nakedcapitalism.com/2012/05/europe-is-falling-apart.html

Bottom line: the economy continues to stumble along making slow but steady progress; and this week’s data support that notion.

Our political class had another marvelous week highlighted by the senate’s 0 to 100 vote against Obama’s 2012 budget and a sophomoric, whiney butt proposal from that same august body to penalize an American from renouncing his citizenship. Once again nothing on spending, taxes, the deficit. All in all, depressing as hell; but well reflected in our Models.

Of course, when it comes to the magnitude of risk, Europe remains the 800 pound gorilla in the room; and as noted above, this week, conditions only got worse. So my take on Europe is unchanged:

‘Across the pond, the eurocrats are doing what they do best--smoking cigars, drinking wine, chasing skirts and laying on the beach; in other words, doing everything possible to ignore their problem. My obvious concern is that this strategy is not a formula for correcting an acute case insolvency. They may ultimately solve it but it appears that it will take an emergency to generate the necessary action; and given the progressive worsening of the situation, the risk is that conditions will simply deteriorate to the point where the problem is unfixable. In any case, it appears that a crisis is needed to prod action. We just don’t know when and the extent of the economic fallout’.

This week’s data:

(1) housing: weekly mortgage applications rose, but purchase applications fell; April housing starts were strong, but building permits were disappointing; the April homebuilders confidence index advanced modestly,

(2) consumer: weekly retail sales were mixed; April retail sales were up; weekly jobless claims were basically flat but ahead of expectations,

(3) industry: April industrial production was quite strong; March business inventories rose and at half the rate of sales; the May NY Fed manufacturing index was up much more than anticipated while the Philadelphia Fed index was terrible,

(4) macroeconomic: the April leading economic indicators were down; the April CPI was unchanged; the minutes of the latest FOMC meeting revealed nothing new policy wise.

The Economic Risks:

(1) the economy is weaker [stronger] than expected.

(2) Fed policy (reading the data correctly).

(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).

(4) protectionism (Free trade is a major positive for world and US economic growth.).

(5) fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.).

(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)

Politics

The domestic political environment is a neutral but could be improving for Your Money while the international political environment remains a negative.

The Market-Disciplined Investing

Technical

The indices (DJIA 12369, S&P 1295) closed solidly within their intermediate term up trends (11641-16641, 1223-1790). However, with the S&P’s close Friday, they both have now confirmed the break below the 12744, 1338 support level; and therefore continue to struggle to reset a lower boundary to their short term trading ranges (?-13302, ?-1422).

For a hint of where that may be, we turn to other visible support levels; and as you know in addition to the lower boundaries of the Averages intermediate term up trends, there are a number, including (1) their 200 day moving averages [12198, 1277], (2) the neckline of the reverse head and shoulders pattern [12287, 1266] and (3) the old resistance/support level [11741, 1230].

As for resistance, we are now looking at (1) the 12919, 1372 former support level, (2) the former 12744, 1338 support level, (3) the 50 day moving averages [13032, 1380] and (4) upper boundaries of their short term trading ranges [13302, 1422]. Notice the growing list of resistance levels?---making any recovery potentially torturous.
http://pragcap.com/risk-ratio-indicates-more-correction-to-come

I have repeatedly opined that I don’t believe the current Market weakness is a precursor to a bear market; and that it is simply probing for a lower boundary that will establish a wider trading range incorporating a more reasonable spread around Fair Value. That said, as the fundamentals in the EU continue to deteriorate and the eurocrats procrastinate, the greater the risk that prices will knife through all the above support levels and disprove my thesis.

Update on ‘the best stock market indicator ever’:
http://advisorperspectives.com/dshort/guest/John-Carlucci-Best-Indicator-Ever-Update.php

Volume on Friday was up big; breadth was mixed with the flow of funds indicator continuing to plunge. The VIX was up, closing above the upper boundary of its short term trading range for the third day. While the time element of our discipline generally encompasses four to five days depending on the price action, in the this case the distance element has completely overwhelmed the process. Accordingly, the break above the upper boundary of the short term trading range is confirmed---and that is not good for stocks.

GLD had another strong day Friday, recovering above the former lower boundary of its short term trading range.

Bottom line:

(1) the indices are probing for new lower boundaries to the short term trading ranges [?-13302, ?-1422] but remain well within their intermediate term up trends (11641-16641, 1223-1790],

(2) long term, the Averages are in a very long term [78 years] up trend defined by the 4187-14789, 644-2000 and a shorter but still long term [13 years] trading range defined by 7148-14198, 766-1575.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (12369) finished this week about 12.5% above Fair Value (10985) while the S&P (1295) closed 4.6% under valued (1358). Incorporated in that ‘Fair Value’ judgment is a ‘muddle through’ scenario in Europe and a sluggish recovery at home that isn’t likely to improve until we change the personnel in Washington.

This week’s economic data provided support to the ‘recovery’ part of the slow recovery forecasted by our Model. Lower oil prices are also helping. Not so positive is the continued uncertainty around the magnitude of the JPM loss as well as the extent to which bank management’s in general simply don’t know how much risk is being carried on their balance sheets. All things considered though, I believe that our economy is currently on track to come in as our Model projects. Thus, the US economic inputs to our Valuation Model are unchanged.

Our political class continues to be an embarrassment. This week the senate voted Obama’s 2012 budget down 0 to 100, but offered no alternative, leaving the US without a budget for the third year in a row. Adding insult to injury, they managed to whip up all the righteous indignation of a 12 year old school girl by proposing legislation to penalize individuals who otherwise are sick and tired of putting up with their incompetency and have the cojones to seek refuge elsewhere. Good job---just like we assumed in our Models.

With respect to Europe, conditions continue to deteriorate. This week’s actions were particularly disturbing as a bank run began in Greece and appeared to be spreading to Spain. And nothing from the political class to address those disruptions or to either hold Greece in the euro or moderate the pain of its exit.

‘The problem is not that we don’t understand the size and scope of this crisis, the problem is that no one seemingly has the balls to do anything about it--which clearly threatens our ‘muddle through’ scenario. To be sure, the eurocrats have acted to pull back from the brink on prior occasions. However, the risk is that because Spain and Italy are so much larger than Greece, the momentum towards default may be impossible to stop once it gathers speed. That raises the probability that either a misstep will lead to a very severe recession and/or a counterparty default in the CDS market snowballs out of control throughout the global financial system.’

My investment conclusion: stocks are starting to reflect the risks of some sort of European meltdown. The problem is that we won’t know the extent of that meltdown until either the eurocrats take some action to moderate it or it just ignites on its own. In either case, though, some portion of the outcome is getting priced in.

The good news is that our economy is growing even though not at a satisfactory rate. The even better news is that (1) our Sell Discipline has led to a build up in cash as some stocks have hit their Sell Half Range and (2) our trading discipline has also moved our Portfolios out of a portion of holdings where the stock prices have violated major support. All that cash brings stability in times of downward volatility and provides reserves for taking advantage of lower stock prices.

In addition, our Buy Lists are growing; and we even nibbled a bit Friday morning. We will continue that strategy if prices decline further. Once support is achieved, our Portfolios will get more aggressive on the Buy side.

I did not shine in my GLD transactions this week, having made a trading sale early in the week but Buying shares back on Friday morning. The redeeming news to this otherwise clumsy trade was that GLD was Bought back at a slightly lower price than the original sale.

This week, our Portfolios Sold then bought back GLD. In addition, several positions in stocks that were breaking down technically were Sold and proceeds used to Buy back shares in other positions that had previously been liquidated at higher prices.

Bottom line:

(1) our Portfolios will carry a high cash balance,

(2) we continue to include gold and foreign ETF’s in our asset mix because we continue to believe that inflation is a major long term risk. An investment in gold is an inflation hedge and holdings in other countries provide exposure to better growth opportunities. However, the likelihood of a continued strengthening in the dollar argues for less emphasis on these investment alternatives over the intermediate term.

(3) defense is still important.

DJIA S&P

Current 2012 Year End Fair Value* 11300 1400
Fair Value as of 5/31/12 10985 1358
Close this week 12369 1295

Over Valuation vs. 5/31 Close
5% overvalued 11534 1425
10% overvalued 12083 1493
15% overvalued 12632 1561

Under Valuation vs. 5/31 Close
5% undervalued 10435 1290
10%undervalued 9886 1222 15%undervalued 9337 1154

* 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.

The Morning Call + Subscriber Alert + QEIII?

2012-05-18T08:37:00.002-04:00

The Market

Technical

The indices (DJIA 12442, S&P 1304) had another ugly day, the Dow closing below 12744 for the fourth day, the S&P below 1338 for the third day. The DJIA has now satisfied its time element of our time and distance discipline (thereby confirming the break below 12744) while the S&P will follow suit at the close today.

Assuming that occurs the following are the next likely support levels: (1) their 200 day moving averages [12198, 1278], (2) the neckline of the reverse head and shoulders pattern [12287, 1266] and (3) the old resistance/support level [11741, 1230].

Meanwhile, they remain well within their intermediate term up trends (11641-16641, 1222-1789).

Volume was up a tad; breadth was ugly. The VIX jumped 10% and finished above the upper boundary of its short term trading range for the second day.

GLD did a Titan III impersonation yesterday, bouncing hard and staying above the lower boundary of its intermediate term trading range. However, it is still below the former lower boundary of its short term trading range.
http://www.zerohedge.com/news/guest-post-gold-tells-truth

Bottom line: in the absence of any kind of visible support, I am assuming any bounce from these levels would simply to a reaction from an oversold position. So I remain very cautious technically speaking. That said, as I noted yesterday, some of our stocks are only starting to break down while others appear to have found support. My inclination is to do some small trades at these levels selling some shares of the former while nibbling at the latter.

The one thing that did appear to hit solid support was GLD which rebounded rather dramatically off the lower boundary of its intermediate term trading range. Further the present decline is almost an exact duplicate of this January’s sell off and bounce. So as wishy washy as it seems, our Portfolios will buy back the shares of GLD sold earlier this week.

The latest AAII Sentiment Survey (short):
http://pragcap.com/bullish-sentiment-nears-a-two-year-low

Fundamental

Headlines

Yesterday’s economic news was not that positive: (1) weekly jobless claims were flat with the prior week---not great but not horrible, (2) the leading economic indicators were disappointing and (3) the Philly Fed index was a disaster.

Of course, given that investors have ignored them of late, it probably didn’t matter. Although there was plenty of bad news from virtually every other direction to keep sentiment in the tank:

(1) in Europe, Moody’s downgraded Spanish bank ratings and it appeared that the Greek bank run was moving to Spain as the funds outflow jumped noticeably,

The current European crisis in historical perspective (medium):
http://www.nationalreview.com/articles/300149/let-sleeping-germans-lie-victor-davis-hanson

Europe’s dilemma in 4 minutes:
http://www.zerohedge.com/news/everything-you-need-know-about-europes-dilemma-4-minutes

(2) JP Morgan announced the losses from its prop trading department had grown to $3 billion. Do I hear $4 billion?

(3) the morons in Washington announced that they were so upset, nay, outraged that they were working on legislation to bar anyone who renounced their citizenship to avoid paying taxes from ever returning to the US. This in response to one of the [Brazilian born] Facebook founders pulling up stakes and moving the Singapore. This is such bulls**t on so many levels, I don’t even know where to start. But I’ll try.

First of all, if one renounces one’s citizenship, one is automatically assessed a tax one’s assets. Secondly, if the renunciation is part of a trend, why not deal with the issues that are causing Americans to leave in the first place---rather than react with some whining butt, sour grapes legislation. Finally, where is the outrage amongst the political class about having no federal budget for three years, about the non-stop bail out spending of our tax dollars and printing of fiat money, about the budget busting healthcare legislation that [according to Nancy Pelosi] needed to be passed ‘so we can find out what’s in it’, about the billions wasted on ‘green energy’ while prohibiting the building of the Keystone pipeline?

OK, I feel better now---but you get the picture.

However, I am not the only one pissed (short):
http://cafehayek.com/2012/05/20340.html

Bottom line: as disappointing as today’s economic news was, it really did nothing to alter our outlook. Likewise, the JP Morgan news was not unexpected; as you know, I have been yakking about the lack of transparency of our banking system’s balance sheet since 2007. And as much as I fume about the magnitude of incompetency of those worthless turds in Washington, that is not a sudden revelation. All in all, I believe that stocks are undervalued knowing all this.

What scares the living daylights out of me is the mounting prospect of a run on the banks of the southern European countries. If it is starting to happen in Spain, then it is only a matter of time till Italy follows suit. And if that happens then we are really talking about (1) financial chaos in Europe, at least for a short period of time and (2) the prospect that all those derivative trades that our own banks have on their books with the EU banks as counterparties will meet the JP Morgan fate only to the tenth power.

It is enough to make you want to just grab dates and run. What is curious though is the performance of GLD yesterday. The sudden inverse correlation suggests that either somebody knows or strongly suspects that an EU rescue package is in the works and/or that QEIII is coming very soon. If the former, I have said before that I believed that the eurocrats would do something. It has always been a matter of magnitude and timing. Granted nothing short a return to fiscal responsibility is not going to cure what ails Europe; but perhaps the ‘something’ will be sufficient to allow an orderly exit of Greece from the euro and to prevent the kind of explosive unwinding of the EU that would be the ‘disaster scenario.

The problem, of course, is that we simply don’t know what these guys are going to do; so for the moment, it is difficult to handicap what the potential outcomes will be. So our Portfolios continue to hold lots of cash.
http://www.project-syndicate.org/commentary/greece-must-exit

Subscriber Alert

The stock price of Expeditors Int’l ($38) has traded below the lower boundary of it Buy Value Range as well as its Stop Loss Price. Accordingly, it is being Removed from the Aggressive Growth Buy List. Approximately, one half of this position will be Sold and the proceeds re-invested in Quality Systems ($30). You will re-call that earlier the Aggressive Growth Portfolio had made a trading sale of QSII at $34-35.

The stock price of T Rowe Price ($58) has traded below major support. The Dividend Growth and High Yield Portfolios are reducing the size of this position. In the Dividend Growth Portfolio the proceeds will be re-invested in South Jersey Industries ($47). A trading sale in this stock had been made at $51.

All of our Portfolios will Buy back the shares of GLD that had been sold on Monday.

Thoughts on Investing--New Rules of Money courtesy of Forbes

#15 Use ETF’s to Expand Your Investing Horizons

There are nearly 1100 exchange traded funds holding over $1 billion in assets. Not al ETF’s are good for you--leverage and inverse funds are particularly dangerous--but ETF’s are still the cheapest way to invest in broad indexes like the S&P and Russell 2000. They are also give individual investors easy access to foreign currencies like the Swiss franc and yen, and commodities ranging from timber to platinum. They open a world of foreign investing opportunities from China and Brazil to Turkey and Africa.

News on Stocks in Our Portfolios

Tiffany (TIF) increases its quarterly dividend payout by 10% to $0.32 a share.

More earnings per share reports:

Reported Expected

Quality Systems $.25 $.27
Donaldson .46 .43

Economics

This Week’s Data

April leading economic indicators fell 0.1% versus expectations of an increase of 0.1%.
http://advisorperspectives.com/dshort/updates/Conference-Board-Leading-Economic-Index.php

The May Philadelphia Fed manufacturing index came in at -5.8 versus estimates of +10.0 and April’s reading of +6.5.
http://www.calculatedriskblog.com/2012/05/philly-fed-regional-manufacturing.html

Other

Foreclosures have ground to a halt (medium):
http://www.zerohedge.com/news/american-foreclosure-process-has-ground-halt

Politics

Domestic

The consequences of centralized planning-a glimpse of Europe’s future (medium and today’s must read):
http://american.com/archive/2012/may/the-hayek-effect-the-political-consequences-of-planned-austerity

I have never been a ‘birther’ (i.e. one who questions Obama’s origins); however, you have to read this. It does mean that He wasn’t lying in this presentation; but it does mean that He was either lying in the pamphlet or has been lying to all of us from the beginning:
http://www.breitbart.com/Big-Government/2012/05/17/The-Vetting-Barack-Obama-Literary-Agent-1991-Born-in-Kenya-Raised-Indonesia-Hawaii

The problem is not the lack of bipartisanship in congress, the problem is too much (i.e. all these assholes want to do is spend Your Money):
http://www.jewishworldreview.com/cols/will051712.php3

More senseless drivel from our political class (medium):
http://www.zerohedge.com/news/guest-post-regardless-what-propaganda-says-not-how-free-society-treats-people

Morning Journal-Must see video of Alan Simpson

2012-05-17T08:44:00.002-04:00

Economics

This Week’s Data

April industrial production rose 1.1% versus expectations of up 0.6%; capacity utilization came in at 79.2 versus forecasts of 79.0.
http://mjperry.blogspot.com/2012/05/industrial-production-rebounds-in-april.html

With some perspective (short):
http://scottgrannis.blogspot.com/2012/05/some-additional-perspective-on-europe.html

The minutes from the last Fed meeting were released but contained very little new information. The committee did dance the QEIII issue but there was no indication of a policy change anytime soon.

Weekly jobless claims were unchanged versus estimates of a 5,000 decline.
http://www.calculatedriskblog.com/2012/05/weekly-initial-unemployment-claims-at_17.html

Other

Alan Simpson on the US fiscal debacle (6 minute video):
http://www.zerohedge.com/news/one-half-simpson-bowles-goes-there-krugman-borders-hysteria

Another solution for JP Morgan (medium):
http://www.nationalreview.com/articles/299954/once-again-break-banks-arnold-kling

More data pointing to a slowdown in China (short):
http://pragcap.com/to-see-chinas-slowdown-in-real-time-just-watch-their-interest-rates

A survey of economists and their 2012 GDP projections (short):
http://advisorperspectives.com/dshort/commentaries/WSJ-Economist-Survey-on-GDP-May-2012.php

Fed intervention and the Market (short/medium):
http://advisorperspectives.com/dshort/commentaries/Fed-Intervention-Update.php

Politics

Domestic

More crony capitalism (medium):
http://michellemalkin.com/2012/05/16/obamcare-cronyism-the-first-ladys-patient-dumping-privacy-meddling-scheme/

News on Stocks in Our Portfolios

HollyFrontier (HFC) announces a special dividend of $0.50/share and a 50% increase in its quarterly dividend to $0.15 from $0.10/share.

The Morning Call-Warning! Oncoming Train

2012-05-17T08:36:00.002-04:00

The Market

Technical

The indices (DJIA 12598, S&P 1324) continue in their challenge of the 12744, 1338 support level---the Dow for the third day, the S&P for its second. However, they both remain within their intermediate term up trends (11624-16624, 1221-1788).

Volume declined; breadth was mixed again, but the flow of funds indicator continues to crash. The VIX traded up and closed above the upper boundary of its short term trading range. Our time and distance discipline is now operative; but if the break is confirmed it will not be a good sign for stocks.

Gold fell but remains above the lower boundary of its intermediate term trading range (148.20).
http://www.zerohedge.com/news/canary-gold-mine-historic-move-japanese-pension-fund-switches-gold-first-time-ever

Bottom line: I keep thinking that stocks are going to stage an oversold rally, especially when we get good economic news. But then, they just get hammered, again. I think that it makes little sense to try to get in front of this downward move. That said, I continue to see a mixed picture within our Universe of stocks, i.e. some breaking important support level while others seem to have found a bottom and are going flat. So once we have a bottom, there will be plenty of things to do.

No selling panic, just a buyers strike (medium):
http://www.minyanville.com/business-news/markets/articles/market-analysis-NYSE-McClellan-Oscillator-NYMO/5/16/2012/id/41037

Flash update of ‘the best stock market indicator ever’ (short):
http://advisorperspectives.com/dshort/guest/John-Carlucci-Best-Indicator-Ever-Update.php

Fundamental

Headlines

Yesterday’s economic news was mixed to positive: (1) weekly mortgage applications up while purchase applications were down, (2) April housing starts rose but building permits fell, but (3) April industrial production and capacity utilization were much stronger than anticipated. Once again, these signs of a mildly improving economy juiced the bulls early in the day but then were offset by the continuing weight of a potential collapse in Europe plus the release of the minutes from the last FOMC meeting which indicated an ambivalent attitude to QEIII.

Goldman’s thoughts on the endgame in Greece (medium):
http://www.zerohedge.com/news/what-happens-if-greek-payments-stop-goldmans-thought-experiment-day-after

Don’t forget Italy (medium):
http://www.telegraph.co.uk/finance/financialcrisis/9268330/Italys-banks-shaken-as-economic-slump-deepens.html

Meanwhile, lest we forget that we have our own ship of fools, the Senate yesterday voted on Obama’s FY2012 budget and it received............drum roll please..........0 votes. Make’s you kind of proud, doesn’t it?

Bottom line: yesterday was relatively quiet but sellers continued to put pressure on prices despite some very sound industrial production numbers. At the moment, it appears that good US news will remain meaningless until there is some visibility on the EU financial dilemma. That could happen any day; but until it does, the course of least resistance seems to be to stand out of the way and let stocks get cheaper. I have a Buy List that grows everyday but little inclination to act on it until the eurocrats get off their fat asses and so something to resolve an escalating problem.

A somewhat lengthy analysis of the current state of affairs in the EU and the global banking system:
http://www.zerohedge.com/news/chris-martenson-we-are-about-have-another-2008-style-crisis

Morning Journal-A closer look at the 'fiscal cliff'

2012-05-16T08:42:00.001-04:00

Economics

This Week’s Data

The International Council of Shopping Centers reported weekly sales of major retailers fell 0.8% versus the prior week while rising 4.5% versus the comparable period a year ago: Redbook Research reported month to date retail chain store sales up 3.7% on a year over year basis.

March business inventories rose by 0.3% versus expectations of up 0.4%; importantly, business sales were up 0.6%.

The National Association of Home Builders confidence index came in at 29 versus estimates of 26.
http://www.calculatedriskblog.com/2012/05/nahb-builder-confidence-increases-in.html

Weekly mortgage applications increased 9.2%, however, purchase applications declined 2.4%.

April housing starts jumped 9.6% versus forecasts of up 4.7%: however, building permits fell 6.4% versus expectations of 4.4% decrease.
http://www.calculatedriskblog.com/2012/05/housing-starts-increase-to-717000-in.html

Other

A look inside the 1/1/13 ‘fiscal cliff’ (medium):
http://www.washingtonpost.com/opinions/is-the-fiscal-cliff-just-a-myth/2012/05/14/gIQAM5tkPU_story.html

Politics

Domestic

Some facts about GS Steel (medium):
http://www.nationalreview.com/articles/299940/mitt-romney-vampire-rich-lowry

News on Stocks in Our Portfolios

Staples reported first quarter earnings per share of $.30, in line with expectations.

The Morning Call-Stocks are the hands of the EU

2012-05-16T08:36:00.001-04:00

Note: I am on jury duty today; so I have no idea what tomorrow’s Morning Call will look like.

The Market

Technical

The indices (12632, S&P 1330) are in the midst of a challenge of the 12744, 1338 support level---the Dow for the second day, the S&P for the first. Absent a huge price drop (the distance element), the time element of our Discipline will confirm the penetration of the 12744, 1338 level on Friday.

To repeat the parameters of any new short term trading range:

On the downside (1) their 200 day moving averages [12190, 1277], (2) the neckline of the reverse head and shoulders pattern [12287, 1266] and (3) the old resistance/support level [11741, 1230].

As for resistance, we are now looking at (1) the 12919, 1372 former support level, (2) the 50 day moving averages [13039, 1384] and (3) upper boundaries of their short term trading ranges [13302, 1422].

Intermediate term, the Averages are well within their up trend (11624-16624, 1219-1786).

Volume rose; breadth was mixed, though the flow of funds indicator is getting downright ugly. The VIX was up and closed right on the upper boundary of its short term trading range. A confirmed break above this level would be negative for stocks.

GLD fell again, but remains above the lower boundary of its intermediate term trading range (148.20).

Bottom line: even though I am not bearish on stock prices at current levels, if 12744, 1338 can’t hold, then among the other visible support levels the closest is 4.5% percent away. So we could be in for some more pain near term. In this atmosphere, I continue to focus on our Stop Loss and trading discipline. However, a number of stocks that our Portfolios made trading sales in earlier this year are approaching attractive re-entry levels. That raises the potential that our Portfolios could be both buying and selling if prices continue to decline.

Fundamental

Headlines

Pre-opening the data flow was pretty darn good yesterday: (1) on the economic front, April CPI was flat, retail sales were up and the NY Fed manufacturing index was a blow out, and (2) over night the EU chiefs suggested that Greece deserved some leniency in solving its fiscal problems; and while the PMI’s across most of Europe were negative, Germany was in the plus column and talking heads were getting jiggy with that info. Later in the morning, we got more good news as March business inventories were up with sales growing at twice that rate; and the home builders’ confidence index improved. That kept prices above the flat line for the first half of the day.

Then the Greek political parties announced that they couldn’t form a coalition government, the finance ministry estimated that 700 million euros had been withdrawn from the Greek banking system in recent days (raising fears of similar actions in Portugal, Spain and Italy) and not surprisingly, sovereign debt across the EU traded down. Confirming that US economic data is meaningless however positive, stocks got the willies and finished off for the day.
http://www.zerohedge.com/news/has-greek-bank-run-started

More on what happens if Greece leaves the euro (medium):
http://www.ritholtz.com/blog/2012/05/what-happens-if-greece-leaves/

JP Morgan’s recent trading losses seem to be fading for the moment---partly because the $2 billion loss is manageable, partly because Jamie Dimon still commands respect (and the benefit of the doubt). That said, the risk in this situation is not that Morgan’s losses could disrupt our financial system but that it could represent the tip of an iceberg that incorporates not just US banks but European banks as well. If it turns out that Morgan is an isolated incident, then it will continue to receive less and less attention. But the risk is that the problem is more systemic and there are other shoes to drop.

Part two of the Biderman/Bianco discussion (9 minute video):
http://www.zerohedge.com/news/biderman-and-bianco-black-swan-bonanza

Satyajit Das looks at JP Morgan (medium/long):
http://www.nakedcapitalism.com/2012/05/satyajit-das-topiary-lessons-jp-morgans-us-2-billion-loss.html

The real problem with JP Morgan (medium and today’s must read):
http://www.zerohedge.com/news/guest-post-president-obama-view-and-false-notion-too-big-fail

Bottom line:

The economy is progressing much as I expected---slow and uneven; but it is moving forward. Under that assumption, stocks (as measured by the S&P) are slightly undervalued. Given that equities tend to vacillate around Fair Value, sometimes in quite volatile swings, it is not surprising that prices could move lower. In the process, it is likely that within our universe of stocks values will be created---that’s the good news.

The bad news is the current political inertia in Europe in dealing with the fiscal problems of its southern states. The risk is that the eurocrats delay any action too long and events overwhelm whatever curative measures they attempt to implement at the last minute---and Europe sinks into a major recession and/or its financial system becomes partially or completely dysfunctional. That won’t be good for the US economy or for US stocks. I can’t believe the eurocrats will be that stupid and so I have not yet factored an EU debacle into our forecast. But that moment is not that far away.

The latest from Mohamed El Erian (medium):
http://advisorperspectives.com/commentaries/pimco_51312.php

Morning Journal-Biderman and Bianco on Fed policy

2012-05-15T08:40:00.001-04:00

Economics

This Week’s Data

The April consumer price index came in unchanged, in line with expectations; core CPI rose 0.2% also as anticipated.

April retail sales were up 0.1%, in line with estimates; ex autos, they were up 0.1% versus forecasts of up 0.2%.

The May New York Fed manufacturing index soared to 17.09 versus expectations of 10.0 and 6.6 recorded in April.

Other

C&I loans continue to grow (short):
http://mjperry.blogspot.com/2012/05/commercial-loan-volume-back-to-2007.html

Biderman and Bianco on Fed policy (6 minute video):
http://www.zerohedge.com/news/biderman-and-bianco-bury-bernankes-bond-bull-market-backbone

Weekly update on gasoline prices (short):
http://advisorperspectives.com/dshort/updates/Gasoline-Update.php

Politics

Domestic

The left’s lament against Obama (medium):
http://www.nakedcapitalism.com/2012/05/barack-obama-the-great-deceiver.html

News on Stocks in Our Portfolios

More quarterly earnings per share reports:

Reported Expected

Home Depot $.65 $.65

The Morning Call-Will 12744/1338 hold?

2012-05-15T08:36:00.002-04:00

The Market

Technical

After a rough day, the indices (DJIA 12695, S&P 1338) are challenging the secondary support level and my initial candidate for a new lower boundary to their short term trading ranges (12744-13302, 1338-1422). Our time and distance discipline is now operative on the DJIA. As dismal as this sounds, both of the Averages are well within their intermediate term up trends (11604-16604, 1219-1786).

Right now I think the crucial levels to watch are S&P 1338 for support and S&P 1359 for resistance---which is the upper boundary of its very short term down trend.

Volume fell; breadth deteriorated. The VIX was up and remained within its short and intermediate term trading ranges. However, last night’s close was very near the upper boundary of its short term trading range.

GLD got whacked---again. For the second day, it was below the lower boundary of its secondary support level of its short term trading range. Yesterday our Portfolios reduced their positions to 4-5%. The lower boundary of its intermediate term trading range is at 148.10. A break of that level will prompt additional sales.
http://www.zerohedge.com/news/meet-latest-converted-gold-bug-imf

Bottom line: the technical picture keeps getting uglier. In that atmosphere, our Sell and trading disciplines increase in importance.

Fundamental

Headlines

No economic data released yesterday. Again, even if there were, it is unlikely investors would have noticed. Front and center were:

(1) the unfolding fiasco at JP Morgan. Heads are rolling and the size of the losses keep inching up---although to be fair, the total estimated loss at present is well within Morgan’s capability to absorb. The problem is that [a] no one knows what evil lurks on the balance sheets of other US financial institutions, [b] there is an uneasy feeling that the US big banks are simply too big to manage and too big to regulate and no one seems to want to think about how to correct it, and [c] forget that no one knows how many landmines there are on US bank balance sheets, the potential for a couple of nuclear bombs on the euro banking systems books is almost heart stopping.
http://www.ritholtz.com/blog/2012/05/everything-is-a-hedge/

Why the big banks need to be broken apart (medium):
http://www.nypost.com/p/news/opinion/opedcolumnists/break_up_the_banks_NoZue6C7k34jZqUcjnTzYM

(2) Europe, Europe, Europe. [a] the Greeks can’t form a government. A new round of elections in June is likely and so the slow torture from this source continues, [b] Angela Merkel’s party lost elections in Germany largest state, creating additional uncertainty from Europe’s most stable and best economy and [c] Spain had another poorly received bond auction. More gruel for this witch’s brew. And yet, the political class is AWOL. If this is a sign that this crowd has resigned itself to letting events run their course, we are likely in for a very rough ride.

The latest from John Mauldin on Europe (medium/long):
http://www.minyanville.com/business-news/the-economy/articles/euros-France-debt-Germany-Spanish-banks/5/14/2012/id/40974

Bottom line: stocks are getting cheaper as investors realize that the US economy is no where near a normal rebound and the financial system still has enough problems to prevent it from financing any higher rate of growth. At least in our forecast, that is not bad news. Indeed, equities at current prices reflect all that; so based on domestic events, there is no reason to anticipate a lower Market.

Europe may be another story. It is coming unraveled; and the eurocrats seem to be frozen in the headlights. They may come up with a solution that allows Europe to continue to ‘muddle through’; and they may not. However, until something happens all I can assume is that the risks to our Portfolios are rising; hence, their current high cash position helps me sleep at night. I am building a list of potential buy candidates while at the same time watching our trading stops very closely. I fear our Portfolios may have more selling to do before they get the opportunity to buy.

The latest from John Hussman (medium/long):
http://advisorperspectives.com/commentaries/hussman_51412.php

The latest from Jim Rogers (10 minute video)

2012-05-15T07:51:00.002-04:00

The Morning Call + Subscriber Alert + What unity in Israel likely means

2012-05-14T08:24:00.005-04:00

The Market

Technical

Monday Morning Chartology

The question for the S&P right now is, will be break 1338 and probe for a lower, lower boundary or will it break the very short term down trend and lend strength to 1338 as the new lower boundary?

GLD broke the 154.10 level Friday. Our time and distance discipline kicks in; but since there is a trading component to this position, our Portfolios will reduce their GLD holdings to 4-5% at the Market open this morning. The lower boundary of its intermediate trading range is at 148.20.

The VIX remains in a trading range.

Update on ‘the best stock market indicator ever’ (short):
http://advisorperspectives.com/dshort/guest/John-Carlucci-Best-Indicator-Ever-Update.php

Fundamental

The estimated cost of Greece leaving the euro (medium):
http://www.zerohedge.com/news/jpmorgan-estimates-immediate-losses-greek-exit-could-reach-400-billion

Economics

This Week’s Data

Other

A positive take on the latest budget deficit (short):
http://scottgrannis.blogspot.com/2012/05/federal-budget-outlook-continues-to.html

What’s different globally this time (short):
http://advisorperspectives.com/commentaries/global_51112.php

Politics

Domestic

Monday Morning Wake Up (3 minute video):
http://gregmankiw.blogspot.com/2012/05/from-harvard-baseball-team.html

International War Against Radical Islam

Israel unites (medium):
http://www.washingtonpost.com/opinions/echoes-of-67-israel-unites/2012/05/10/gIQA9tUaGU_story.html

The Closing Bell-Is the 'best in breed' less than best?

2012-05-12T09:10:00.003-04:00

Statistical Summary

Current Economic Forecast

2011

Real Growth in Gross Domestic Product: +1.5- +2.5%
Inflation: 2-3 %
Growth in Corporate Profits: 7-12%

2012

Real Growth in Gross Domestic Product (revised): +1.0- +2.0%
Inflation (revised): 2.5-3.5 %
Growth in Corporate Profits (revised): 5-10%

Current Market Forecast

Dow Jones Industrial Average

Current Trend (revised):
Short Term Trading Range (?)-13302
Intermediate Up Trend 11604-16604
Long Term Trading Range 7148-14180
Very LT Up Trend 4187-14789

2011 Year End Fair Value 10750-10770

2012 Year End Fair Value 11290-11310

Standard & Poor’s 500

Current Trend (revised):
Short Term Trading Range (?)-1422
Intermediate Term Up Trend 1218-1785
Long Term Trading Range 766-1575
Very LT Up Trend 644-2000

2011 Year End Fair Value 1320-1340

2012 Year End Fair Value 1390-1410

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 30%
High Yield Portfolio 33%
Aggressive Growth Portfolio 34%

Economics

The economy is a modest positive for Your Money. It was a very slow week for economic data. Most of it was mixed (retail sales, jobless claims and March wholesale inventories/sales) to positive (mortgage and purchase applications, the April PPI headline number and the University of Michigan’s preliminary May index of consumer sentiment) with one negative stat (the March trade deficit). While limited, there is nothing in these figures to warrant questioning our forecast.

However, what does cause me to question our outlook is the latest doozy from JP Morgan; that is, its prop trading desk took too much risk in the derivatives market, didn’t understand (or care about) the extent of the risk and lost a boat load of money. As I noted in yesterday’s Morning Call, coming out of the 2007/2008 financial crisis, one of my primary concerns was the soundness of the US banking system’s balance sheet. My reasoning was that in addition to the losses that they had to write off (that weakened their balance sheet), there likely remained plenty risk (losses) that they either didn’t know existed or they knew and were lying about it. As a result, in the summary of our economic forecast was the phrase ‘and a financial system with an impaired balance sheet’.

I was later duped by all the bright and rosy bulls**t from the Fed, the Treasury and the banks that they (the banks) had worked hard to get rid of or wrote off the poor assets and had strengthened their financial condition with the result that I mistakenly edited that aforementioned phrase out. Clearly, the huge loses from derivatives trading by the supposedly ‘best in breed’ bank suggest that I was premature in that judgment. That is bad enough; however, given that many European banks are on the precipice of bankruptcy, the question arises, how much exposure do our banks have to their EU counterparts and, like Morgan, have no clue (or are lying) about? Certainly, I don’t know; but this risk prompts me to re-add the statement regarding our financial system to our forecast summary---which also means my confidence in that forecast has been downgraded.

‘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 along with the likelihood a rising and potentially corrosive rate of inflation due to excessive money creation and the historic inability of the Fed to properly time the reversal of that monetary policy.’

Another in depth but not so technical look at JP Morgan prop trading fiasco (medium):
http://www.nakedcapitalism.com/2012/05/jp-morgan-loss-bomb-confirms-that-its-time-to-kill-var.html

And the bottom line on the whole system of prop trading (medium):
http://www.ritholtz.com/blog/2012/05/imperfect-bankers/

As for the risks facing this outlook:

(1) as you know, I had previously re-established ‘a stronger than expected recovery’ on this list given the better than anticipated profit ‘beat’ rate in the initial weeks of first quarter earnings season. I stated that ‘while I think it a meaningless exercise....., I am going to leave ‘a better than expected economic growth rate’ as a possible risk to our own forecast--at least until no reasonable doubt remains that this quarter’s ‘beat’ rate is anything but a function of unnecessarily low analyst expectations.’

However, last week, the ‘beat’ rate stat reversed itself dramatically falling from 73% to 60%, the latter being below the average of recent quarters [62%]. I think that in light of this latest tally, we have reached the aforementioned threshold. Accordingly, I am removing ‘a stronger than expected recovery’ as a risk to our forecast.

(2) while oil prices are still too high, they continue to decline [Mr. President, aren’t you going to give speculators credit for that? Just asking.]. Clearly, the more they fall, the less the risk that that high energy prices could stifle consumer spending and shrink corporate profit margins. Indeed at some point, energy prices will transition from being a negative for the economy to a positive as consumer disposable income rises and the cost of a key production component falls. We are not there yet; but the trend is certainly going our way.
http://www.zerohedge.com/news/crudes-crash-conundrum-explained

That said, a blow up in the Middle East could change that in an instant.

(3) the ECRI weekly index was basically flat this week. I continue to not take this indicator too seriously. However, I am keeping it on our list of risks because of [a] its track record for calling economic downturns and [b] the adamancy of its founder regarding this particular call---which he reiterated again this week [see below]. Furthermore, it has a long time horizon; so until the founder cries ‘uncle’, I leave it as a risk to our outlook.
http://advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php

(4) finally, the sovereign and bank debt problems in Europe remain the biggest risk to our forecast; and as you know, following last weekend’s French and Greek elections, it returned to center stage as the newly elected politicians promise that austerity is a thing of the past [as if]. Meanwhile, the economic data were grim, Greece is completely unraveling and the Spanish banks are a whisker away from the trash bin.

At the moment, the problem with all of this is the seeming inability of the political class to properly deal with a single critical issue. As a result, the euro is increasingly at risk of becoming a failed concept. What is so frustrating is that the evidence of its demise is right in front of the eurocrats’ eyes and it is never ending. This week, for example, in the face of the fallout from last weekend’s elections [and the excoriation of austerity] there was absolutely nothing [at least to date] in the way of a possible solution forthcoming from the EU establishment---not even the usual ‘everything is fine; there are no problems we can’t fix’ bulls**t they normally give out.

Once again, I am not saying that they won’t pull another rabbit out of the hat this time around. But their current ‘deer in the headlights’ response is not comforting. Hence, our ‘muddle through’ scenario probably has no better than an even chance of occurring. If it does not then, our forecast will have to deal with the increased likelihood of a severe recession if not a depression in Europe over the short term with the chance that the EU banking system seizes up and spreading to the global markets.

Not to end this on too dreary a note, the worse case [dissolve the euro or redefine the euro by kicking southern European countries out or something comparable] for the EU short term is actually the most positive case, in my opinion, longer term. Better to admit failure, cease compounding the error with more harmful fiscal/monetary policies and remove the drag from the economically responsible countries than bet the whole enchilada on what is fast becoming a bankrupt ideal.

A more sanguine look at Europe (medium):
http://pragcap.com/10-points-on-the-comity-of-europe

And a not so sanguine one (medium):
http://www.ritholtz.com/blog/2012/05/imperfect-bankers/

Bottom line: the economy continues to stumble along making slow but steady progress---just as depicted by our Model.

Our political class spent this week arguing over gay marriage while both our trade and budget deficit grow and 1/1/13 is a week closer. Discouraging as this all is, it too is in our Model.

As far as the major risk to our forecast, things have only gotten worse. To emphasize my conclusion, I considered putting the following in all caps or in bold italics or just repeating a couple more times. But since you have already read several times, I will leave it as it is:

‘Across the pond, the eurocrats are doing what they do best--smoking cigars, drinking wine, chasing skirts and laying on the beach; in other words, doing everything possible to ignore their problem. My obvious concern is that this strategy is not a formula for correcting an acute case insolvency. They may ultimately solve it but it appears that it will take an emergency to generate the necessary action; and given the progressive worsening of the situation, the risk is that conditions will simply deteriorate to the point where the problem is unfixable. In any case, it appears that a crisis is needed to prod action. We just don’t know when and the extent of the economic fallout’.

This week’s data:

(1) housing: weekly mortgage and purchase applications rose,

(2) consumer: weekly retail sales were mixed; weekly jobless claims were basically flat with the prior week; the preliminary May University of Michigan index of consumer sentiment came in at 77.8 versus expectations of 76.2,

(3) industry: March wholesale inventories fell but sales rose; small business sentiment rose in April,

(4) macroeconomic: the March trade deficit was larger than anticipated; the April producer price index headline number fell while the core rose as expected.

The Economic Risks:

(1) the economy is weaker [stronger] than expected.

(2) Fed policy (reading the data correctly).

(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).

(4) protectionism (Free trade is a major positive for world and US economic growth.).

(5) fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.).

(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)

Politics

The domestic political environment is a neutral but could be improving for Your Money while the international political environment remains a negative.

The Market-Disciplined Investing

Technical

The indices (DJIA 12820, S&P 1353) closed solidly within their intermediate term up trends (11604-16604, 1218-1785); however, they are struggling with the reset of the lower boundary to their short term trading ranges (?-13302, ?-1422).

While the 12744, 1338 levels look to be decent candidates for the new lower boundary, there are plenty of others including (1) their 200 day moving averages [12183, 1276], (2) the neckline of the reverse head and shoulders pattern [12287, 1266] and (3) the old resistance/support level [11741, 1230].

As for resistance, we are now looking at (1) the 12919, 1372 former support level, (2) the 50 day moving averages [13062, 1386] and (3) upper boundaries of their short term trading ranges [13302, 1422]

Just to reiterate, I don’t believe the current Market weakness is a precursor to a bear market; it is simply probing for a lower boundary that will establish a wider trading range incorporating a more reasonable spread around Fair Value. The worse case would be a challenge of the lower boundaries of their intermediate term up trends

Volume on Friday was flat; breadth was down. The VIX was up, closing within its short/intermediate term trading ranges and continuing to build a reverse head and shoulders formation.

GLD closed down and below the secondary support level of 154.10. Our time and distance discipline kicks in here; but since there is a trading component to this holding, our Portfolios will Sell a portion of their GLD holdings Monday morning, barring an over night/early morning snap back above the 154.10 level. The lower boundary of the intermediate term trading range is 148.20.

Bottom line:

(1) the indices are probing for new lower boundaries to the short term trading ranges [?-13302, ?-1422] but remain well within their intermediate term up trends (11604-16604, 1218-1785],

(2) long term, the Averages are in a very long term [78 years] up trend defined by the 4187-14789, 644-2000 and a shorter but still long term [13 years] trading range defined by 7148-14198, 766-1575.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (12820) finished this week about 16.7% above Fair Value (10985) while the S&P (1353) closed 0.4% under valued (1358). Incorporated in that ‘Fair Value’ judgment is a ‘muddle through’ scenario in Europe and a sluggish recovery at home that isn’t likely to improve until we change the personnel in Washington.

This week’s economic data supports the anemic recovery forecasted by our Model. The good news is that it may soon be getting additional help from declining oil prices. The bad news is that even the best CEO in our financial system can’t manage his ‘too big to fail’ bank, which adds an extra element of risk to our outlook. All that said, I haven’t altered the economic inputs to our Valuation Model.

Our political class continues to do absolutely nothing to solve our fiscal problems. This week they wasted their time debating gay marriage and whether an Arizona sheriff is a racist----you know, critically important s**t. Once again no mention much less action on spending, taxes, the deficit or the explosion in fiat money---just like we assumed in our Models.

With respect to Europe, I keep hoping that somebody will put on their big boy pants and take the steps needed to start the EU down the road to fiscal responsibility. But that is not happening; indeed I am reminded of Munich 1938 when the eurocrats ignored the risks and prayed their latest action would prevent catastrophe. We know how that worked out.

‘The problem is not that we don’t understand the size and scope of this crisis, the problem is that no one seemingly has the balls to do anything about it--which clearly threatens our ‘muddle through’ scenario. To be sure, the eurocrats have acted to pull back from the brink on prior occasions. However, the risk is that because Spain and Italy are so much larger than Greece, the momentum towards default may be impossible to stop once it gathers speed. That raises the probability that either a misstep will lead to a very severe recession and/or a counterparty default in the CDS market snowballs out of control throughout the global financial system.’

The risk to the financial system, I might add, is all the greater now that we know our own banks are not as financially sound as we had thought; and if they aren’t, how bad do think the eurosystem is?

My investment conclusion: if it weren’t for Europe, I would be resting easy, unconcerned about the economic outlook and equity values portrayed by our Models. Unfortunately, the EU political class seems incapable of seriously addressing the problems facing both their countries and their financial systems. Their only solution seems to be doing more of the same which (aside from being very little) only brings us to the classic definition of insanity (i.e. doing the same thing and expecting a different outcome).
http://www.telegraph.co.uk/news/worldnews/europe/greece/9257302/Its-too-late-for-Germany-to-save-the-euro.html

The good news is that stocks are at least starting to recognize that all is not well in Denmark. The bad news is that we don’t know how awful things can get; and unfortunately that has been made worse by the recent disclosure that our own banking system isn’t quite as swell as we thought.

That continues to argue for a big cash position and strict attention to our Price and trading Disciplines. I leave GLD as an asterisk to this strategy. Not because I don’t believe that it will ultimately prove to be a great hedge; but because right now the price action seems to be suggesting that I am in the minority on that judgment. In this Market, I am not going to stand in front of an oncoming train.

This week, our Portfolios did nothing.

Bottom line:

(1) our Portfolios will carry a high cash balance,

(2) we continue to include gold and foreign ETF’s in our asset mix because we continue to believe that inflation is a major long term risk. An investment in gold is an inflation hedge and holdings in other countries provide exposure to better growth opportunities. However, the likelihood of a continued strengthening in the dollar argues for less emphasis on these investment alternatives over the intermediate term.

(3) defense is still important.

DJIA S&P

Current 2012 Year End Fair Value* 11300 1400
Fair Value as of 5/31/12 10985 1358
Close this week 12820 1353

Over Valuation vs. 5/31 Close
5% overvalued 11534 1425
10% overvalued 12083 1493
15% overvalued 12632 1561
20% overvalued 13182 1629

Under Valuation vs. 5/31 Close
5% undervalued 10435 1290
10%undervalued 9886 1222 15%undervalued 9337 1154

* 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.

The Morning Call - Liar, liar, pants on fire

2012-05-11T08:42:00.002-04:00

The Market
Technical

The DJIA (12885) closed below the lower boundary of its short term trading range (12919-13302) for the second day. Should this challenge be confirmed, 12744 looks to be a logical candidate for a re-set lower boundary. It does however remain firmly within its intermediate term up trend (11597-16597).

The S&P (1357) is now in a short term down trend with an upper boundary at 1368. However, I continue to believe that this index is in a transition to a wider trading range with a lower, lower boundary (1338). Like the Dow, it is safely within its intermediate term up trend (1218-1785).

Each index remains below its 50 day moving average (13055/1386). Volume rose again; breadth also improved. The VIX fell but is trading well above the lower boundary of its short/intermediate term trading range.

GLD (154.77) rallied fractionally but it still well below the lower boundary of its short term trading range. I think that this boundary is a lost cause; however, there is a secondary support level slightly below it that corresponds to the left shoulder of the reverse head and shoulders formation that I have mentioned several times. So I am not giving up on GLD quite yet. I know that this sounds like I am rationalizing my GLD position; and I probably am. Nonetheless, our Portfolios won’t start scaling back their positions until GLD breaches 154.10.
http://www.zerohedge.com/news/gold-%E2%80%98will-go-3000-dollars-ounce%E2%80%99-rosenberg

Bottom line: if yesterday was a dead cat bounce, then ‘dead’ is the operative word. As you can tell, I was surprised at the weakness of the rally---which I don’t think bodes well for the near term pin action. I noted yesterday that the level at which any rally fizzled would tell us something about the underlying strength of the Market. If there is no follow through to the upside today, then I think it likely that there is sufficient downside left to warrant staying on the sidelines.

Regressing to the trend (short):
http://www.ritholtz.com/blog/2012/05/charts-regressing-to-the-trend-line/

Fundamental

Headlines

Another slow day for economic data: barely better than anticipated jobless claims, a slightly larger than expected trade deficit and a stronger budget surplus than forecast. Also, once again, no one cared.

And once again, Europe was the center of attention. The stand out news was a statement from the Greek politician who is expected to become the country’s next prime minister in which he basically said that he would call Germany/the ECB bluff on the bailout. If he does it, it may be the biggest political bluff since the Kennedy/Russian standoff in the Cuban missile crisis.
http://pragcap.com/alexi-tsipras-gets-it

In addition, there was steady speculation about what the EU sovereign debt crisis end game will look like:
http://www.nakedcapitalism.com/2012/05/europes-problems-multiply.html

And the math in Europe doesn’t work (sound familiar?); does it work here? (medium):
http://pragcap.com/3-things-i-think-i-think-or-2

And China’s sovereign wealth fund bails on Europe (medium):
http://www.zerohedge.com/news/china-gives-europe-will-target-africa-instead

The other news item which occurred after hours and is likely to influence trading today was the announcement by JP Morgan that it needed to ‘reposition’ its propriety trading portfolio. Translation: more risk was taken than should have been, an $800 billion (minimum) loss was incurred and it can’t be corrected overnight. Probably worse, JP Morgan is supposed to be the best in breed; so what do you think will be coming from the rest of the ‘too big to fail’ thieves?

For anyone who wants to get into the weeds on this issue, here is an explanation. For those who don’t the bottom line is (1) the big banks are betting too much money in an ill defined market and end up harming themselves, (2) the whiz kid traders understand math but not markets and the markets are what kill you.
http://www.zerohedge.com/news/jpm-staring-another-3-billion-loss

Bottom line: for a long time, the summary statement on our economic forecast included the provision that the banking system’s balance sheet was impaired by having taken too much risk and too many losses. I took it out after the endless hoopla by the Fed, the Treasury and the industry insisting that US bank financial condition was gold plated. Liar, liar, pants on fire. It is clear that Dodd Frank, management controls and incentives have not changed enough to alter the mindset among bankers that they can leverage up other people’s money and if they win, they get a bonus and if they lose, it is someone else’s problem (yours and mine). That is not encouraging going into a potential EU financial crisis when the premier US bank management clearly has no idea where the mines are laid.

I sure don’t want to get in front of this train. The good news is that we might find where the real support for stock prices exists sooner than we thought.

More on the bullish case (short):
http://blog.covestor.com/2012/05/why-we-are-not-starting-a-major-correction

The latest from Marc Faber (12 minute video):
http://www.zerohedge.com/news/marc-faber-sees-1987-crash-approaching

The Fed and the S&P (short):
http://www.zerohedge.com/news/how-fed-quietly-bought-1150-sp-points

Thoughts on Investing--New Rules of Money courtesy of Forbes

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Economics

This Week’s Data

The April Treasury budget was in surplus by $59.1 billion versus expectations of a $30 billion overage.

The April producer price index fell 0.2% versus forecasts of no change; core PPI was up 0.2% as anticipated.

Other

***over night, Chinese and Indian industrial production came in below estimates.

Stimulus spending keeps failing (medium):
http://online.wsj.com/article/SB10001424052702304451104577390482019129156.html?mod=WSJ_Opinion_LEADTop

A look inside yesterday’s US trade deficit numbers (medium):
http://mjperry.blogspot.com/2012/05/total-us-trade-sets-new-record-high-in.html

The Bloomberg Consumer Comfort Index falls (medium):
http://www.zerohedge.com/news/consumer-comfort-plummets-most-feb-2008-personal-finance-confidence-crashes

Politics

Domestic

The impact of the Obamacare tax (medium):
http://www.jewishworldreview.com/cols/will051012.php3

Can the Fed hold interest rates down when the refinancing needs are so high? (medium):
http://www.zerohedge.com/news/sp-opens-pandoras-box-wall-refi-worry-46000000000000-tall

International War Against Radical Islam

What is a Palestinian refugee? (medium):
http://www.nationalreview.com/articles/299512/real-palestinian-refugee-problem-clifford-d-may

The latest from Jim Grant

2012-05-11T08:10:00.000-04:00

Morning Journal-The latest government screw job

2012-05-10T08:46:00.001-04:00

Economics

This Week’s Data

March wholesale inventories were up 0.3% versus expectations of up 0.6%; wholesale sales were up 0.5%.

The US March trade deficit was $51.8 billion versus estimates of $49.5 billion.

Weekly jobless claims rose 2,000 versus forecasts of a decline of 1,000; however, the prior week was revised up 3,000, so the net was down 1,000.
http://www.calculatedriskblog.com/2012/05/weekly-initial-unemployment-claims-at.html

Other

Tax cuts versus spending increases---a side by side comparison (medium):
http://mjperry.blogspot.com/2012/05/anti-keynesian-supply-side-tax-and.html

Citigroup Economic Surprise Index (short):
http://pragcap.com/a-nosedive-in-the-cesi

The latest from Charles Biderman (3 minute video):
http://www.zerohedge.com/news/europe-has-started-endgame-and-biderman-says-us-next

Politics

Domestic

More mischief from our political class (medium):
http://www.jewishworldreview.com/cols/will050512.php3

And this from the IRS. Hint: if you don’t want to be outraged, don’t watch this 6 minute video:
http://www.wthr.com/video?clipId=7054149&topVideoCatNo=103348&autoStart=true

The Morning Call-Oversold bounce?

2012-05-10T08:41:00.001-04:00

The Market

Technical

The DJIA (12835) broke the lower boundary of its short term trading range (12919-13302), starting our time and distance discipline; however, it does but potentially put the Dow back in sync with the S&P. The DJIA remains well within its intermediate term uptrend (11597-16597).

At the close yesterday, the S&P (1354) confirmed the break of the lower boundary of its short term trading range. By definition that means that the short term trend is down with an upper boundary of 1374. That said, as you know I think that this is not the start of a big down move but rather a probe for a lower boundary to a trading range. This index is also within its intermediate term uptrend (1218-1785).

Both the Averages are well below their 50 day moving averages (13055-1386). Volume rose; breadth was mixed. The VIX was up but remains within its short and intermediate term trading ranges. As long as it stays within its short term trading range, it is mildly positive for stocks.

GLD fell again and closed for the second day below the lower boundary of its short term trading range though it remains within its intermediate term trading and the developing reverse head and shoulders formation..
http://dragonflycap.com/2012/05/09/gold-is-doing-the-limbo/
http://www.zerohedge.com/news/goldman-sees-%E2%80%9Ccurrency-last-resort%E2%80%9D-15-1840oz-6-months

Bottom line: despite what has been the pattern of a big sell off early in the day and a rally later substantially reducing early losses, prices continue to decline with the S&P now having broken below the lower boundary of its short term trading range and the DJIA threatening to do the same.

Sooner or later, equities will at the very least stage an oversold rally. When that happens, the point at which it fizzles out should give us some information about the relative strength of the bulls versus the bears. However, with the exception of seeing an attack on 12744/1338 (a strong contender for the new lower boundary of the short term trading range) and a strong bounce, I don’t want to be trying to second guess the winner of the current bull/bear struggle.
http://www.bespokeinvest.com/thinkbig/2012/5/9/oversold-stocks-piling-up.html

Here is a bullish take on the Market (medium):
http://www.marketwatch.com/story/major-correction-unlikely-2012-05-09

The latest from Trader Mike (short):
http://www.stocktradingtogo.com/2012/05/09/market-recap-19000-subscribers/

Fundamental

Headlines

Yesterday was another meager economic stat day: weekly mortgage and purchase applications both turned positive for the first time in several weeks and March wholesale inventories came in lower than expected though sales grew more than inventories.

Again, I don’t think investors even noticed as the news out of Europe dominated headlines and psychology. Spanish bond yields moved higher when it became clear that the Spanish government was waffling on its proposal for shoring up bank balance sheets. In addition, EU officials issued a series of off, on again statements regarding whether or not the EU would fund the next bail out tranche to Greece due today. Again, the risk here is not that we don’t know what alternatives are available to each party in this charade. We know them all too well. The risk is that we have no idea what the weak, leaderless, cowardly group of morons making the decisions will do, when they will do it and what the counter party response will be.

More on the choices that both Greece and Germany face (medium):
http://www.bloomberg.com/news/2012-05-08/greek-elections-force-germany-to-weigh-austerity-endgame.html

I would title this Thursday Morning Humor if it weren’t so serious (3 minute video):
http://www.zerohedge.com/news/nigel-farage-eu-titanic-has-now-hit-iceberg

The Spanish bank bailout looks like a dud (medium):
http://www.zerohedge.com/news/spains-bank-bailout-complete-dud-allows-banks-opt-out

How long will Germany continue to finance the EU (medium):
http://www.zerohedge.com/news/europes-most-parabolic-chart-goes-probolic-er

Bottom line: if we only had to deal with the current flow of US economic data and incompetencies of our own political class, then it would be easy to observe that stocks are now slightly below Fair Value, that our Portfolio Buy Lists are growing and that we need to be making our plans for putting money to work. Of course, it is never easy; although I am making a list---and checking it twice.

However, the European crisis is so fraught with known unknowns that we have to worry about a misguided group of eurocrats taking steps that lead to either a severe EU recession or a nonfunctioning financial system (think Neville Chamberlain). To be clear, I don’t think Greece departing the euro is among those unknowns; not because it isn’t an unknown, but because even if it occurs it will have the macroeconomic affect of a gnat on a goat’s ass. I worry that it happens and then southern Europe decides to follow it.

Not that the eurocrats won’t pull a goal out with two seconds left ala the NY Rangers. Indeed that still is perhaps foolishly our scenario. But Europe is clearly starting to rain on our parade and carries with it tail risk that we have to be hedged against.

That said, on the thesis that I can’t bet our entire Portfolio on a tail risk, I have my list and our Portfolios will likely start to nibble when the technical picture clears.

Another bull argument---7 in fact (medium):
http://www.minyanville.com/trading-and-investing/stocks/articles/bull-market-bull-market-prediction-bear/5/8/2012/id/40859

A potential bear case (short):
http://www.capitalspectator.com/archives/2012/05/is_the_recent_f.html#more

Subscriber Alert

The stock price of Oracle ($28) has traded below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio owns a 75% position in ORCL. No additional shares will be purchased at this time.