All American Investor

Thoughts on Investing 2/27/12

2012-01-27T16:30:00.002-05:00

Graduation season is upon us. From the next generation of Warren Buffett wannabes, I occasionally hear questions such as “What should I learn to become a great investor?”

Contrary to popular belief, investing isn’t a traditional academic discipline. Money management is hardly a typical major. There are, of course, plenty of “Business Administration” undergrads, but their focus tends to be on running companies, rather than investing in them.

We churn out MBAs like made-in-China widgets, yet few ever become outstanding investors. And don’t even ask about economists — the profession that missed the housing boom and bust, the Great Recession, the credit crisis and the market collapse.

Great investors are savvy generalists. I can think of five fields that are hugely helpful to asset management. If you were to study these disciplines, your understanding of how markets work would greatly improve. And you would be a better investor.

How? You will generate better risk-adjusted returns; meaning, you will get the most bang for the bucks you are putting at risk. You will suffer less from volatility — the stomach-churning ups and downs in the markets that are one part risk, one part opportunity. And you will avoid the typical mistakes that most investors make.
The five disciplines that can help:

Historian: Knowing what has happened in the past (and how often) is an enormous advantage when it comes to investing. It informs you of the range of possibilities, allows you to conceptualize possible outcomes to various scenarios and provides a framework for thinking about market cycles.

Heading into the market bottom in 2003, some market historians warned about a secular bear market. These are the decade-plus long periods of huge rallies and great collapses. Some warned that investors should not be surprised if after a decade, the markets were essentially unchanged, which is exactly what happened.

Think back to the market lows in March 2009. After about a 20 percent bounce off the bottom, quite a few commentators expressed fears that the markets had gone “too far, too fast.” Market historians knew that the median bounce after a drop of 50 percent or more was 75 percent. With that information, you might not have been scared away from equities just before they gained 80 percent in value over 18 months.

Psychiatrist: Speaking of scared: Have you ever sold anything in a panic — then regretted it over the ensuing months? What about the opposite — greedily buying stocks that were screaming higher because everyone else was?
Many investors fall prey to these errors. Fear and greed are the most enduring investor emotions. They lead to destructive behaviors. Carl Richards, a financial planner, sums it up thusly: “Buy greed at tops; Sell fear at bottoms; repeat until broke.”

Not understanding your own psychology is the downfall of many an investor. The best financial plan becomes worthless if you are unprepared for the emotional turmoil that accompanies the ups and downs of markets.
The crowd becomes an unthinking mob at tops and bottoms. Being able to read the emotional state of the market, as well as keeping your own emotions in check, are hallmarks of great investors.

Trial lawyer: Good litigators are always skeptical, but not negative. Is that witness telling the truth? What is motivating him? Is the opposing counsel’s argument logical? Being able to answer these questions makes for a good lawyer – and a good investor.

All CEOs want you to buy their company’s stock; every analyst wants you to follow his equity calls; every fund manager wants to run your money. When it comes to investing, everyone is trying to separate you from your money. Good investing requires good judgment. Being able to recognize valuable intel versus the usual blather is a huge advantage.

Like a good litigator, you must question data, consider alternative explanations, argue against the obvious. You cannot blindly accept everything you hear as truth, nor can you reject everything out of hand. Being able to discern between information that is valuable and that which is not, is crucial.

Mathematician/statistician: Investing is filled with math: compound interest-rates, dividend yields, long-term gains, price-to-earnings ratio, risk-adjusted returns, percentage draw downs, annualized rate of returns.

Don’t worry if you suffer from math anxiety: If you can operate the simplest calculator — even the free one that came with your computer — you have the requisite math skills needed.

If you follow the professional literature there is a plethora of advanced mathematical formulas of dubious utility. Value-at-risk is a complex mathematical formula that was supposed to tell Wall Street banks how much risk they could safely assume. It failed to prevent them from blowing themselves up during the credit crisis. The Sharpe ratio measures the excess return — the “risk premium” — an investment strategy has. Even William Sharpe, its creator, has said it’s been misapplied by Wall Street’s wizards.

Investors can ignore these sorts of mathematical esoterics. But understanding basic math is key.

Accountant: When you buy a stock, you are buying an interest in a company’s future revenue and profit. How much you pay for that future cash flow determines whether you are over or under paying. That means understanding the basics of a company’s books is a key to recognizing value.

An understanding of basic accounting is essential to grasping the fundamental health of a company or business model. It is how you determine whether an existing company is profitable, or when a young firm might become profitable. But it also can help you determine when a formerly profitable company is heading down the wrong path.
You don’t have to be a forensic accountant. These are sleuths in green visors poring over pages and pages of quarterly filings and footnotes, looking for evidence of fraud or accounting shenanigans. Forensic accountants are the guys who discovered the frauds at Enron and Worldcom, and they warned about AIG and Lehman Brothers.

Amazingly, even after these frauds were revealed, many investors refused to believe them. Having a basic knowledge about accounting can help you understand and heed the work of forensic accountants.

You don’t need to have an MBA or doctorate in economics to be a good investor. Indeed, as the spectacular blow up at Long-Term Capital Management has taught us, these can be impediments to good investing.

Instead, you need to develop more general skills. Learn market history, understand crowd psychology, how to think critically, be able to do simple math and understand basic accounting. Do this, and you are on the path to becoming a much better investor.

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.

@AllAmerInvest, The Trend of the Market Remains UP, Chart

2012-01-27T09:02:00.000-05:00

The uptrend in the S & P 500 continues.

All American Investor

One thing you should notice when you look at the SP 500 chart below is the slope of the 40 day moving average (green line). The slope is trending up. It is the slope that is most important, not the absolute value of the moving average.

The market should now be able to take downside attacks. Expect the market to find good support if the market comes back to, or near the 40 day moving average. This is where you want to consider buying the market.

Obviously, the market is still vulnerable to event risk from Europe.

The slope of the 200 day moving average (red line) has not yet turned up. This is of some concern. A turn to the upside on the 200 day is going to put enormous pressure on the shorts, and it is likely they will have not choice but to start covering or reducing risk.

You will also notice that the market is trading at the top of the shaded area. The lines at the top and bottom of the shaded area equal +2 and -2 standard deviations over and under the Line.

Resist the temptation to all nutty and make short term buys, or trades when the market is at or above 2 standard deviations above the line.

We are not there yet, but this market is starting to remind of a "real good" bull market.

Original content Bob DeMarco, All American Investor

Morning Journal-Another government 'investment' bites the dust

2012-01-27T08:57:00.002-05:00

Economics
This Week’s Data

December new home sales fell 2.5% versus expectations of an increase of 1.5%.
http://www.calculatedriskblog.com/2012/01/2011-record-low-new-home-sales-and.html

The December leading economic indicators rose 0.4% versus estimates of a 0.7% advance.

Initial fourth quarter GDP was reported up 2.8% versus forecasts of up 3.0%; the GDP deflator came in at +0.4% versus expectations of +2.0%
http://www.calculatedriskblog.com/2012/01/real-gdp-increased-28-annual-rate-in-q4.html

Politics
Domestic

How much does Buffett’s secretary make? You might be surprised.
http://www.forbes.com/sites/paulroderickgregory/2012/01/25/warren-buffetts-secretary-likely-makes-between-200000-and-500000year/?feed=rss_home

Another government ‘investment’ bites the dust (medium):
http://www.zerohedge.com/news/taxpayers-lose-another-1185-million-next-obama-stimulus-pet-project-files-bankruptcy

International

More euro incontinence (medium)
http://www.zerohedge.com/news/juncker-breaks-away-propaganda-pack-says-euro-default-will-lead-contagion

News on Stocks in Our Portfolios

More earnings per share reports:

Reported Expected

T Row Price $.72 $.66
Alliance Resources 1.93 1.80
Altria .50 .49
Federated Investors .36 .39

The Morning Call-I'm lightening up

2012-01-27T08:42:00.001-05:00

The Market
Technical

I was little surprised by the down draft in the indices (DJIA 12734, S&P 1318) yesterday. Nonetheless, they still closed near the upper boundaries of their intermediate term trading ranges (10725-12919, 1101-1372) and well above the lower boundaries of their short term up trends (12181, 1260). Furthermore the S&P’s 50 day moving average (1253) continues to move up toward its 200 day moving average (1256). A ‘cross’ would be a significant positive.

Volume declined, as did breadth. The VIX rose but remains in a marked down trend.

GLD (167) rose again. The next resistance level is circa 175. Any weakness from current levels will prompt the purchase of additional shares.

Bottom line: yesterday’s disappointing pin action, especially in light of Wednesday’s easing of monetary policy, suggests that equity prices are close enough to the recent highs that investors who bought at that old high and/or those that bought near the recent lows may be starting to cash in.

That is not to imply that a more direct assault on 12919, 1372 won’t occur or even be unsuccessful. As you know, I believe that the Averages will reach that level; and as I said yesterday, an easier Fed generally means higher prices. So the odds have increased that those highs will be breached.

That said, with no improvement in the fundamentals, those odds still aren’t high enough to convince me that any challenge will be successful.

Bullish sentiment remains high (short):
http://pragcap.com/bullish-sentiment-remains-elevated-2

The January effect (short):
http://blog.stocktradersalmanac.com/post/As-January-Goes-so-Goes-the-Year

Focusing on a pair of flags (short):
http://advisorperspectives.com/dshort/guest/Chris-Kimble-120126-A-Pair-of-Flags.php

Bearish sentiment near lows (short):
http://www.bespokeinvest.com/thinkbig/2012/1/26/bearish-sentiment-drops-below-20.html

Fundamental

Headlines

The economic news was mixed yesterday: weekly jobless claims were higher than expected, but given the recent strength in the employment numbers, some consolidation at a higher level is not surprising; December durable goods orders were better than anticipated; while December new home sales and the leading economic indicators were disappointing.

However, most of the news commentary and analysis remained on the change in Fed policy; and given the axiom of ‘not fighting the Fed’, that was what was so surprising about the Market sell off. Clearly, I expected a much stronger boost to upward momentum. That it didn’t occur may be, as I suggested above, that investors anticipated that follow through and decided that it was time to take some money off the table.

Bottom line: the economic numbers, the political environment in the US and events in Europe are all developing more or less in line with the assumptions in both our Economic and Valuation Models. At current prices (as defined by the S&P) valuations (as defined by our Valuation Model) are within 1% of Fair Value. That doesn’t create any urgent need to be chasing stock prices higher; indeed, if anything, it suggests that our attention is better focused overvaluation than undervaluation.

To be sure, this Market may prove me wrong and bust through 12919, 1372; but the operating record of our Sell Half Discipline is strong enough that even if I am wrong on the Market, the sales that have been and will be made will in retrospect have proven to be the right.

The problem with QE’s and zero interest rate policies (medium and today’s must read):
http://www.nakedcapitalism.com/2012/01/philip-pilkington-is-qezirp-killing-demand.html

Republicans move to prevent the US from making IMF contribution to bail out Europe (medium):
http://www.zerohedge.com/news/republicans-demand-block-us-imf-funding-bail-out-europe

The latest from Doug Kass (long(:
http://www.thestreet.com/story/11382331/1/kass-pressing-pause.html

Subscriber Alert

The stock price of Illinois Tool Works (ITW $53) has traded back into its Sell Half Range. Accordingly, the Dividend Growth Portfolio is being reduced it to a 75% holding. Further Sales can be expected as the Market works its way higher.

The stock prices of Nucor (NUE-$44) and Linear Technology (LLTC-$33) are bumping up against multi year technical highs. While they are not in the Sell Half Range, the Dividend Growth Portfolio is making a trading sale, reducing these positions to 75% of normal.

A recent review of the fundamental of Eli Lilly resulted in it no longer qualifying for the High Yield Universe. The High Yield Portfolio will use the latest price strength to begin moving out of LLY.

Like NUE and LLTC, the stock prices of Alliance Resource Group (ARLP-$78) an Kinder Morgan Energy Ptrs (KMP-$88) have reached technically vulnerable areas. The High Yield Portfolio is cutting these positions to 75% of normal.

Similarly, Reliance Steel (RS-$55) is at a multi year technical high. The Aggressive Growth Portfolio is reducing this position to 75% of normal.

A recent review of Amphenol (APH-$55) concluded that it no longer qualified for the Aggressive Growth Universe. The Aggressive Growth Portfolio is using the current Market strength to move out of this holding.

Intel INTC) 2012 Review

2012-01-26T15:39:00.003-05:00

Intel Corporation (INTC)is a leading manufacturer of integrated circuits (microprocessors, notably Pentium, microcontrollers, memory chips) and computer modules and boards to personal computer, communications, industrial automation, military and electronic equipment markets.

While profits are somewhat cyclical, the company has grown its dividend at a 28% annual rate over the past ten years earning a 10-20% return on equity. Despite the adverse Market conditions in 2008/2009, Intel should continue to lead the rapid growth in the semiconductor industry because:

(1) its processors are characterized by greater functionality and lower cost than its competition,

(2) expected acceleration in server demand,

(3) its outstanding R&D effort continues to develop industry leading products. The latest include Nehalem for desktops and Atom for smart phones,

(4) enterprise spending is again on the up trend,

(5) its recently formed partnership with Google to introduce android based products into the tablet and smart phone markets,

(6) the acquisition of McAfee provides an intro into the mobile security market.

Negatives:

(1) it has been slow to introduce products into the consumer market,

(2) it is lagging competition in graphics processing,

(3) the iPad is taking market share from the PC,

(4) legal problems resulting from questionable marketing tactics.

INTC is rated A++ by Value Line, has 4% debt to equity ratio and its stock yields 3.7%.

Statistical Summary

	Stock Yield	Dividend Growth Rate	Payout Ratio	# Increases Since 2002
INTC	3.7%	11%	34%	8
IND	2.1	9*	50	NA

	Debt/Equity	ROE	EPS Down Since 2002	Net Margin	Value Line Rating
INTC	4%	22%	3	22%	A++
IND	15	22	NA	18	NA

*most companies in INTC industry do not pay dividends

Chart

Note: INTC stock made good progress off its March 2009 low, surpassing the down trend off its December 2007 high (straight red line) and the November 2008 trading high (green line). Long term, it is in a trading range; the blue line is the lower boundary. Intermediate term is in an up trend (purple lines). The wiggly red line is the 50 day moving average. The Dividend Growth Portfolio does not own INTC. The upper boundary of its Buy Value Range is $13; the lower boundary of its Sell Half Range is $29.

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

Morning Journal-Fact checking the SOTU

2012-01-26T08:55:00.002-05:00

Economics

This Week’s Data

December pending home sales index fell 3.5% versus expectations of a 1.0% decline and the November reading of +7.3%.

Weekly jobless claims rose 25,000 versus estimates of an 18,000 increase.
http://www.calculatedriskblog.com/2012/01/weekly-initial-unemployment-claims_26.html

December durable goods orders advanced 3.0% versus forecasts of +2.0%; ex autos, it was up 2.1% versus expectations of up 0.7%.

Politics
Domestic

My favorite democrat’s take on the state of the union speech (short):
http://dailycaller.com/2012/01/25/wheres-the-osawatamie/

In the SOTU, Obama praised the bail out of GM. Forgetting the fact that the law was turned on its head, i.e. the creditors got screwed and the unions were saved, this note on how things are working out (short):
http://dailycaller.com/2012/01/24/wagner-act-outsourcing/

Fact checking the SOTU speech (9 minute video):
http://www.youtube.com/watch?v=eQdwr-xNJIU

Much is being made of the baggage that Newt has to haul around. One such piece is the ethics violation to which he pled guilty in 1997. Here is a complete and thorough discussion of the entire affair. It is revealing; and anyone deeming this ethics charge as a strike against Newt should read this. It is a bit long. (As a disclaimer, I am personally lukewarm at best to Newt’s candidacy.)
http://campaign2012.washingtonexaminer.com/article/what-really-happened-gingrich-ethics-case/336051

News on Stocks in Our Portfolios

More earnings per share reports:

Reported Expected

Grainger (WW) $2.13 $2.12
ConocoPhillips 2.02 1.89
ATT .42 .43
Colgate Palmolive 1.30 1.30
3M 1.35 1.31
Quality Systems .36 .38
Caterpillar 2.32 1.77

The Morning Call--We are Adding to GLD

2012-01-26T08:41:00.001-05:00

The Market
Technical

The indices (DJIA 12758, S&P 1326) picked up momentum to the upside yesterday, closing within their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of their short term up trends (12155, 1255). The 12919, 1372 level is clearly within striking distance; and as I have said repeatedly, prices are likely to get there.

Volume was up marginally; breadth improved. The VIX declined and remains within a firm down trend.

GLD soared, rebounding off its 50 day moving average and finished decidedly above the down trend off its September highs. At the Market open, our Portfolios will Add to their positions, taking them above 5%.

Bottom line: 12919, 1372 here we come. However, I have opined that these boundaries will hold. I am sticking with that, though with the news out of the Fed yesterday, the likelihood of me being wrong has increased.

The percentage of stocks above their 50 day moving average (charts):
http://www.bespokeinvest.com/thinkbig/2012/1/25/sp-500-sector-percentage-of-stocks-above-50-day-moving-avera.html

Stock prices are up but so are earnings downgrades (short):
http://www.bespokeinvest.com/thinkbig/2012/1/25/analysts-start-out-the-year-on-the-wrong-side-of-the-bed.html

Fundamental
Headlines

The great earnings news from Apple Tuesday night had little impact on stocks at yesterday’s opening because all the early Wednesday news was negative: (1) economic news: December pending home sales [down] and mortgage applications [also down] (2) news from Europe: the UK economy is slowing more than anticipated and Portuguese interest rates are blowing out to the upside. The latter points are particularly concerning viz a viz our forecast in that they could be signs that our ‘muddle through’ scenario could be too optimistic. However, this was all soon forgotten.

First Greece, then Portugal (medium):
http://www.marketwatch.com/story/forget-greece-its-portugal-thatll-destroy-euro-2012-01-25?siteid=rss&rss=1

Over night rates are again up (short):
http://www.zerohedge.com/news/portugal-10-year-yield-passes-15-first-time-where-greek-10-year-was-august

The big news was the change in policy coming out of the FOMC meeting--extending the period of accommodative monetary policy out to at least mid 2014; in other words, low rates and easy money for as far as the eye can see. Let’s call this move QE 2.5 and basically parallels the recent loosening in EU monetary policy (which not coincidentally is also a three year program).

The good news is that (1) it will provide additional help to the European financial system in dealing with its liquidity problem, (2) it potentially lessens the risk associated with my biggest fear--a bankruptcy that could lead to a chain reaction in the EU sovereign debt credit default swap market in which counterparties are unable to meet their obligations, and (3) based on investor reaction to QE 1, QE 2 and operation twist, this should be a plus for stock prices.

The bad news is that it makes Fed’s ultimate task of removing all the excess liquidity on bank balance sheets that much harder. Think inflation.

Surprisingly enough, except for the aforementioned extension of easy money, the rest of FOMC statement read almost identically to the statement from the last FOMC meeting: rates were left unchanged, the economy is expanding moderately (though slightly less so than previously forecast) and unemployment unlikely to improve materially anytime soon. In other words, even though nothing has changed, the Fed is doubling down on easy money. Obama to the Ber-nank, thank you.

Bottom line: the Fed is doing everything in its power to mitigate any global liquidity risk. While that may be helpful short term in avoiding a freeze up in our banking system should we get a disorderly default in Europe, it doesn’t address the real problems either here or abroad--which are solvency risks (fiscal irresponsibility). And it is the solvency issues that are the more important determinants of the pace (or lack thereof) of economic recovery.

My point here is that while the Fed’s new policy may be reducing the magnitude of the downside IF our forecast is too optimistic; but it does nothing to improve the upside because it isn’t going to induce banks to lend or businesses to borrow any more than QE1, QE2 or operation twist did--because the banks and businesses are scared sh**tless of fiscal/regulatory policies (and who could blame them after Tuesday night’s speech?) not monetary policy. In short, it raises the probability that our outlook will be spot on; and if that is the case, then nothing has changed with respect to valuations.
http://blog.stocktradersalmanac.com/post/Bond-Bubble-Stays-Alive

And (short):
http://scottgrannis.blogspot.com/2012/01/more-fiscal-and-monetary-stimulus-means.html

On the other hand, the old saw to ‘not fight the Fed’ has to have increased as a price determining factor at this point; and that suggests that the odds that prices could overshoot the 12919, 1372 boundary have gone up. Nevertheless, with no change in the fundamentals, i.e. Fair Value at S&P 1336, my strategy is to force the Market to prove me wrong. In the meantime, I can’t ignore our Discipline to Sell stocks that move into their Sell Half Range.

A corollary of not fighting the Fed when there is already trillions of dollars on bank balance sheets is that the risk of inflation/currency debasement has gone up, strengthening the case for owning gold.

Thoughts from David Rosenberg (medium):
http://www.zerohedge.com/news/tying-it-all-together-david-rosenberg

Subscriber Alert

The stock price of CR Bard (BCR-$90) has traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio will continue to Hold BCR.

The stock price of Sigma Aldrich (SIAL-70) has traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth and Aggressive Growth Buy Lists. The Dividend Growth and Aggressive Growth Portfolios will continue to Hold SIAL.

The stock price of Cato Corp (CATO-$27) has traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the High Yield Buy List. The High Yield Portfolio will continue to CATO.

As noted above, our Portfolios are Adding to their GLD positions at the Market open.

Morning Journal-The US inches closer to a European moment

2012-01-25T08:49:00.001-05:00

Economics
This Week’s Data

The International Council of Shopping Centers reported weekly sales of major retailer fell 1.4% versus the prior week but rose 2.8% versus the comparable period in 2011; Redbook Research reported month to date retail chain store sales dropped 1.6% versus the similar time frame in December but increased 2.5% on a year over year basis.

Weekly mortgage applications fell 5.0% while purchase applications dropped 5.4%.

Other

The US inches closer to a European moment (medium):
http://money.cnn.com/2012/01/24/markets/thebuzz/index.htm?iid=HP_LN

MIT data show inflation declining at year end (short):
http://mjperry.blogspot.com/2012/01/ppmit-data-show-inflation-moderating-at.html

Truck tonnage continues strong (short):
http://scottgrannis.blogspot.com/2012/01/truck-tonnage-is-very-impressive.html

Politics

Domestic

The Club for Growth on Romney and Gingrich (3 minute video):
http://www.clubforgrowth.org/perm/?postID=15730

News on Stocks in Our Portfolios

More earnings per share reports:

Reported Expected

Canadian Nat’l RR $1.30 $1.26
Peabody Energy .93 1.32
Praxair 1.36 1.37
General Dynamics 1.68 1.99
United Technologies 1.47 1.46
Total System Services ,31 .31
UGI .77 .97
Abbott Labs 1.54 1.44
Automatic Data Processing .68 .68
Boeing 1.32 1.01

The Morning Call-What did He just say?

2012-01-25T08:39:00.001-05:00

The Market
Technical

The indices (DJIA 12675, S&P 1314) had a mildly negative day, closing within their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of their short term up trends (12145, 1253).

There is no resistance between current levels and the 12919, 1372 level; and both of the Averages have multiple support levels, including the neckline of the reverse head and shoulders pattern (12287, 1266), their 200 day moving averages (11967, 1257), the lower boundary of their short term up trends (12145, 1253) and the old resistance/support level (11741, 1230). In addition, the S&P 50 day moving average (1250) continues to close on the 200 day moving average [1257] for a possible ‘golden cross’.
http://advisorperspectives.com/dshort/guest/Chris-Kimble-120124-NYSE-at-Resistance.php

Finally, I ran a check of our internal indicator, comparing individual stock current levels with the comparable 12919, 1372 boundaries; out of a Universe of 158 stocks, 52 were above the 12919, 1372 level, 78 were not and 28 were too close to call. That is actually a much stronger reading than I had expected; however, it is not strong enough at the moment to have predictive value. I will be monitoring this indicator closely if prices continue to advance.

Volume declined as did breadth. The VIX rose a bit but remains in a down trend.

GLD sold off and closed right on its 50 day moving average. If it holds above this trend line and successfully challenges the short term down trend off its September 2011 high, our Portfolios will Add to this position.

Bottom line: the last two day’s performance notwithstanding, the moment remains to the upside. So I think that there is a good chance that the 12919, 1372 level will be challenged; but I don’t think that it will be successful. Of course, it is always hairy making calls at critical technical junctures and clearly I could be wrong. However, until proven so, our strategy assumes the upper boundaries of the trading ranges will hold.

A look at the Market from the perspective of the Elliott Wave theory (short):
http://www.minyanville.com/businessmarkets/articles/elliott-wave-elliott-wave-theory-qe3/1/24/2012/id/39000

The seasonal tendency of stock prices in February (short):
http://blog.stocktradersalmanac.com/post/January-Gains-Frequently-Correct-or-Consolidate-in-February

Fundamental

Headlines

Yesterday was another slow day, news flow wise. On the economic front, weekly retail sales were a bit of a disappointment. Earnings season continued apace and results are pretty much in line with the expectation that there would be a clear slowdown in the rate of growth (see below). The theme for the day I think was waiting: (1) the FOMC was meeting but we won’t get the results until after the close today, (2) the state of the union was last night, (3) the eurocrats can’t figure out how to put Greece into bankruptcy and (4) Apple, probably the most visible and widely followed company in America, was scheduled to report financial results after the close.

On the last point, Apple’s results were absolutely a blow out. The stock was up big in after hours trading and will probably impact the pin action today. Indeed, it could be the propellant for the Market’s challenge of the 12919, 1372 level.

Bottom line:

(1) while little new is expected from the Fed, that is not the same thing as saying that there shouldn’t be. Mistakes have been made and they need to be addressed in order to insure that the current fragile recovery doesn’t roll over on us.

Where the Fed is wrong (medium):
http://www.zerohedge.com/news/fed-should-hire-mechanic

(2) the magnitude of the known unknowns in the EU are significant; and the longer eurocrats dally, the greater the possibility of investors tiring of the procrastination or panicking and precipitating a financial crisis.

Here are but two examples (first short, second medium):
http://www.bloomberg.com/news/2012-01-25/germany-rejects-indecent-call-to-ecb-on-greece-meister-says.html
http://www.zerohedge.com/news/european-stress-reemerges-risk-epicenter-following-portugal-admission-it-needs-%E2%82%AC30-billion-bail

Thoughts of the former chief economist of the IMF on Europe (medium):
http://www.zerohedge.com/news/dreams-versus-reality-former-imf-chief-economist-europes-last-stand

Can the US grow amidst a European recession? (short):
http://www.zerohedge.com/news/decoupalypsis-now

(3) judging by last night’s speech, Obama is either living on a different planet than I am, is delusional or thinks that He can bulls**t passed the truth. For all the soaring rhetoric, I didn’t hear a single word about His signature accomplishments and how much they have helped America: Obamacare, Dodd Frank, the stimulus package. Whatever His mental state, I can only conclude that nothing in the tax code, the regulatory system or the outrageous budget expenditures is going to change, at least not this year.

The point here is that much of the good news (a recovering economy, Europe ‘muddles through’) seems priced into stocks. So what is left to Buy? I don’t’ have answer for that and that is why I see no reason to be chasing stock prices at these levels.

Here is a little contrary thinking on the EU sovereign debt problem (medium):
http://www.voxeu.org/index.php?q=node/7553

The fourth quarter earnings and revenues ‘beat’ rates are declining (short):
http://www.bespokeinvest.com/thinkbig/2012/1/24/fourth-quarter-earnings-and-revenue-beat-rates.html

United Parcel Service (UPS) 2012 Review

2012-01-24T16:00:00.002-05:00

United Parcel Service (UPS) is the world’s largest integrated air and ground package delivery service, operating in over 200 countries.

The company also offers specialized transportation and logistics services. UPS had grown its earnings at a 5% pace in the last ten years though dividends have increased at a 12% annual rate. It has a 30%+ return on equity. UPS suffered a slowdown in growth as a result of the 2009 recession; however, it has recovered and should return to above earnings growth as a result of:

(1) as the economy improves, the company should experience operating leverage with improved pricing and volume,

(2) expanding its global exposure. It recently opened its new intra Asia hub in China. In addition, it is making key strategic investments in infrastructure and complementary operations in Asia, the Middle East and Eastern Europe,

(3) its continued investment in technology and service enhancements,

(4) its effort to raise its health care distribution business which is expected to grow at a well above average pace,

(5) an ongoing share repurchase program.

Negatives:

(1) it is in a highly competitive industry,

(2) approximately 60% of its work force in unionized subjecting it to the risks of work stoppages and slowdowns,

(3) its international exposure increases the risks of economic difficulty from both the EU and the more volatile emerging markets.

UPS is rated A by Value Line, has a 59% debt to equity ratio and its stock currently yields about 3.0%.

Statistical Summary

	Stock Yield	Dividend Growth Rate	Payout Ratio	# Increases Since 2002
UPS	3.0%	4%	43%	10
IND	.1	3*	1	NA

	Debt/Equity	ROE	EPS Down Since 2002	Net Margin	Value Line Rating
UPS	59%	43%	2	8%	A
IND	87	29	NA	5	NA

*most companies in UPS industry do not pay dividends

Chart

Note: UPS stock made good progress off its March 2009 low, surpassing the down trend off its September 2007 high (red line) and the November 2008 trading high (green line). Until very recently the stock was in a trading range dating from 2004; however, it recently broke above the upper boundary of that trading range and re-set to an up trend (straight blue lines).. It is also in an intermediate term up trend (purple lines). The wiggly blue line is on balance volume. The Dividend Growth Portfolio owns a one half position in UPS. Additional shares would be Bought at $70; the lower boundary of its Buy Value Range is $88.

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

Morning Journal-Debt matters

2012-01-24T08:57:00.001-05:00

Economics
This Week’s Data

Other

Greg Mankiw on taxes (medium):
http://www.nytimes.com/2012/01/22/business/four-keys-to-a-better-tax-system-economic-view.html?_r=1

More shenanigans between the administration and the banks (medium):
http://www.nakedcapitalism.com/2012/01/obama-to-give-banks-mortgage-get-out-of-jail-almost-free-card-pressures-state-attorneys-generals-to-capitulate.html

A more in depth look at the Baltic Dry Index (medium):
http://www.investmentpostcards.com/2012/01/23/baltic-dry-index-%E2%80%93-sell-off-overdone/

Debt matters....or does it (short and a must read):
http://pragcap.com/debt-matters

An in depth look at current debt levels (medium):
http://advisorperspectives.com/dshort/guest/Shedlock-120123-Debt-and-Deleveraging-Five-Pronged-Solution.php

Bank lending is still growing (short):
http://scottgrannis.blogspot.com/2012/01/bank-lending-still-accelerating.html

Politics

Domestic

Mickey Kaus debates with himself over ‘recess’ appointments (medium):
http://dailycaller.com/2012/01/21/kausfiles-averts-constitutional-crisis/

News on Stocks in Our Portfolios

More earnings per share reports:

Reported Expected

Johnson and Johnson $1.13 $1.09
Verizon .52 .53
Kimberly Clark 1.28 1.26
McDonalds 1.33 1.30

The Morning Call-The narrative is too positive

2012-01-24T08:41:00.001-05:00

The Market
Technical

The indices (DJIA 12708, S&P 1316) finished the day flattish and mixed (S&P up, DJIA down) though there was some volatility intraday. At the close, they were within their intermediate term trading ranges (10725-12919, 1101-1372) and well above the lower boundaries of their recent short term up trends (12099, 1251).

Volume fell; breadth was flat. The VIX rose but remains in solid down trend.

GLD (163) rose, breaking above its 50 day moving average. The last remaining resistance level is the down trend off the September high (circa 164). A move above this boundary will prompt additional buying.

Bottom line: there is still nothing in the technicals that suggests the current upward momentum won’t continue. I won’t argue with the Averages reaching Fair Value (S&P 1336) or the upper boundary of the current intermediate term trading ranges (12919, 1372); but since that is such a short distance away, I don’t see the point in Buying stocks for a couple of percentage points. Indeed, as I have made clear, the higher prices trade, the more stocks in Universe are moving into their Sell Half Range or bumping against significant resistance levels. That will lead to further Sales.
http://www.zerohedge.com/news/guest-post-complacency-risk-high

A look at resistance (short):
http://advisorperspectives.com/dshort/guest/Chris-Kimble-120123-SPX-800-Pound-Gorilla.php

On the other hand, GLD appears close to surmounting key resistance levels formed during the down turn from last September. If that happens, our Portfolios will be Adding to their positions.

Fundamental

Headlines

There is very new little to discuss. No US economic news. There was some lousy data out of Germany; but we already know, Europe is slowing down and may be in a recession.

The eurocrats still can’t decide on how to solve the Greek problem, though the endgame is visible and inevitable. They just don’t seem willing to accept it. In any case, that country’s bankruptcy is in our forecast.

Bottom line: I continue to believe that investor’s are far too complacent regarding the headwinds that face both the US and Europe. That is not to argue that stocks won’t trade at Fair Value because those headwinds are priced into our Model. And that may all that is happening--investors continuing to put their cash to work as long as stocks are even fractionally undervalued. That is not something I would do; but I can at least understand it.

The problem is the narrative that is accompanying this action particularly as it relates to Europe. It is, at least in my opinion, way too positive on potential outcomes to the EU credit crisis. If, as a result, stock prices continue advance beyond Fair Value, then the further they rise, the more aggressive our Selling will become--with the caveat that I would take a confirmed break of the 12919, 1372 level as a sign that I seriously rethink my assumptions in our Models.

This is an example of what the narrative is ignoring (medium):
http://www.zerohedge.com/news/portugal-reenters-bailout-radar-traders-realize-greek-bailout-model-not-feasible-here

Comparing past economic and stock market recoveries (medium and today’s must read):
http://www.zerohedge.com/news/us-unrecovery

The latest from John Hussman (medium):
http://advisorperspectives.com/commentaries/hussman_12312.php

John Mauldin on the EU dilemma. As usual, his articles are long but worth the read:
http://www.minyanville.com/businessmarkets/articles/european-debt-crisis-greece-debt-sovereign/1/23/2012/id/38957

Confessions of a bear (medium):
http://www.zerohedge.com/news/guest-post-i-was-wrong-about-everything

@AllAmerinvest Stock Futures Down Early, Chart

2012-01-24T08:20:00.001-05:00

U.S. stock-index futures are slipping after a meeting of euro-area finance chiefs finished without making progress on a debt-swap deal for Greece.

All American Investor

The 40 day average (red line) has crossed the 200 day moving average (green line). This is a positive.

The 200 day moving average is still sloping down, so it is still time to be cautious.

Overall, the trend remains up.

Original content Bob DeMarco, All American Investor

Thoughts on Investing--from Jeffrey Hirsch

2012-01-23T09:00:00.002-05:00

9% DJIA Gains In Election Years When Sitting President Runs

By Jeffrey A. Hirsch

Since the inception of the Dow Jones Industrial Average in 1896 there have been 19 presidential elections that a sitting president was running for reelection. DJIA posted gains in 14 of these 19 election years. There were only two losses greater than 5%. In 1932 as the Great Depression took hold, the DJIA fell 23.1% and President Hoover lost his reelection bid during the worst bear market in DJIA history that brought the blue chip average down 86% from April 1930 to July 1932. This was also the only incumbent to lose the office when the market was down.

Ironically, the DJIA posted gains during the four other election years when the incumbent lost. As WWII ravaged Europe in 1940 DJIA lost 12.7%. In all 19 years the DJIA gained 9% on average. When the incumbent was reelected DJIA gained 10.7% versus 4.3% in the years the incumbent was ousted. Markets feed off of a popular president or rally in celebration after an unpopular president is replaced.

The Morning Call--Monday Morning Chartology 1/23/12

2012-01-23T08:38:00.006-05:00

The Market

Technical

Monday Morning Chartology

You can’t argue with the strength displayed by the S&P in this chart.

Short term, GLD is clearly acting better. It does, however, have resistance at the 50 day moving average (the red wiggly line) and the down trend off the September 2011 highs.

The VIX continues to drop like stone. You can see substantial support at the circa 15 level.

A sign of complacency? (short):
http://blogs.wsj.com/marketbeat/2012/01/20/heres-one-sign-investors-are-too-complacent/

The number of stocks above their 200 day moving average:
http://advisorperspectives.com/dshort/guest/John-Carlucci-Best-Indicator-Ever-Update.php

Politics

Domestic

Obama’s staff and the 1% (medium):
http://www.nationalreview.com/articles/288630/why-do-obama-officials-get-rich-rich-lowry

International War Against Radical Islam

Another small step in the demise of the dollar (medium):
http://www.zerohedge.com/news/india-joins-asian-dollar-exclusion-zone-will-transact-iran-rupees

The Closing Bell--Can this rally last?

2012-01-21T13:34:00.003-05:00

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):
Intermediate Term Trading Range 10725-12919
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):
Intermediate/Short Term Trading Range 1101-1372
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 22%
High Yield Portfolio 25%
Aggressive Growth Portfolio 25%

Economics

The economy is a modest positive for Your Money. The data this week was mixed, although there was a positive bias. The pluses included weekly mortgage and purchase applications, December existing home sales, weekly retail sales, the NY Fed business index and--the standout--declining weekly jobless claims; December new home starts was the major negative. Finally, I would term as mixed December industrial production, the Philly Fed index and the inflation numbers.

All in all, not bad and fairly reflective of our forecast: a below average secular rate of recovery resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with an impaired balance sheet and a business community unwilling to hire and invest because the aforementioned 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.

Supporting the inept-yet-burdensome-government assumption in this thesis was Obama’s determination this week to ‘conditionally’ reject the Keystone Pipeline project. There is absolutely nothing beneficial to decision other than to pander to the environmental lobby; and it only illustrates that 2012 will be a lost year in the sense of any progress being made in correcting irresponsible government fiscal and regulatory policies.
http://www.nationalreview.com/author/56454/latest

Unfortunately, the republicans are doing everything possible to prolong this scenario:
http://www.washingtonpost.com/opinions/republicans-legitimize-obamas-reelection-rhetoric/2012/01/19/gIQA5pB5BQ_story.html

Of course, I am always worried about where our forecast could go awry One way would be the resumption of the almost universally positive string of economic stats that we witnessed in December which would portend a stronger recovery than is in our outlook. That thesis was helped this week by the upbeat data in housing and employment, two indictors that have long been a drag on the economy. However, given the oft repeated headwinds that the US economy faces, I need a longer period of sustained improving data before revising upward our forecast. Nevertheless, it still remains a risk to outlook that I may be underestimating the natural recuperative power of the US economy.

On the other hand, I am equally concerned about the recession call by the very forward looking ECRI weekly leading index given (1) its track record and (2) the likelihood of a major revision in the computation of the leading economic indicator which may also show a weakening economy [see Thursday’s Morning Call for a more detailed discussion].

This week’s ECRI reading reversed again to the upside which helps keep its latest recession call from becoming a slam dunk.
http://advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php

It may seem confusing and contradictory to be simultaneously fretting over the economy being either stronger or weaker than our forecast. However to me, it actually serves to support it, in that multiple forces pulling the economy in opposite directions probably insures that it will progress much as I anticipate.

All that said, the major risk to our outlook comes not from within but from Europe, specifically the potential that the eurocrats will mishandle the resolution of their sovereign debt problems. To be sure, the recent implementation of the new ECB funding program has served to lessen liquidity strains and diminish the possibility of a disaster scenario. That clearly is a positive. Indeed, it raises substantially the probability that our ‘muddle through’ scenario will prove correct.

On the other hand, it only buys time for the eurocrats to do the heavy lifting on the more significant problem, i.e. reducing spending and reducing debt; and unfortunately, little has been accomplished on that score. So this play is nowhere near its last act; and to be clear, the last act is going to involve pain. The only question is, how severe will it be?

If the eurocrats elect to continue on the current course that they are on, that is, do only enough to prevent Europe from imploding, then our ‘muddling through’ forecast will likely best portray the EU economy for the next decade as it moves from mini crisis to mini crisis struggling to reduce debt and reduce expenditures and failing to produce growth. This may be the least painful scenario in the short term but it ultimately becomes a decade long Chinese water torture, stifling progress and growth in Europe and contributing nothing to global growth (Japan 2.0).
http://www.zerohedge.com/news/global-deleveraging-you-are-here

Regrettably, it also leaves open the possibility that investors will tire of the eurocrats lack of will and courage and either refuse to support them or panic. Whichever might occur, the result would be a much more severe economic contraction not only in Europe but in the global economy and would include the possibility of (my biggest fear):

‘multiple bank and country defaults that lead to a collapse in the EU credit default swaps market which in turn results in an abrogation of counterparty obligations that negatively impacts US bank balance sheets as much as or more than Lehman Bros.’

This from Gary Shilling (medium):
http://www.marketwatch.com/story/shilling-says-new-global-recession-is-here-2012-01-20?link=MW_story_popular

Bottom line: virtually all the current data and political developments both here and abroad support our forecast; so our Economic Model remains unchanged; There are risks, of course, including but not limited to a roll over in the US economic growth and a change for the worse in either investor or the EU electorate’s patience with a bumbling European political class that leads to multiple bank and/or country defaults and severe recession.

However, just to be clear, our’s is a positive outlook. It is just tempered by the reality that much work has to done to return both our government and the EU to a sound fiscal basis; and that involves below average secular growth as the Western world deleverages.

This week’s data:

(1) housing: weekly mortgage and purchase applications rose strongly again, though seasonal factors influenced these numbers; December housing starts fell much more than an anticipated, while existing home sales [by far the larger market] rose in line with forecasts,

(2) consumer: weekly retail sales were up; weekly jobless claims plummeted,

(3) industry: December industrial production was slightly below expectations; there were somewhat conflicting signals from two January regional Fed business indices--the NY Fed’s came in up and better than estimates while the Philadelphia Fed’s was up but below forecasts,

(4) macroeconomic: December PPI headline number was very positive [down versus expectations of up] while the core PPI was exactly the opposite; December CPI headline and core figures were reported as estimated.

The Economic Risks:

(1) the economy is weaker 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 12623, S&P 1314) had another great week, closing near the upper boundaries of their intermediate term trading ranges (10725-12919, 1101-1372) and well above the lower boundaries of the short term up trends off the October 2011 lows (current intersect: 12070, 1248).

Clearly, the very positive technical bias continues unabated, suggesting more of the same in upcoming weeks. The numerous factors contributing to this positive outlook include:

(1) there is almost no resistance between current price levels and 12919, 1372,

(2) the upside target for the recent break above the reverse head and shoulders formation is S&P 1360-1370,

(3) the Averages have a number of near-in support levels [a] the neckline of the reverse head and shoulders pattern {12287, 1266}, [b] their 200 day moving averages {11961, 1257}, [c] the aforementioned lower boundary of their short term up trends {12070, 1248} and [d] the old resistance/support level {11741, 1230},

(4) the S&P 50 day moving average [1248] continues to close on the 200 day moving average [1257]. The intersection and penetration of the 200 by the 50 day moving average, commonly referred to as a ‘golden cross’, is viewed very positively by technicians,

(5) the VIX fell another 8% Friday, busting to the downside of what looked like a developing base. Further declines would be a sign of improving stock prices.

As overwhelming as this assortment of up beat indicators is, there are persuasive counter arguments to the notion that stocks will shoot the moon; among them the number of stocks either in or near their Sell Half Ranges or significant resistance levels, the current Fair Value of the Market--S&P 1336 as computed by our Valuation Model, the fact that the upper boundaries of the current trading ranges offer resistance and the overhang of unfinished business on the EU debt crisis. http://blog.stocktradersalmanac.com/post/Bulls-Eye-October-Forecast-DOW-12700-By-January-2012

So at least in my analysis, equity prices are at or close to a critical juncture. On the one hand, stocks are nearing the upper boundary of a trading range with a momentum that seems unstoppable; on the other, our Valuation Model is giving multiple signals that stocks in general are fairly valued while a goodly number are expensive on an historical absolute and relative basis.

Situations like this when the technicals and fundamentals are dramatically at odds are confounding at best and can be gut wrenching affairs. But that is not an argument for doing nothing. My strategy has always been to listen to (my version of) the fundamentals until the Market tells me that I am wrong--and in this case, that won’t happen until the Averages confirm a break over 12919,1372. So for the moment, my focus is on the fundamentals specifically our Sell Discipline; if the Market ends up proving that judgment wrong, then I will take my lumps and adapt.

Volume was higher on Friday but that was related to option expiration activity; breadth was mixed though the flow of funds indicator was quite strong. Finally, as I noted above, the VIX sank another 8% leaving it firmly in a down trend.

Where’s the volume?
http://advisorperspectives.com/dshort/commentaries/Trading-Volume-in-the-SPX-120120.php

Stock price/bond yield disconnect (short):
http://scottgrannis.blogspot.com/2012/01/bondequity-disconnect.html

GLD was up yesterday, closing above its 200 day moving average and the lower boundary of its short term up trend.

Bottom line:

(1) the DJIA and S&P are in an intermediate term trading range (10725-12919, 1101-1372),

(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 (12720) finished this week about 17.7% above Fair Value (10805) while the S&P closed (1314) 1.6% undervalued (1336). 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.

To quote from last week:

Two assumptions in the above statement seem to tracking as I had expected; that is, (1) the most recent data support the view that the secular growth rate of the economy is presently distinctly sub par and likely to remain so without some changes in policies governing spending, taxation, regulation, trade and money supply and (2) that is probably not going to happen until at least early 2013 and perhaps not then.

That leaves investors, entrepreneurs, business men and consumers to rely on their own ingenuity to overcome (1) above and then to attempt to create value. The good news is that seems to be happening in a limited way right now and for that we have to be thankful. But I believe that the headwinds are simply to powerful to enable the economy to recover at an historically normal pace without removing the obstacles presented by an over active, inefficient, economically ignorant and far too paternalistic government.

Furthermore, as I noted in the first paragraph of this section, much of the progress that either has been and is being made is decently reflected in current stock prices. Sure there remains a gap between current prices and Fair Value. But that gap is small and very general in nature. Meanwhile, there are plenty of stocks that have reached extraordinary valuations, at least as computed by our Model. To be sure, there is some chance that economic growth may improve more than I am forecasting; but it is not going to move the needle on valuations by much. Bottom line: none of the above makes me overly anxious to put money to work. (note: only the technicals do)

The point of all this is that (1) I am not negative on the prospects for growth in the US, I just think that they we will be sub par, (2) nor am I betting that Europe will implode, I just think it will not grow until it has solved its fiscal problem, (3) nor do I believe stocks prices are in for a fall. What I am saying is that to the extent that our forecast is a positive one, it is well reflected in current valuations in general and richly valued in some specific cases--and as a money manager, right now I have to address the latter. Reflecting that, this week our Portfolios Sold small portions of a number of either fundamentally or technically overextended stocks; and if prices continue to advance, additional sales can be expected. Our Portfolios also Added to their GLD holdings.

This from Morgan Stanley (medium):
http://www.zerohedge.com/news/stock-ramp-just-more-deja-vu-insanity-warns-morgan-stanley

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 1/31/12 10805 1336
Close this week 12623 1314

Over Valuation vs. 1/31 Close
5% overvalued 11345 1402
10% overvalued 11885 1469
15% overvalued 12425 1536
20% overvalued 12966 1603

Under Valuation vs. 1/31 Close
5% undervalued 10264 1269
10%undervalued 9724 1202
15%undervalued 9184 1135

* 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.

Subscriber Alert

2012-01-20T15:11:00.002-05:00

SUBSCRIBER ALERT
1/20/12

Our Portfolios are going to continue to chip away at stocks that are near the Sell Half Range or major resistance levels. Accordingly, a small portion of the following holdings are being Sold.

In the Dividend Growth Portfolio: Paychex, Nucor

In the High Yield Portfolio: Kinder Morgan Energy Ptrs

In the Aggressive Growth Portfolio: Medivation, Suncor, Reliance Steel

Morning Journal-More on the Keystone Pipeline decision

2012-01-20T08:51:00.002-05:00

Economics
This Week’s Data

The January Philadelphia Fed manufacturing index came in at 7.3 versus expectations of 10.0 and the December reading of 10.3.
http://advisorperspectives.com/dshort/updates/Philly-Fed-Business-Outlook.php

Other

Greg Mankiw on the progressivity of the US tax code (short):
http://gregmankiw.blogspot.com/2012/01/five-observations-about-progressivity.html

Politics
Domestic

More on the Keystone Pipeline decision:
http://www.powerlineblog.com/archives/2012/01/the-keystone-of-the-republicans-2012-presidential-campaign.php
http://www.powerlineblog.com/archives/2012/01/white-house-keystone-cops-continued.php

Canada to Obama, ‘we will continue to diversify its energy exports’:
http://www.zerohedge.com/news/keystone-aftermath-arrives-canada-pledges-sell-oil-asia-us-becomes-source-uncertainty

Big government’s further shredding of individual rights (medium):
http://www.ritholtz.com/blog/2012/01/homeland-security-shreds-constitutional-right-to-anonymous-political-speech-%E2%80%93-not-to-protect-our-security-%E2%80%93-but-to-monitor-dissent/

News on Stocks in Our Portfolios

More earnings per share reports:

Reported Expected

Schlumberger $1.11 $1.09

@AllAmerInvest Global Recession, Retirement Havens, Google Down Ten Percent, Malcolm X

2012-01-20T08:43:00.001-05:00

Shilling says new global recession is here

And here’s the really bad news: He thinks Europe will experience a recession as deep as ours was from 2007-2009 — enough to tip the U.S.’s relatively better economy into recession, too, during the first quarter of 2012.
Read More

Google
Shares fell as much as 10 percent in extended trading yesterday after Google reported fourth-quarter sales, excluding revenue passed on to partner sites, of $8.13 billion, falling short of the $8.41 billion average estimate of analysts surveyed by Bloomberg. Profit before certain costs was $9.50 a share, missing the $10.50 average estimate.

All American Investor

The world’s top 10 retirement havens
It might not seem the world’s top retirement haven, but the editors at International Living say the Republic of Ecuador is the best place in the world to retire to. The cost of living is low and real estate is cheap.

Why America Needs a Malcolm X Day
Malcolm ended his life rejecting anti-whiteness and nationalism in favor of a bold multiculturalism that was and is still willing to welcome anyone into his international interfaith anti-oppression movement: to judge by creed and not by race. He grew to understand it took all types to make the human family complete and explicitly rejected racial hatred and espoused a universal law of justice.

Original content Bob DeMarco, All American Investor

The Morning Call--Upside is limited

2012-01-20T08:42:00.001-05:00

The Market
Technical

The indices (DJIA 12623, S&P 1314) had another quietly up day closing within their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of their short term up trends (12056, 1244).

Volume was flat; breadth down. The VIX fell 5%, finishing (1) within the current down trend and (2) below the developing base that I mentioned previously--a positive for stocks.

GLD was off fractionally, but remains within its short term up trend.

A long term perspective on gold (medium):
http://www.zerohedge.com/news/longer-term-perspective-gold-and-more-nomura

Bottom line: price momentum is clearly to the upside and seems to be picking up. I have no good technical argument why that wouldn’t continue. Indeed, more and more technical factors are turning positive.

I would be thrilled by all this if the S&P were 200 points lower. Unfortunately, the S&P is fractionally below Fair Value, the DJIA is well above it, the upper boundaries of the Averages current trading ranges are within striking distance and I keep adding to my list of our stocks that are nearing either their Sell Half Range or significant multi year resistance barriers.

I am clearly looking very wrong right now for not making a trading Buy when prices took out the neckline of that reverse head and shoulders. In the end, I am sticking with what at the moment is a clear contrarian view that the upside is limited and that the boundaries of the current trading ranges will hold; so I remain content to not chase prices up.

A different look at sentiment (short):
http://www.marketwatch.com/story/worrisome-complacency-2012-01-18?link=home_carousel

Is the Market simply tired of being pessimistic? (short):
http://www.macrobusiness.com.au/2012/01/pessimism-fatigue/

Another thought on what is driving this Market (medium):
http://www.zerohedge.com/news/print-or-panic-trimtabs-markets-meltup

A chart of long term interest rates:
http://www.ritholtz.com/blog/2012/01/222-years-of-long-term-interest-rates/

Fundamental
Headlines

Yesterday’s economic news was mixed: the weekly jobless claims number was outstanding, December housing starts were very disappointing and December CPI was a wash. On the other hand, earnings season continues to perk along and appears to be meeting expectations, i.e. up but at a decreasing rate of growth. Finally, the almost daily EU sovereign debt auctions are occurring at rising prices (lower rates) indicating increasing optimism that the sovereign debt crisis is easing.

Most of the above fits our forecast; though I would question investor enthusiasm for the debt of countries that mathematically have no chance of paying that debt back except via inflation. However, assuming the US recovery continues and that corporate profits continue to grow and the EU ‘muddles through’, I can’t get equity values much higher than they are at present. If investors want to pay year end 2012 or 2013 values today, that is their privilege.

But I am not because (1) given the severe division within not only our political class but our electorate, I am not sure the problems of an over spending, over taxing, over regulating nanny state are ever going to be solved; and until they are the US economy may grow but it will never achieve its historical secular rate because it will constantly be plagued with an overbearing, inefficient government that commands too large a share of this country’s resources and (2) just because investors are getting jiggy over the debt of near bankrupt countries doesn’t make those countries less bankrupt. The sovereign debt levels of much of southern Europe are so enormous relative to those countries’ ability to repay and then fund growth on top of that, you have to question what the buyers of their bonds are thinking about.

Bottom line: this is not an argument for a Market crash. I am simply pointing out that the good news of a sustained albeit below average US economic recovery and a scenario in which the eurocrats do just enough to resolve decades of fiscal irresponsibility so that the continent does not fall off a cliff but not enough to enforce financial prudence is already reflected in a Market that has risen 22% since October 2011, doubled since March 2009 and is only 20% off the all time highs achieved in the speculative blow tops of the 2000 and 2007 Markets.

The latest thoughts of Mohamed El Erian (medium):
http://www.project-syndicate.org/commentary/elerian13/English

Why the IMF is looking to raise $500 billion to back stop the EU (medium):
http://www.nakedcapitalism.com/2012/01/so-why-has-the-imf-asked-for-500-billion-that-it-probably-wont-get.html

KKR not positive on Europe (medium):
http://www.zerohedge.com/news/kkr-avoids-european-sovereigns-austerity-concerns

A contrarian view on the massive liquidity injections now taking place in Europe (medium):
http://www.zerohedge.com/news/citis-contrary-fx-view-ecb-easing-would-be-eur-positive

Morning Journal A big day for economic data

2012-01-19T08:56:00.002-05:00

Economics
This Week’s Data

The International Council of Shopping Centers reported weekly sales of major retailer up 0.1% versus last week and up 3.3% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales up 2.8% on a year over year basis.

The December producer price index fell 0.1% versus expectations of a 0.3% increase; core PPI was up 0.3% versus estimates of up 0.1%.
http://scottgrannis.blogspot.com/2012/01/thoughts-on-producer-inflation.html

December industrial production increased by 0.4% versus forecasts of a rise of 0.5%; capacity utilization came in at 78.1 as anticipated.
http://www.calculatedriskblog.com/2012/01/industrial-production-increased-04-in.html

Weekly jobless claims plummeted 47,000 versus expectations of a 9,000 drop.
http://www.calculatedriskblog.com/2012/01/weekly-initial-unemployment-claims_19.html

The December consumer price index came in unchanged as anticipated; core CPI rose 0.1% versus estimates of up 0.2%.

December housing starts fell 28,000 versus forecasts of a 1,000 decline; building permits decreased 1,000 versus expectations of being unchanged.

Other

Port of LA sets record (short):
http://mjperry.blogspot.com/2012/01/la-port-sets-record-in-2011-for-export.html

Homebuilder sentiment improves (short):
http://scottgrannis.blogspot.com/2012/01/more-signs-of-improvement.html

Politics

Domestic

This brief quote from Adam Smith on politicians. It is amazing to me how long Man has been keenly attuned to his own short comings but somehow has avoided doing anything about them:
http://cafehayek.com/2012/01/adam-smith-on-the-the-self-deception-of-politicians.html

News on Stocks in Our Portfolios

More quarterly earnings per share reports:

Reported Expected

Amphenol $.73 $.70
Fastenal .30 .30
Kinder Morgan Energy Ptrs .51 .62
Schwab .13 .13
Rockwell Collins .86 .84

The Morning Call Big changes potentially coming to the leading economic indicators

2012-01-19T08:39:00.001-05:00

The Market
Technical

The indices (DJIA 12578, S&P 1308) had a great day, leaving them within their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of a short term up trends (12026, 1242). Both of the Averages have multiple support levels that are close in. Furthermore, the S&P 50 day moving average continues to close the gap with the 200 day moving average; if that ‘cross’ is made, then the technical picture will improve even more.

Volume was flat; breadth improved. The VIX got whacked by 6% and closed near the developing base which I mentioned yesterday. If this level holds, that could potentially become a mild negative for stocks.

GLD (161) rose again and continues its short term recovery. However, resistance exists at the down trend off its September 2011 high (164.8).

Bottom line: the Market looks healthy; I still have no reason to believe that anything technical will obstruct its move to the 12919, 1372 level. Aggressive traders may want to play this move. However, at the moment, I am building a list of stock positions to be reduced as prices approach the upper boundary of the current trading ranges.

The latest read on the Barron’s confidence index (short):
http://www.investmentpostcards.com/2012/01/18/barron%E2%80%99s-confidence-index-shows-worrying-decline/

Fundamental
Headlines

Yesterday’s economic news was mostly positive: weekly mortgage applications were a blow out, but seasonality factored in, weekly retail sales were up, December PPI was down and December industrial production was up though a tad less than anticipated. As always, I am encouraged by any data that is supportive of our forecast.

The only other news worth mentioning was the conditional rejection by the administration of the Keystone pipeline project. The developers have the option of re-routing the pipeline around a supposedly environmentally sensitive in Nebraska and re-applying.

Most analysts agree that this initial rejection was an election year ploy to appease the environmental lobby; and hopefully it will ultimately get approved post election. Not doing so, in my opinion, would be so wrong on so many levels (jobs, energy independence and prices being the most important). Unfortunately, we have to live with the risk that long term this project could be rejected and in the meantime of having to endure a completely dysfunctional political system that will only further discourage business investment and individual consumption.
http://www.zerohedge.com/news/obama-blames-republicans-keystone-xl-decision

Bottom line: investor sentiment seems to coalescing around the assumptions that the US economy will continue to grow in 2012 and that the resolution of the EU sovereign debt problem will not be too painful; and that seems to be the driving force behind rising stock prices. The above assumptions, of course, sound very similar to those in our own forecast; the difference is that I can’t get equity valuations materially higher than they are today.

We have been through this kind of drill before; that is, without any changes, our forecast relative to the Street expectations goes from too optimistic to too pessimistic and back again. Today, our forecast seems to be traversing to the too pessimistic camp; and to be sure, it may be. But (1) while our economy is improving, it still has huge internal headwinds: a debilitating debt to GDP ratio with no effort being made to correct it, a banking system that still hesitant to lend money to anyone other than AAA corporate giants and a business community unwilling to make domestic investments because of fear of a government more interested in social ideals than economic growth [see above] and (2) while the new ECB funding program alleviates short term fears of a liquidity collapse, the longer term solvency issue that is a function of decades irresponsible fiscal policy has not been adequately addressed and until it is, will pose the risk not only of a more severe recession than anticipated but an implosion of the EU banking system if investors become unwilling to hold EU sovereign debt.

Another take on the outlook for Europe this year (medium):
http://advisorperspectives.com/commentaries/abbett_11712.php

Which is a long winded way of saying that I don’t buy this current optimism, I see too many impediments to transitioning to a more positive growth scenario and I can’t get Valuations much higher than present levels. Hence, my focus right now is on those holdings that have the greatest downside vulnerability with an eye to making sales as prices advance.

As a footnote: One of my worries about our economic forecast is the recent ECRI weekly index readings which point to a recession. One of the reasons for holding this bit of dissonance at bay was the strength shown by the leading economic indicators. Well, it seems that the Conference Board, which computes the LED, has decided that to revise the make up of this index.

While the Conference Board itself has not yet released any new stats, Lance Roberts has taken the computational revisions that were announced and imputed the new series of data--and the answer is, the ECRI seems to have it correct. I am going to await the Conference Board’s official release; however, in the meantime, I will be working on potential changes to our own forecast that reflect a weaker economy. If the Conference Board’s revision has a similar impact on 2012 growth assumptions from widely followed Street economists, this rally may stop dead in its tracks. In any case, here is Lance’s analysis of the changes and the results. (medium):
http://advisorperspectives.com/dshort/guest/Lance-Roberts-120118-Industrial-Production-Confirming-Changes-To-LEI.php

Who is buying? Check out Goldman’s take (short):
http://www.zerohedge.com/news/goldman-confirms-smart-money-now-offloading-retail-sees-12880-eurusd-short-covering-threshold

To date this quarter’s earnings ‘beat’ rate is about 50% versus over 70% in prior quarters.
http://www.zerohedge.com/news/bloomberg-worst-start-years-earnings

Subscriber Alert

The stock prices of Staples (SPLS-$15) and Oracle (ORCL-$28) traded above the upper boundary of their respective Buy Value Ranges. Accordingly, they are being Removed from the Aggressive Growth Buy List. The Aggressive Growth Portfolio will continue to Hold these stocks.

@AllAmerInvest Get Rich, Piracy, Cheaters, Surprise, Nutty Cramer

2012-01-19T08:31:00.000-05:00

Questions and answers about the issues behind the controversial Internet anti-piracy bills

Online piracy costs U.S. copyright owners and producers billions of dollars every year, but legislation in Congress to block foreign Internet thieves and swindlers has met strong resistance from high-tech companies, spotlighted by Wikipedia’s protest blackout Wednesday, warning of a threat to Internet freedom.
Read More

What the Top 1% of Earners Majored In -- How to Get Rich
We got an interesting question from an academic adviser at a Texas university: could we tell what the top 1 percent of earners majored in?

U.S. Vows to Expand Insider Trading Probe as Fourth Ring Charged
The U.S. government vowed to continue its five-year investigation into insider trading on Wall Street as it charged a fourth ring of hedge-fund traders with using illegal information to make millions of dollars.

All American Investor

Bank of America Surprises

Cramer Dresses Up

Original content Bob DeMarco, All American Investor

Johnson & Johnson (JNJ) 2012 Review

2012-01-18T16:22:00.000-05:00

Johnson & Johnson (JNJ) is a major developer, manufacturer and marketer of health care products.

Its major divisions are: Consumer (baby care, oral care, non-prescription drugs, wound care and skin care), Medical Devices (electrophysiology, circulatory disease management and orthopedic joint reconstruction) and Pharmaceuticals (contraceptives, psychiatric, anti-infective, gastrointestinal and dermatological).

Over the past ten years, the company has earned a 20-30% return on equity while growing its earnings and dividend at a 12-14% annual rate. While profit and dividend growth may slow somewhat short term, its strong, well diversified product line should continue to grow rapidly longer term as a result of:

(1) acquisitions--the latest being [a] Cougar Biotechnology, a biotech company developing oncology products for treating prostate cancer, breast cancer and multiple myeloma, [b] an Elan division, which develops products for the treatment and prevention of neurodegenerative conditions including Alzheimers, [c] Crucell, which will strengthen its presence in the vaccine market, [d] Synthes which will enhance its medical device portfolio and [e] an agreement with Gilead to develop a once daily antiretroviral HIV pill,

(2) continued strong performance of Remicade, JNJ’s best selling drug for the treatment of rheumatoid arthritis, Crohn’s disease and ulcerative colitis,

(3) focus on commercializing its late stage pharmaceutical pipeline and invest in future growth areas (venous thromboembolism, deep vein thrombosis, atrial fibrillation,

(4) growing presence in the emerging markets.

Negatives:

(1) generic sales,

(2) FDA warnings on several drugs including Remicade,

(3) EU pricing pressures,

(4) A recent FDA consent decree that will impact earnings per share by roughly $.12,

(5) the risk of product recalls.

JNJ stock offers a 3.5% dividend yield, carries a 17% debt to equity ration and is rated A++ by Value Line.

Statistical Summary

	Stock Yield	Dividend Growth Rate	Payout Ratio	# Increases Since 2002
JNJ	3.5%	7%	45%	10
IND	1.2	8*	32	NA

	Debt/Equity	ROE	EPS Down Since 2002	Net Margin	Value Line Rating
JNJ	17%	21%	0	21%	A++
IND	21	18	NA	5	NA

*most companies in JNJ industry do not pay dividends

Chart

Note: JNJ stock rebounded quickly off its March 2009 low, quickly surpassing the down trend off its September 2008 high (red line); however, it took much longer to successfully challenge it November 2008 trading high (green line). Long term, JNJ is in a trading range (straight blue lines(. Intermediate term, it is in an up trend (purple lines). The wiggly blue line is on balance volume. The Dividend Growth Portfolio owns a 75% position in JNJ. Shares would be Added at $47. The lower boundary of its Sell Half Range is $85; although I am considering a trading sale of a portion of this holding due to its proximity to the upper boundary of its trading range.

http://finance.yahoo.com/q?s=JNJ
1/12

@AllAmerInvest Bull Sentiment, Wholesale Prices Fall, Euro Collateral, MIT Running the Show,

2012-01-18T08:57:00.000-05:00

Wholesale Prices in U.S. Unexpectedly Fall

Wholesale prices in the U.S. unexpectedly dropped in December, consistent with the Federal Reserve’s assessment that inflation remains tame.
Read More

Bullish Signals May Mean a Need to Pull Back

Stocks have rallied 20% since October lows, based on intraday levels. But investor sentiment also has gained, and that's a bad sign for contrarian investors. Mark Hulbert looks at past bull markets to glean some answers.

If you don't see the video go here.

All American Investor

Europe Crisis Rescue Begins With MIT Men as a Matter of Trust
The MIT central bankers represent “an extraordinary level of policy influence for any one economics department,” said James Poterba, president of the National Bureau of Economic Research, which is responsible for dating the beginnings and endings of U.S. recessions. “I’m trying to think about what was in the water.” He was head of the economics department from 2006 to 2008 and is still a faculty member.

Collateral shifts in the eurozone
We all know the story in the public repo market. The European Central Bank has provided three years worth of funding against the widest range of collateral it has ever dared to accept, and is preparing to do it all again in February. We know the type of collateral it accepted, and how much funding it provided.

But what, pray tell, is the story in the private interbank repo market?

Original content Bob DeMarco, All American Investor