Friday, July 23, 2010

Steve Cook -- The Morning Call - July 23


By Steve Cook
Strategic Stock Investments

The Market


Technical

The Averages (DJIA 10322, S&P 1093) put in a great day yesterday busting through the upper boundary of the April to present down trend (9027-10226, 951-1080) authoritatively. In fact, yesterday’s move qualified this break based on distance. Given the extreme volatility of late, I would like at least one more day of time. In addition, while it is clearly a positive that stocks have made that higher low (than 9645, 1009), it would bring great comfort to have the Market make a higher high--which is not that far away (10413, 1099).


For the first time in months, volume was actually comparable to that of down days and breadth was strong. Our internal indicator improved. The only negative was the VIX which was down but remained above a critical support level.

Bottom line: I think the odds are that the Market is re-setting itself into a trading range probably defined by 9645-10725, 1009-1149. However, I would like to see some follow through--something that neither the bulls nor the bears have been able to produce in the last months. Further assuming that the new trading range’s boundaries are 9645-10725, 1009-1149 then there is more risk than reward in investing at current price levels.

Fundamental

Headlines
  1. all the economic indicators (jobless claims, existing home sales, leading economic indicator) released were down; but all of them were not down as much as forecast. I know that it is a push to argue that conditions are good because they are not as bad as expected. However, everyone knows that the US economy has hit a soft patch; the argument has been whether or not it means a ‘double dip’; and if the downside momentum is moderating, then it changes the probability of a ‘double dip’. That doesn’t mean that there won’t be one; but if the likelihood has lessened and it will be reflected in stock prices,
  2. earnings continue to surprise on the upside [see below]. Perhaps more important, as the link in yesterday’s Morning Call illustrated, revenues are better than anticipated. Remember that the bear case during first quarter earnings season and coming into second quarter earnings season was that corporations were spiking profits due to cost cutting but there was no top line growth. Well, guess what? We are getting improvement in sales,
  3. the European manufacturing index came in above expectations. Could I be wrong regarding the economic health of the EU? I am convinced that we have not seen the last of the EU sovereign debt problem. But what if the recently imposed austerity measures by several of the largest economic players in combination with improving bank balance sheets as a result of the ‘stress test’ turn out positive? Notice that is a question not a statement.

    Euro zone: No evidence of a double-dip recession, yet
  4. Harry Reid announced that ‘cap and trade’ was dead.
  5. several dems are publicly advocating the extension of all of the so called Bush tax cuts.

The implications of tax policy on the Marker (medium)

The potential significance of (3) and (4) above can’t be under estimated. To be sure, Obama got His healthcare and financial regulatory reform. But the above are signs that He has basically shot His liberal social agenda wad and that economically speaking, the Market now knows the worst news--at least with respect to the issue of misguided US political/social/economic policies.

Bottom line: perhaps the worm has turned with respect to US fiscal policy, the risk of a significant slow down in Chinese economic growth and capping the ultimate cost of the Gulf cleanup; although I am not convinced that the EU has solved its sovereign debt problems. Nevertheless, in total a lot of negative pressure has been lifted from the Market; and coupled with a more positive growth in second quarter corporate revenue, there is a reasonable case for improved equity valuation. As I noted above, there is a technical argument for not getting overly aggressive at this point in putting cash reserves to work; however, if the Market can absorb the EU ‘stress test results due to be released at noon today, the more upbeat technical and fundamental outlook persuades me to put a small amount of cash back to work.


Thoughts on Investing—from the Apprenticed Investor

Learn the Magic Formula!
Become a Stock Market Genius!
Get Inside the Millionaire Mind!
Become a One Minute Millionaire!

That's the message of several new books that, for lack of a better phrase, purport to have discovered the magic formula for investing.

Umm, I don't think so.

Sorry to be such a party pooper, but there is, of course, no such elixir. It takes some smarts, lots of hard work and a little bit of luck to be a successful investor.

But you probably knew that already, didn't you? Successful investing requires effort and intelligence. We know it needs an ongoing self-evaluation process, one that requires constant adaptation and improvement. It demands a well-thought-out plan that is meticulously executed, with good record-keeping and data-mining.

The best investors aren't looking for a big miracle. Instead, they seek small ways to improve their performance, such as a capital preservation strategy that ensures minor losses do not become portfolio-wreckers. To outperform the markets requires attention to hundreds of small details such as knowing when to be a more aggressive and when to throttle back; when to do nothing; using risk management.

The best investors know their own weaknesses, and know how to keep their emotions in check.

Lastly, it never hurts to have the fair winds of chance blow your way. But magic formula? If it were that easy, then everyone would be rich.


News on Stocks in Our Portfolios


A positive write up on several of our holdings (short):

http://seekingalpha.com/article/216067-6-dividend-aristocrats-worth-considering?source=email

Murphy Oil (Dividend Growth Portfolio) is selling its refinery properties and redeploying the proceeds ($1.7 billion) into exploration and production.

More Cash in Investors’ Hands

Economics

This Week’s Data

June existing homes sales fell 5.1% versus expectations of a 9.0% decline.

June leading economic indicators decreased 0.2% versus estimates of -0.3%


Other

Rail traffic continues strong (short):

More good news from Europe (short)


Politics

Domestic

The first of many unintended consequences of the fin reg bill (short)

Steve Cook earned an MBA at Harvard and did post graduate work in economics and financial analysis at New York University. He earned his Chartered Financial Analysts designation in 1973. Steve has 40 years of investment experience including institutional portfolio management at Scudder Stevens and Clark and Bear Stearns. He managed a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Steve now manges Strategic Stock Investments which focuses on wealth building through strategic investments.


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Original content Bob DeMarco, All American Investor