Steve Cook on Disciplined Investing

Playing the hand that you are dealt

Steve Cook — Wed, 18 Nov 2009 14:36:00 GMT

Economics

   This Week’s Data

    October industrial production rose 0.1% versus expectations of a 0.4% increase; capacity utilization came in at 70.7, in line with estimates.

    Weekly mortgage applications dropped 4.7%.

    October housing starts fell 10.6% versus expectations of a 1.8% increase; building permits declined 4.0% versus estimates of a 1.7% rise.
    http://www.calculatedriskblog.com/2009/11/housing-starts-decline-sharply-in.html

    The October consumer price index rose 0.3% versus forecasts of a being up 0.2%; core CPI increased 0.2% versus expectations of a 0.1% rise.

   Other

    A different take on yesterday’s PPI number (chart):
    http://www.businessinsider.com/chart-of-the-day-producer-price-index-crude-goods-2009-11?utm_source=Triggermail&utm_medium=email&utm_campaign=Clusterstock%20Chart%20of%20the%20Day%2C%20Tuesday%2C%2011%2F17%2F09

    An update on the Baltic Dry Index, which is smokin’ (chart):
    http://mjperry.blogspot.com/2009/11/baltic-dry-index-roars-back-1025-gain.html

Politics

Domestic

Why universal standard (as in healthcare) are not as good as they sound (medium):
http://cafehayek.com/2009/11/universal-standards.html?utm_source=feedburner&utm_medium=email

    What was Belichick thinking (medium):
    http://www.weei.com/sports/boston/patriots/christopher-price/2009/11/16/when-it-comes-fourth-down-belichick-anything-con

International War Against Radical Islam

The Market

    Technical

    The DJIA (10437) remains within its up trend off the March lows (9953-11888). The important issue on my mind is, will the S&P (1110) hold above the 1102 level long enough to effectively re-establish its up trend (1056-1338). Yesterday it did in the face of a higher dollar; although volume was once again abysmal. Nevertheless, the sellers tied to push the S&P lower and couldn’t get it done. So score one for the bulls and assume the increased likelihood of at least one more leg up in this Market.

    As I noted, the dollar was up but so were stocks, gold and most commodities. Another off-again day. The VIX traded down and remains in a trading range.

   Fundamental

      Headlines

    The Chinese lectured Obama on US monetary/fiscal policy and indicated that they had no intention of allowing the yuan to appreciate. Not good news for the dollar which I assume means that it will continue to burn. And if the inverse dollar/stock-gold-commodities relationship holds, then stocks it seems are going to keep going up.
    http://online.barrons.com/article/SB125838307659350463.html?mod=BOL_hpp_dc (long)

I have made it clear that the whole notion of a declining dollar being good for stocks sets me on edge because of my Market experience in Nixon/Carter years. Ultimately easy money which drives the dollar down also drives inflation up; and when inflation goes up, the discount rate goes up; and when that happens, P/E multiples shrink and bond prices and stock prices go down. Having seen it up close and personal, I know that it happens. I appreciate that in the first instance massive infusions of liquidity will drive asset prices up. But sooner or later, we have to pay the piper. I thought that we had reached the ‘sooner or later’ two weeks ago. But the Market is telling us, not so. So clearly, I am just not smart enough to know when the ‘sooner or later’ occurs; and till it does, we have to play the game as it is being dealt.

    It could be that the ‘seasonal’ factor is in play; that is, historically, stocks tend to rise in the November/December period. Maybe it is because investors get all warm and fuzzy on the Holidays and their tendency is to be more positive than they might otherwise be. So right now perhaps they are just choosing to ignore or postponing having to deal with the longer term implications of the combination of disastrous monetary and fiscal policies. Maybe it has to do with the fact that most hedge funds fiscal year ends in October and the big boys have retreated to sidelines to plan how to spend their bonuses. Whatever the reason, the seasonality has been there historically and it may be working its magic now.

I also understand that if the institutional community is as underinvested as some say (another favorite reason to be bullish quoted by the experts), that there are good reasons not related to valuation for portfolio managers to buy stocks. However, that notion doesn’t make any more sense to me than stock prices going up because inflation is rising. That is why our Portfolios keep lowering their exposure to the US Market, upping their percentage invested in gold and foreign ETF’s and that is why our cash equivalents emphasize the TIPS treasuries and short term notes.

    A look at gold versus the S&P (chart):
    http://www.ritholtz.com/blog/2009/11/is-gold-really-in-a-bubble/

    Large caps outperforming (chart):
    http://traderfeed.blogspot.com/2009/11/more-large-cap-outperformance-among-us.html

I hate looking stupid

Steve Cook — Fri, 30 Oct 2009 13:32:00 GMT

Economics

   This Week’s Data

   Other

    Before getting too jiggy with yesterday’s GDP report, read this:
    http://www.businessinsider.com/chart-of-the-day-motor-vehicle-output-2009-10?utm_source=Triggermail&utm_medium=email&utm_campaign=Clusterstock%20Chart%20of%20the%20Day%2C%20Thursday%2C%2010%2F29%2F09
\

    And this (medium):
    http://www.capitalspectator.com/archives/2009/10/q3_gdp_is_up_bu.html#more

    Banks still are not lending--which does nothing for economic growth (graph):
    http://www.businessinsider.com/its-the-worst-ever-credit-crunch-on-main-street-2009-10

    US railroad car loadings are still declining (short):
    http://www.zerohedge.com/article/weekly-us-railroad-carloadings-down-148-cumulative-decline-180

Politics

Domestic

International War Against Radical Islam

The Market

    Technical

    Powerful rally yesterday. At the close, the DJIA (9962) had returned to a level above the lower boundary of its March to present up trend (9845-11827), but the S&P (1066) had not (1078-1322): gold traded back above the short term up trend line it broke on Wednesday and the VIX traded back below the down trend off its October 2008 high, but the dollar remained above the upper boundary of its down trend. So despite the power, the technical picture is not entirely clear. To be sure, another day like yesterday and all doubt about Market direction will be removed. But before seriously considering reversing Thursday’s trades, I need more technical clarity than we have.

    I thought this a good (and timely) article from The Street.com on technical analysis, in general, and volume, in particular:

    If people out there are still comparing volume figures now to what was "normal" over the past many years, they're missing the big picture. Volume is not going to average 1.6 billion shares on the NYSE anymore (as it did when there were 10,000 hedge funds worldwide and prop trading desks at every major sell-side firm).

Virtually the whole rally from the March low to present was done on less volume than the decline in price in 2008 and into the beginning of this year. Does one say that the whole 60% rally is null and void because it was on low volume? Of course not.

Welcome to a new era -- not of low volume, just lower volume. Fewer hedge funds. Less bulge bracket prop trading. Less public participation.

I see no technical analysis rules violated. But more important, are there really "rules" in technical analysis? If it's in a textbook, does it make it a "rule"? To me, it is but a suggestion of the author. And when it comes to volume analysis, I can find you an equal number of exceptions for every "rule" about it you find in the textbooks. Getting stuck on what one thinks is a TA rule is a sure recipe for losing money while charting.

If one makes money from looking at a chart, they will take the credit for the right call. If they lose money from looking at a chart, they will say technical analysis failed them. That's part of Behavioral Finance Theory and the Self-Attribution bias -- it's not the chart that failed them, nor the methodology itself. It's the improper interpretation of what one considers "rules,"
Case in point: Yesterday broke the S&P's uptrend line from the March low. Everyone knows that. But ask yourself: 1) Did breaking the uptrend line mean that the uptrend in the S&P was broken? 2) If a key level gets broken on a closing basis, is it really broken if the next morning the security or index gaps higher and then trades up all day to close back above the key level it broke the prior day? How you answer those questions will provide a clue as to how much you understand what charting is really about as opposed to reading TA textbooks and claiming that you're a technical analyst.

    The latest from Trader Mike:
    http://tradermike.net/2009/10/october_29_2009_stock_market_recap

   Fundamental

    Up date on the ‘beat’ rate:
    http://bespokeinvest.typepad.com/bespoke/2009/10/daily-earnings-trends.html

    This is a bit long but a great discussion on gold in the present environment:
    http://www.zerohedge.com/article/guest-post-bucking-trend

One of the biggest disadvantages of putting your bets down in black and white everyday is that when you are wrong, everyone knows it. And it sure looks like yesterday’s move to raise cash was W-R-O-N-G. The only possible good news is that I only raised cash by 5%--so I was stupid but just by a little bit.

    Actually, as I noted above, the technical picture, at least at the moment, is less clear than it appears on the surface. In addition, today is the last day of the fiscal year of many mutual and hedge funds; so there is some pressure to make fund valuations as of 10/31 as attractive as possible especially in light of their performance over the last year. I am not suggesting any ‘funny business’; but all other things being equal, if you were a fund manager would you want the prices of your holdings up or down at the close of this week?

That said, yesterday’s action makes me ponder two questions. First, does yesterday’s pin action (brought on by the better than expected GDP number reported yesterday morning [see Thursday’s Morning Call]) reflect an improvement in investor attitude on the economy? Following investors seeming indifference to the better than expected revenues reported this quarter, my assumption was that the 60%+ rally that we have had pretty much discounted the continuing but sluggish recovery expected over the six to nine months.

If Thursday’s Market performance belies that assumption, then I will have been wrong on more than just the technical picture. However, I am not going to concede the point after a one day Market move that might suggest otherwise. Let’s see how investors react to the economic data over the next couple of days--and if I am wrong, I’ll adapt.

The other question is, will the solid inverse relationship between the dollar and stock prices continue? As I pointed out above, while the dollar declined yesterday, it nevertheless closed above the down trend off its March high. And stocks smoked; so the relationship (down dollar, up stock prices) was there but just not as strong as I would have expected.

Perhaps I am splitting hairs, but I point out this minor inconsistency because I am having an increasingly tough time believing that the dollar/stock inverse relationship can go on ad infinitum. I believe that loose monetary policy and out of control spending have significant inflationary implications. I believe that this implies a weakening dollar. I believe that a weak dollar likely means higher gold and commodity prices. But I don’t believe that a declining dollar is good for stocks in the long run. I have no clue when that relationship breaks apart, although I had my self convinced it was starting earlier in the week. But may be not; may be there is another leg to go. As I said above, if I am wrong, I’ll adapt.

       Thoughts on Investing from Cramer—Five big mistakes investors make

    NEW YORK (TheStreet) -- In a special episode of his "Mad Money" TV show, Jim Cramer showed investors how to avoid losing money by noting the most common mistakes investors make.

He stressed the importance of investing with discipline, using rules to better recognize opportunities and avoid losing money.

Cramer said his first rule for investors is to not dig in your heels when you're wrong. Quoting the great economist John Maynard Keynes, Cramer said "when the facts change, I change my mind."

Digging in your heels and refusing to acknowledge that your investment thesis is wrong is a sure fire way to lose money, said Cramer. It's natural to be angry, but when the market's turned against you, investors need to adapt. Cramer said he's been repeatedly been chastised by critics and the media for changing his mind. In March 2009, Cramer called a bottom in the market at Dow 6,500 and came under intense scrutiny for his bullish call. But he said the facts were that unless most of the stocks in the Dow went to zero, the average just couldn't go much lower.

The facts changed, he said, and so did his outlook. A month later, the Dow was 1,500 points higher.

Cramer said investors must swallow their pride, admit when they're wrong, and move on if they ever expect to be successful.

Price Matters

Cramer said his next rule for investors is that price matters. He said even the companies you don't like at all can be bought, if the price gets low enough.

Cramer said he never advocates buying a stock where the fundamentals are deteriorating, but in between the best of breed companies and the worst of breed companies, there is a lot of room for opportunity if the price drops far enough.

Cramer said knowing the right price to buy a stock should be a sliding scale, based on how good the company is. The better the company, the more investors should be willing to pay for it.

Cramer said at their very worst, both Bank Of America (BAC Quote)which he also owns for his Action Alerts PLUS portfolio and Sprint (S Quote) were priced for bankruptcy.

That means that anyone who felt bankruptcy wasn't going to happen was able to get these companies at tremendous prices and has been rewarded handsomely.

Investors should also look for companies trying to raise capital through secondary offerings of stock, he said. Often these secondaries are priced below the true value of the company, allowing investors to buy in between 5% and 10% less than the previous day's closing price.

Cramer said price forces investors to make new judgments about bad merchandise, and investors need to be ready.

A Dose of Skepticism

When it comes to investing, don't assume everything you hear or read is the truth, said Cramer. Stocks themselves aren't misleading, he said, but the companies behind them can be.

Cramer told investors that there are strong and weak players in every sector. He said the weaker ones will almost always blame their problems on the entire industry. He also be skeptical when a weaker player said their shortcomings are due to an industrywide slowdown.

Cramer said investors can't assume every company in an industry is the same. He said some companies are better run than others, some sell overseas, others don't, the possibilities are endless. Cramer said investors need to look out for excuses.

True Upside Surprises

Cramer's next rule for investors was also about misdirection, only this time to the upside. He said that not all upside surprises are worth getting excited about. Cramer said that often what the media reports as "better-than-expected" results are not what the professionals on Wall Street were hoping for.

It can be confusing and frustrating for investors to see a company report what the media claims as an upside surprise, only to have shares plummet immediately after.

According to Cramer, there are two types of upside surprises: organic and manufactured. Organic surprises are ones stemming from higher-than-expected sales and improving fundamentals, while the latter comes from just a better bottom line, with no top-line growth.

In the case of a manufactured surprise, Cramer said many factors could be coming into play, such as cost cuts, changing tax rates, or stock buyback programs.

It's not a surprise if a company's "better" earnings come from fewer shares being on the market, he said. A true surprise, said Cramer, comes from better-than- expected sales and nothing else.

So-Called Expert Advice

Cramer's final rule for investors focused on TV pundits who criticize the market and tell you to avoid stocks at all costs.

Cramer said investors should never assume these "experts" are any more honest than those hyping up stocks. Having a negative outlook, he said, does not equal credibility.

Cramer said those who criticize the markets may not be trying to help you. While it may be hard to believe, he said mutual and hedge fund managers may actually want the markets down to short stocks or buy in at better prices.

    News on Stocks in Our Portfolios

    CME Group (Dividend Growth and Aggressive Growth Portfolios) reported third quarter operating earnings per share of $3.35 versus expectations $3.29 and $2.81 recorded in the comparable 2008 quarter.

    Colgate Palmolive (Dividend Growth Portfolio) reported third quarter earnings per share of $1.12 versus estimates of $1.11 and $.99 reported in the 2008 third quarter.

    ExxonMobil (Dividend Growth Portfolio) reported third quarter earnings per share of $.98 versus expectations of $1.08 and $2.58 reported in last year’s third quarter.

Yesterday's disconnect: noise or a sign?

Steve Cook — Wed, 21 Oct 2009 13:26:00 GMT

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers rose 0.2% versus the prior week and 2.8% versus the comparable period in 2008; Redbook Research reported month to date retail chain store sales up 0.5% on a year over year basis.

   Other

    More discussion on the dollar (long):
    http://www.poorandstupid.com/2009_10_18_chronArchive.asp#8365307403585034543

Here is a must read speech from David Einhorn on the risks to our economy (long):
    http://www.realclearmarkets.com/blog/einhorn-vic-2009-speech.pdf

Politics

Domestic

This is scary (4 minutes on the climate control treaty):
http://www.youtube.com/watch?v=PMe5dOgbu40
However, please remember that for any treaty to become effective, it has to be ratified by the Senate.

    And this (medium):
    http://online.wsj.com/article/SB10001424052748704500604574482191245495128.html

    Volcher’s solution to ‘too big to fail’ (short):
    http://www.ritholtz.com/blog/2009/10/why-obama-cannot-reform-wall-street/

    Here is a rather long rebuttal to that position; but it is a must read (long):
    http://www.nakedcapitalism.com/2009/10/volcker-glass-steagall-and-the-real-tbtf-problem.html

International War Against Radical Islam

The Market

    Technical

    The Averages (DJIA 10041, S&P 1091) remain within their up trend off the March low (9705-11606, 1057-1295). Volume was weak again; and the VIX reversed Monday’s action--in which it rose on an up day in the Market--by declining on a down day. I am not sure what to make of these two days of unusual behavior; it may be nothing more than ‘noise’. To me as long as it remains in a down trend that is a positive for the Market.

    Thoughts from TraderFeed:
    http://traderfeed.blogspot.com/2009/10/morning-briefing-for-october-21st-some.html

    Is current contrary analysis a positive indicator (short):
    http://www.marketwatch.com/story/contrarian-analysis-still-positive-for-stocks-2009-10-20

   Fundamental

     Headlines

    Yesterday’s revenue scoreboard: Biogen beat both EPS and revenue estimates, as did Caterpillar, as did Dupont, as did Pfizer, as did United Technologies, as did Coach, as did UnitedHealth, as did Yahoo, as did SanDisk, as did Gilead Sciences. On the other hand, these companies beat earnings but not sales: Coca Cola, Lockheed Martin and Sherwin Williams.

    As of the close yesterday, of the companies reporting, 79% have beaten their earnings estimates and 65% have beaten their revenue expectations. So to date clearly we are getting the improvement in top line growth that is anticipated in the revenues-are-key thesis; and yesterday’s Market performance notwithstanding, investors are responding positively to those better sales reports--the other tenet of the revenues-are-key thesis.

    That said, can we simply ignore yesterday’s fall in the face of the really good EPS and revenue reports listed in top paragraph? For one day, sure. Particularly when there were other factors weighing on stock prices: (1) the housing starts number was not particularly good--it has been flat for four months now; and many investors believe that there will be no economic recovery without a rebound in this sector. (2) plus the dollar rallied; and recently there has been a pretty firm inverse relationship between the dollar and stock prices.

However, I don’t think that the housing market is all that important to the US economic recovery and a one day breather in the relentless savaging of the buck is not a trend. So for the moment, I am not getting bent out of shape over one day’s contrary pin action. Nevertheless, it does leave enough uncertainty over the issue (will better than expected revenues continue to drive stock prices higher) to keep us from getting complacent.

The Closing Bell-10/17/09

Steve Cook — Sat, 17 Oct 2009 12:36:00 GMT

It is OU/Texas weekend. While my Sooners will likely get thumped, that hasn’t lessened the flow of friends from up north or the number of parties that normally accompany this occasion. As a result, the note is abnormally brief.

Statistical Summary

   Current Economic Forecast

2009
      Real Growth in Gross Domestic Product:        -1.0 - -2.0%
      Inflation:                                1-2 %
     Growth in Corporate Profits:                                    0- -5%

2010

     Real Growth in Gross Domestic Product:        +1.0- +2.0%
     Inflation:                               1.5-2.5 %
     Growth in Corporate Profits:                                    7-15%

   Current Market Forecast

    Dow Jones Industrial Average

       2008
            Current Trend (revised):
            Short Term Up Trend                               9660-11572
             Long Term Trading Range                      6432-14180
            Year End Fair Value (revised):                13450-13850

        2009    Year End Fair Value (revised):         12030-12070

        2010    Year End Fair Value                              12400-12600

    Standard & Poor’s 500

        2008
            Current Trend (revised):
            Short Term Up Trend                           1050-1289
            Long Term Trading Range                        666-1575
            Year End Fair Value (revised):                 1533-1577

       2009    Year End Fair Value                           1370-1410

        2010    Year End Fair Value                       1430-1450

Percentage Cash in Our Portfolios

    Dividend Growth Portfolio                  12.5%
    High Yield Portfolio                     12.5%
    Aggressive Growth Portfolio              12.5%

Economics

    The economy is a short term positive for Your Money. This week’s data was generally upbeat, re-enforcing the notion that the recession has ended. However, there was nothing there to alter my view that the recovery will be an anemic one; nor is there any evidence to suggest that inflation resulting from too much money (liquidity) and too much profligate spending will not be our next problem.

(1)    housing: weekly mortgage applications fell,

(2)    consumer: weekly retail sales rose for the second time in a row and September sales came in better than estimates; weekly jobless claims fell versus an expected increase; the University of Michigan’s preliminary October index of consumer sentiment came in at 69.4 versus forecasts of 73.3 and the 73.5 reading in September,

(3)    industry: September industrial production rose more than anticipated, resulting in capacity utilization increasing more than expected; business inventories declined in September while sales rose, driving down the inventory to sales ratio; two regional Fed October general business conditions reports were somewhat mixed with the NY Fed index very strong and the Philadelphia Fed index declining slightly though still in positive territory,

(4)    macroeconomic: both the September consumer price index and the core index were up more than forecast.

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

Both the domestic and international political environments are a negative for Your Money.

The Market-Disciplined Investing

Technical

    The indices (DJIA 9995, S&P 1087) finished within their up trend off the March lows (9660-11572, 1050-1289). Two points on the recent hiccup in the S&P (the break below the lower boundary of its up trend, then re-setting that up trend with a successful challenge of the prior high):

(1)    following the move above 1080 [the former short term high], there remained the question, at least in my technical discipline, as to whether it was some sort of false signal. As you know, I like to have time and distance confirm the breaking of a trend. Well, everyday since the move above 1080, stock prices have traded in negative territory for at least part of the day. Yet the S&P hasn’t even gotten close to the 1080 level much less actually challenge it. I take that as a pretty good indication that the S&P has resumed an up trend,

(2)    the newly re-set trend is on a flatter trajectory than the former up trend, that is, it is rising at a slower rate of increase. That need not be interpreted negatively as the prior rate of change was unsustainable. The falling VIX, which I have pointed to on several occasions this week, also supports the notion that we are in for a quieter Market, advancing at a more gradual pace.

Bottom line:

(1) short term, both indices are in an up trend. However, I am sticking with our strategy of sensitivity to our trading stops as they apply to stocks’ short term up trend off the March lows [keeping in mind the last time around I was too sensitive].

(2)    long term, stocks are in a trading range defined by the 2002/2009 lows [S&P 666-766] and the 2000/2007 highs [1545-1575]. Importantly, I think that equity prices will continue to recover within that range but it will be a slow and volatile process.

   Fundamental-A Dividend Growth Investment Strategy

The DJIA (9995) finished this week about 16.8% below Fair Value (12019) while the S&P closed (1087) around 21.5% undervalued (1386).

‘Our current economic forecast--a slow, plodding recovery accompanied by higher inflation--is not a lot about which to get excited. True enough; but that doesn’t mean that the securities markets can’t improve--I think that they will. It will just take longer to return to former highs than might otherwise have been the case. As you know I have adjusted our Valuation model several times in attempt to reflect these factors; and I may have to do so again. But at the moment even under our less than optimistic forecast, stocks are still undervalued.’

‘I believe stocks are now reflecting (1) the US economy is not imploding [that accounts for the 666 to 876 move] and (2) gridlock in Washington [that accounts for the 876 to 1004 {?}]. What is left to discount? Earnings returning to a more normal albeit below average secular growth rate. That ought to provide the propellant for a continued advance in stock price; although the ascent is likely to be a bumpy one.

‘I noted last week that ‘The first sign that ‘earnings are returning to a more normal........growth rate’ will most probably be looked for in the upcoming third quarter financial reports....; and the key stat will be revenue growth.’

Within this overview, the current short term fundamental issues are:

(1)    is the revenues-are-key thesis on this quarter’s financial reports valid? More precisely will revenues will be the key or not? and if they are, will they be strong or weak? This week’s financial reports reversed the very limited information we had last week; that is, initially, it appeared that there was nothing compelling about the revenues-are-key thesis. But this week’s accumulated data are now suggesting otherwise, i.e. sales are coming in better than expected and investors are responding favorably to this. Nevertheless, as I noted earlier this week, with only 25% of companies reporting, it still too soon to declare victory. Next week is important with another 25% of companies reporting. However, as of Friday, revenues-are-key seems to be powering the Market.

(2)    the deflation versus inflation argument. If we are right--that inflation is the problem--then our Portfolios are structured properly and any purchases will further that theme. However, if the evidence for deflation grows, we have some work to do re-positioning the holdings in our Portfolios. To date, we have done nothing to reflect the deflation risk aside from the default positions we have in the consumer staples.

This week our Portfolios reduced cash from 15% to 12.5% adding to their foreign ETF as well US stock positions.

           Bottom line:

(1)    our Portfolios have reached their near term objective of 12.5% cash position. It is time for a pause.

(2)    we continue to include gold and foreign ETF’s in our asset mix because we continue to believe that inflation is the major long term risk. An investment in gold is an inflation hedge and holdings in other countries provide a hedge against a weak dollar and exposure to better growth opportunities,

(3)    recognizing [and hedging] that our recent change in emphasis in investment strategy could be wrong, I intend to maintain the use of trading stop losses at least until it is clear whether or not this call is a correct one. These are much tighter stops [i.e. they follow the stock price up] than those determined by our Valuation Model.

(4)    while our strategy is now less defensive, defense remains important.

                                                                     DJIA                    S&P

Current 2009 Year End Fair Value*        12050                    1390
Fair Value as of 10/31//09           12019                    1386
Close this week                9995                      1087

Over Valuation vs. 10/31 Close
    5% overvalued           12619                    1455
    10% overvalued           13221                     1524

Under Valuation vs. 10/31 Close
    5% undervalued                                11418                     1316
10%undervalued           10817                    1247
    15%undervalued                               10216                    1178
    20%undervalued              9615                     1109
    25% undervalued           9014                    1039
    30% undervalued           8413                    970

* 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.

Revenues continue to roll; more excerpts from The Money Game

Steve Cook — Fri, 16 Oct 2009 13:21:00 GMT

Economics

   This Week’s Data

    The October Philadelphia Fed index of general business conditions came in at 11.5 versus expectations of 12.0 and 14.1 recorded in September. While mildly disappointing, it is the third positive reading in a row.
    http://bespokeinvest.typepad.com/bespoke/2009/10/philly-fed-positive-three-months-in-a-row.html

   Other

    China and the dollar (long):
    http://www.thebigmoney.com/articles/money-trail/2009/10/14/stop-worrying-about-china?page=0,0

    The dollar and money supply (medium):
    http://mjperry.blogspot.com/2009/10/based-on-m2-growth-should-be.html

    The EU and South Korea sign a free trade pact; meanwhile, the US does nothing (medium):
    http://www.nytimes.com/2009/10/16/business/global/16trade.html?_r=1

    The New York Fed’s Treasury spread model: zero chance of a double dip (short):
    http://mjperry.blogspot.com/2009/10/ny-fed-treasury-spread-model-zero.html

Politics

Domestic

International War Against Radical Islam

    Charles Krauthammer on the current state of US foreign policy (or lack thereof (medium) :
    http://www.washingtonpost.com/wp-dyn/content/article/2009/10/15/AR2009101502763.html

The Market

    Technical

    The Averages (DJIA 10062, S&P 1096) closed within the up trends off their March lows (9648-11550, 1044-1284). Volume fell off. The VIX traded down and closed below its most recent support level. The re-sets this indicator into a down turn off its October 2008 high (that is a positive).

    A statistical look at the latest up trend (short):
    http://bespokeinvest.typepad.com/bespoke/2009/10/bull-market-checkup.html

   Fundamental

    Here is a negative comment on gold (short):
    http://seekingalpha.com/article/166888-sold-gold

       Headlines

    The revenue beat goes on:

    Yesterday’s scoreboard: Goldman Sachs reported better than expected profits and revenues; Baxter Labs posted higher earnings but flat revenue (though ex currency translations, sales were up 6%); Citicorp reported slightly better than forecast profits and revenues; Google beat on both EPS and revenue; IBM reported better than forecast profit and sales; Advanced Micro Devices had a smaller loss than anticipated and larger revenues than expected; Nokia had much better earnings and slightly better sales than expected; Harley Davidson had lousy earnings but slightly better revenue than estimates; PPG had much better profits and slightly better sales than forecast; Southwest Airlines reported better than expected earnings but poor revenues and gave a dismal outlook.

    One service I saw has the count of companies reporting to date at 86% beating earnings estimates and 60% exceeding revenue forecasts.

    The economic data points (weekly jobless claims, the NY Fed business survey) both positive also helped fuel investor enthusiasm.

      Thoughts on Investing--More excerpts from The Money Game

    The chartist (technical analyst) has less material to report (than the fundamental analyst), and furthermore he does not have the Free Zone of the Long Term to escape into. His thesis is that past patterns tell future patterns; therefore, he must say whether the market (a set of Averages) or a particular stock is going to go up or go down, and it is easy to check his predictions. So he must say something like this:

We expect no furious advance unless the market is able to break through the overhanging resistance at the 920 level. Recent weakness ins oils and strength in aerospace issues indicate leadership is rotating. Support exists at the 885 level, and unless that is pierced on some volume, we would expect it to hold near term. A trading range is indicated.

In short, the market will not go up unless it goes up, nor will it go down unless it goes down, and it will stay the same unless it does either.

This may not be quite so useless as it seems.........a chart can show you what has been going on, and if this differs from what you think ought to be going on, maybe you ought to think again, even if the future is not there in the tea leaves. The assumption of the chart is that you ought to pay attention to it because the people who have already acted, and therefore created the chart, are smarter than you, or know something you don’t know. You may reject the assumption, but it is a good check.

Can the footprints of price movements really predict the future?

If truly and universally they could, they soon would not. When everyone know something, then no one knows anything; the market would soon become too efficient; that is, the gap between the present and future value would quickly be closed by the predictive device.

Does this mean that charts can be ignored? Perhaps charts can be a useful tool even without inherent predictive qualities. A chart can give you an instant portrait of the character of a stock, whether it follows a minuet, a waltz, a twist, of the latest rock gyration. The chart can also sometimes tell you whether the character of the dancer seems to have changed . There is even some mathematical support developing for the thesis that trends persist.

There is one thesis that runs through all of charting which we can isolate and examine. Past patterns help determine future patterns; momentum can be shown on the charts. All chartists, to extrapolate and visibly to determine motion, must draw some sort of line between prices at various times. It may be a mean line, it may be a line connecting the tops and bottoms or both. Then the thesis is that the stock is more likely than not to continue along that line. Never mind whether that ‘more likely’ is 51 percent or 99 percent; that is point at which the enemy attacks. And the enemy is dead serious.

Inflation vs deflation--the battle rages

Steve Cook — Thu, 08 Oct 2009 13:15:00 GMT

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers up 0.3% versus the prior week and up 1.0% versus the comparable period last year; Redbook Research reported month to date retail chain store sales up 0.4% but a decline of 1.9% on a year over year basis.

    Weekly mortgage applications jumped 13.2%.

    August consumer credit shrank $12 billion versus forecasts of being down $8.5 billion. Consumer credit has shrunk $27 billion in the last six months.
    http://www.calculatedriskblog.com/2009/10/consumer-credit-declines-sharply-in.html

    Here is an interesting analysis of the relationship between household debt and the equity market (short):
    http://www.nakedcapitalism.com/2009/10/household-debt-as-an-indicator-of-secular-bull-and-bear-markets.html

    Weekly jobless claims fell 33,000 versus expectations of a 12,000 decline. This should help the market.
    http://www.calculatedriskblog.com/2009/10/weekly-unemployment-claims-lowest-since.html

   Other

    Our Madame Speaker wants more taxes (short):
    http://thehill.com/blogs/blog-briefing-room/news/61783-pelosi-says-new-tax-is-on-the-table

    The stimulus plan. How’s it working so far (medium)?
    http://www.american.com/archive/2009/october/so-how-is-the-stimulus-working-out

    All evidence is not pointing to deflation (short):
    http://mjperry.blogspot.com/2009/10/9th-monthly-increase-in-used-vehicle.html

    Bad news from the UK (short):
    http://econompicdata.blogspot.com/2009/10/uk-production-slumps-to-1992-levels.html

Politics

Domestic

More ‘nanny’ state interference by our elected representatives (short):
http://cafehayek.com/2009/10/offensive-interference.html

    An interesting idea for improving the House (medium):
    http://article.nationalreview.com/?q=YTE2ZjNhOTA1N2UyNDZhMDcwNDU0NDk0ZTJhNzYwZjI=

    Here is an analysis of insurance claims and denials. Guess who denies the most (short)?:
    http://mjperry.blogspot.com/2009/10/how-do-we-keep-medicare-honest-it.html

    The need to improve the regulation derivatives (short):
    http://www.ritholtz.com/blog/2009/10/regulating-derivatives/

    An interesting perspective on taxes from a conservative (short):
    http://www.ritholtz.com/blog/2009/10/partisan-economics/

International War Against Radical Islam

The Market

    Technical

    The Averages (DJIA 9725, S&P 1057) closed within their March to present up trend (9474-11311, 1056-1295). However, as I noted in the Subscriber Alert yesterday morning, the S&P’s rebound has pushed it only marginally back into the up trend. My inclination is to await a more authoritative move above the lower boundary before getting jiggy with the notion of the re-establishment of a solid up trend.

    The VIX has been treated badly the last two days; it is now at 24.68 versus the recent support level of 22.0. A successful challenge of the 22.0 level would be a good sign for stocks.

    Thoughts from Trader Mike (short):
    http://tradermike.net/2009/10/october_7_2009_stock_market_recap

   Fundamental

    The latest from Dougie Kass:
    http://www.thestreet.com/story/10608278/1/kass-staying-practical.html

    2009 has been a very good year so far, can it continue? Likely not (medium):
    http://www.capitalspectator.com/archives/2009/10/the_allornothin.html#more

    Analysts are the most bullish in two years--which may not be a great sign (short):
    http://bespokeinvest.typepad.com/bespoke/2009/10/analysts-at-most-bullish-level-in-two-years.html

    The inflation versus deflation argument raged all day on CNBC. I remain in the camp of those that see inflation as our next big problem although the stats over the last three weeks are making it hard to not adjust the probabilities of either occurring (i.e. raise the odds of deflation, lower the odds of inflation). Clearly in the last two days, investors have placed their bets overwhelmingly on the inflation scenario. At the moment our Portfolios have 12-13% of their assets in direct inflation, weak dollar investments (gold and foreign ETF’s). In addition, they have 70% of the cash equivalents (15%) in inflation hedges (TIPS and short term bonds). Finally, the commodity based stocks (oil, steel, coal) and the large international firms in which a major percentage of their sales are non-dollar denominated comprise a significant portion of their US equity holdings.

    Which means our Portfolios are structured against the inflation risk; but notwithstanding yesterday’s technical breakout in gold, because the fundamentals are suggesting that deflation may be a bigger risk than I thought three weeks, I worry. However for the moment, our Portfolios are doing nothing.

    The case for investing in emerging markets (short):
    http://paul.kedrosky.com/archives/2009/10/the_global_mone.html

       Headlines

    There were the first two major third quarter earnings reports: Alcoa which beat expectations for profits as well as revenues and Monsanto which had better earnings but lower revenues (see below). So after day one of testing the revenues-are-key thesis, we are 1 for 2.

    The congressional budget office scored the Baucus healthcare bill as costing $829 billion over the next ten years and as covering 94% of the US population. These meet two of Obama’s objectives: a cost objective of $900 billion over ten years and covering most of US population. This will give some momentum for passage of this bill; however, I note that the Baucus includes a number of mathematical gimmicks not the least of which is an assumed $400 billion cut in Medicare payments which is most likely not going to occur once seniors realize what is happening.
    http://gregmankiw.blogspot.com/2009/10/70-percent-marginal-tax-rate.html

The Closing Bell-10/3/09

Steve Cook — Sat, 03 Oct 2009 14:27:00 GMT

Note: A close friend who I have known since I was 12 died Thursday morning. I will be going the funeral Tuesday. At this point, the family has not yet made final plans regarding timing, etc, so I am unsure how long this will take me away; but I may miss Tuesday or Wednesday’s Morning Call.

Statistical Summary

   Current Economic Forecast

2008
        Real Growth in Gross Domestic Product (GDP):   -1.0 - +1.0%
        Inflation:                                2-3%
        Growth in Corporate Profits:                        0-5%

2009
        Real Growth in Gross Domestic Product:          -1.0 - -2.0%
        Inflation:                                1-2 %
        Growth in Corporate Profits:                            0- -5%

2010

         Real Growth in Gross Domestic Product:          +1.0- +2.0%
         Inflation:                              1.5-2.5 %
         Growth in Corporate Profits:                                         7-15%

   Current Market Forecast

    Dow Jones Industrial Average

       2008
            Current Trend (revised):
             Short Term Up Trend                           9408-11267
             Long Term Trading Range                      6432-14180
            Year End Fair Value (revised):                13450-13850

        2009    Year End Fair Value (revised):       12030-12070

        2010    Year End Fair Value                           12400-12600

    Standard & Poor’s 500

        2008
            Current Trend (revised):
            Short Term Up Trend ?                        1047-1283
            Short Term Trading Range ?                   989-1080
            Long Term Trading Range                       666-1575
            Year End Fair Value (revised):                   1533-1577

       2009    Year End Fair Value                                1370-1410

        2010    Year End Fair Value                 1430-1450

Percentage Cash in Our Portfolios

    Dividend Growth Portfolio                  15%
    High Yield Portfolio                     15%
    Aggressive Growth Portfolio              15%

Economics

    The economy is a short term positive for Your Money. The good news is that unlike last week in which the stats were almost universally poor, this week could be described as mixed--and it could stay that way. After all our forecast is for a slow struggling recovery; and it may just be that data flow of the last two weeks best describes a slow struggling economy. While such a scenario would still be a net plus, but there may be more ‘struggle’ and less ‘recovery’ than I originally thought. That said, there simply isn’t enough data yet to be contemplating any downward revisions.

    Thus, our forecast continues to be an economy that either has or is bottoming but in a recovery that is anemic by historical standards due to the severely impaired financial system which has neither the assets nor the inclination to provide the lending needed to fund business requirements for a normal recovery and a political agenda that employs a fiscal policy that usurps capital investment.
    http://online.wsj.com/article/SB10001424052748704471504574445470989162030.html

    Longer term, the economy is unlikely to return to the secular growth rate of the past three decades any time soon because of (1) the Fed’s need to reverse the massive infusion of liquidity into the economy. Even if it gets the timing of the ‘exit’ strategy correct, we are still probably faced with a prolonged period of higher than normal interest rates. Of course, historically the Fed has never gotten the ‘exit’ strategy from an easy money policy correct. Which leaves us with the more likely problems of either a ‘double dip’ recession because the Fed acted too soon or much higher inflation because it was too late, and (2) a budget deficit that is out of control, will get worse as the baby boomer generation retires and begins collecting the benefits of social security and medicare programs and will be made worse still if the administration is able to enact its political/social agenda.

    This week’s data:

(1)    housing: while weekly mortgage applications fell 6.2%, August pending home sales were up sharply and the Case Shiller home price index rose for the third month in a row,

(2)    consumer: on the one hand, the employment picture remains bleak with both weekly jobless claims rising and September nonfarm payrolls declining, the Conference Board’s September consumer confidence index decreased slightly and weekly retail sales were mixed; on the other hand, both August personal income and spending came in better than anticipated,

(3)    industry: while the September Chicago purchasing managers index [secondary indicator] declined and August factory orders were much worse than forecast [though they were heavily influenced by volatile aircraft orders], the September Institute for Supply Management manufacturing index came in basically flat with August and August construction spending rose versus estimates of a drop,

(4)    macroeconomics: final second quarter gross domestic product came in better than expected, as did second quarter corporate profits and the August personal consumption expenditure index [inflation] was up 0.1%; and the core PCE was unchanged.

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

Both the domestic and international political environments are a negative for Your Money.

    A critique of McChrystal’s Afghan strategy (very long but worth the read):
    http://article.nationalreview.com/?q=NWQ3Y2U2NjNlYTAyMjI3MTAxZjYyOWZhNTU0Mzg3MzQ=

The Market-Disciplined Investing

Technical

    This week the DJIA (9487) finished within its up trend off the March lows (9408-11267), while the S&P (1025) (which I consider much more indicative of overall stock price movement) appears to have broken down. As I noted in Friday’s Morning Call, if indeed this is the case, then the next logical trading pattern for the S&P is a trading range; and we will probably spend the next week or so defining the lower boundary of that range (the upper boundary is by definition the last high [1080]). Potential candidates are the November 2008 high (1004) and the last definable low--the September 2009 low of 989.

Bottom line:

(1) short term, assuming the up trend has been successfully challenged, our focus will be on the defining of the lower boundary of the trading range. I am sticking with our strategy of sensitivity to our trading stops as they apply to stocks’ short term up trend off the March lows [keeping in mind the last time around I was too sensitive].

(2)    long term, stocks are in a trading range defined by the 2002/2009 lows [S&P 666-766] and the 2000-2007 highs [1545-1575]. Importantly, I think that equity prices will continue to recover within that range but it will be a slow and volatile process.

   Fundamental-A Dividend Growth Investment Strategy

The DJIA (9487) finished this week about 21.2% below Fair Value (12050) while the S&P closed (1025) around 26% undervalued (1386).

‘Our current economic forecast--a slow, plodding recovery accompanied by higher inflation--is not a lot about which to get excited. True enough; but that doesn’t mean that the securities markets can’t improve--I think that they will. It will just take longer to return to former highs than might otherwise have been the case. As you know I have adjusted our Valuation model several times in attempt to reflect these factors; and I may have to do so again. But at the moment even under our less than optimistic forecast, stocks are still undervalued.’

‘I believe stocks are now reflecting (1) the US economy is not imploding [that accounts for the 666 to 876 move] and (2) gridlock in Washington [that accounts for the 876 to 1004 {?}]. What is left to discount? Earnings returning to a more normal albeit below average secular growth rate. That ought to provide the propellant for a continued advance in stock price; although the ascent is likely to be a bumpy one.

I noted last week that ‘The first sign that ‘earnings are returning to a more normal........growth rate’ will most probably be looked for in the upcoming third quarter financial reports, which are not that far away; and the key stat will be revenue growth.’

Those reports begin next week (I incorrectly stated in Friday’s Morning Call that they would begin the following week). So we will start getting feedback on the revenue-is-key thesis soon enough. Of course, it may not be correct; and if it is correct, revenues may be weak and Mr. Market will not likely be happy about that.   In addition, as I outlined in Thursday and Friday’s Morning Calls, there are a host of other issues that could weight on investors and simply overwhelm third quarter earnings results. So the uncertainty quotient has gone; and consequently, it is a time for patience (do nothing). Next week we watch the data and stocks’ reactions to that data for a tell on future price movement.

This week our Portfolios took no action but did make several changes in their Buy Lists.

           Bottom line:

(1)    our focus is on the process of getting more fully invested [our near term objective is to take cash reserves from a 15-25% range to a 12 ½-25% range]. This won’t happen over night because our Buy Discipline simply won’t allow it. But the bottom line is that our objective is to buy stocks when they are rendered cheap by the Market.

(2)    we continue to include gold and foreign ETF’s in our asset mix because, as noted above, inflation isn’t going away as a problem and an investment in other countries provides a hedge against a weak dollar and exposure to better growth opportunities,

(3)    recognizing [and hedging] that our recent change in emphasis in investment strategy could be wrong, I intend to maintain the use of trading stop losses at least until it is clear whether or not this call is a correct one. These are much tighter stops [i.e. they follow the stock price up] than those determined by our Valuation Model.

(4)    while our strategy is now less defensive, defense remains important.

                                                                    DJIA                    S&P

Current 2009 Year End Fair Value*        12050                    1390
Fair Value as of 10/31//09           12019                    1386
Close this week                8212                   877

Over Valuation vs. 10/31 Close
    5% overvalued           12619                    1455
    10% overvalued           13221                      1524

Under Valuation vs. 10/31 Close
    5% undervalued                                11418                    1316
   10%undervalued              10817                    1247
    15%undervalued                               10216                    1178
    20%undervalued           9615                     1109
    25% undervalued        9014                    1039
    30% undervalued           8413                    970

* 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.

Look's like the uptrend is over. What now?

Steve Cook — Fri, 02 Oct 2009 13:27:00 GMT

Economics

   This Week’s Data

    The September Institute for Supply Management (ISM) manufacturing index came in at 52.6 versus expectations of 53.5 and 52.9 recorded in August.

    August construction spending rose 0.8% versus estimates of a decline of 0.1% and a decrease in July of 1.1%. Residential construction was up a powerful 4.7%,\.

    August pending home sales spiked 6.4% versus July’s number and 12.4% on a year over year basis.
    http://mjperry.blogspot.com/2009/10/pending-home-sales-set-record-for-7th.html

    August US auto sales were up 22.4% versus July, primarily the result of the cash-for-clunkers program.

    September nonfarm payrolls fell 263,000 versus expectations of a 170,000 decline.
    http://www.ritholtz.com/blog/2009/10/ugly-nfp-263k/
    http://econompicdata.blogspot.com/2009/10/hours-worked-per-person-tailspin.html

   Other

    Another look at who is paying the tax man (medium):
    http://money.cnn.com/2009/09/30/pf/taxes/who_pays_taxes/index.htm?postversion=2009093012

Politics

Domestic

International War Against Radical Islam

The Market

    Technical

    The DJIA (9509) closed within its March to present up trend (9394-11250); while the S&P (1024) did not (1044-1278). Volume was decent; The VIX traded higher (28.27). As a word of caution, over 30, it enters into what prior to 2007 had normally been regarded as very negative territory.

    But that is less pressing than the S&P breaking the lower boundary of its March to present up trend. A couple of points:

(1)    I have never considered a break in trend based on a one day Market performance as cast in stone. Normally, before altering the assumption that the S&P is in an up trend, I would like to get time (S&P stays below the lower boundary of the up trend for several days) and/or distance (a meaningful move below the boundary). That said, the troublesome thing is that yesterday’s move put the S&P 1.4% below the 1044 level and by my definition, that is distance. Nevertheless, I am going to wait at least through today’s pin action today before declaring the trend broken.

(2)    even if stocks have broken their up trend that doesn’t mean we are in for a plunge. It simply means that the rate of ascent has slowed. The next logical pattern is a trading range. So while I believed that this latest up trend would take stock prices to higher levels before decelerating, I am not going to be especially concerned if yesterday’s decline was the break. The task now is to find the boundaries of the trading range. Of course, we know the upper boundary. It is the September 23 intraday high circa 1079. Potential lower boundaries [areas where prices have seen support] are 1004 [the November 2008 high] and 992 [the early September 2009 support level].

(3)    a check of our own internal indicator shows that as of the close yesterday, out of 161 stocks in our Universes, 94 remain in the up trends off their March lows, 100 trade above their November 2008 trading high and 119 are above the down trend off their 2007/2008 highs.

(4)    so while I am not overjoyed by what appears to be an earlier than expected end to the short term up trend, at moment I don’t anticipated a major downside correction [10%+]; and whatever the resulting decline in stock prices, it will hopefully move them into their Buy Value Ranges and give our Portfolios the opportunity to Add to some of our partial positions,

(5)    finally, last Monday’s sale of covered calls against stocks that had gotten ahead of themselves on a valuation basis once again proves to me that our Valuation Model is working.

        Bottom line: Let’s see how stocks do today before declaring the up trend over.   Given the current strength in our internal indicator, even if stocks are transitioning into a trading range, I don’t think that there is significant downside.

   Fundamental

     Headlines

    Lots of economic news yesterday (see above). The bad news was that jobless claims were worse than expected and the ISM manufacturing index came up short of estimates, though not enough to get bent out of shape about. The good news was that consumer income and spending were better than anticipated, as was construction spending, as was pending home sales. All in all, save the jobless claims, the first good day that we have had in economic statistics in a week or so.

    But the psychology was wrong. Wednesday, investors worried that a somewhat disappointing (and less than meaningful) Chicago PMI portended a lousy ISM manufacturing index (it was positive but ever so slightly less than the August reading). Yesterday, they worried that the weekly jobless claims report meant a bad nonfarm payrolls number due out this morning--and they were correct, (see above). But the point is that investors have been living quite nicely with erratic economic data; however, in the last couple of days psychology seems to have shifted to a more negative stance.

    Why? Yesterday I suggested:

‘Investors are likely holding back making any large commitments in either direction ahead of third quarter earnings [and revenues].

          Two other items to keep in mind in the days ahead. (1) the spat of negative economic news over the past two weeks suddenly has investors more uncertain about the recovery; and while it is still way too soon to be changing our forecast, you can count me among the ‘more uncertain’ (2) Obama is getting His first big test as commander-in-chief--the Iranian nuclear/missile program/problem--and investors may be growing nervous about the outcome.’ Charles Krauthammer’s thoughts (long):
http://www.washingtonpost.com/wp-dyn/content/article/2009/10/01/AR2009100104208.html

And:
http://article.nationalreview.com/?q=MDQ2ZGI4NjEyZmU5ODExMzViMmFiNGVmZWZjYjE1MWU=

Well, (1) the ‘spat of negative economic news’ reason was somewhat mitigated by the overall positive tone of yesterday’s good news, however (2) ‘the investors holding back for third quarter earnings’ and ‘the Iranian test’ factors haven’t changed. We are still a week away from the first third quarter earnings report; and given Obama’s propensity to orate the opposition to death, we are stuck with the overhang of this quagmire for months.

To these I would add:

(1)    fiscal policy/the dollar.   Bernanke testified yesterday before House Financial Services Committee in which he plainly stated that current fiscal policy if unaltered would create problems for the dollar. This on top of the statement from the head of the World Bank concerning the deteriorating value of the dollar {linked to on Wednesday}. Investors may be worrying about the {low} probability of a change in fiscal policy and the continuing fall of the dollar.

(2)    the Tuesday speech by Vice Chairman Kohn {linked to yesterday} was at odds with the editorial by Kevin Warsh {linked to in last week’s Closing Bell} over the timing of the Fed ‘exit’ strategy. Uncertainty over Fed policy causes heartburn.

(3)    the Environmental Protection Agency announced proposed changes in its emissions standards that would eliminated green house gases [carbon dioxide]. There are questions as to whether this is even constitutional [legislating from the executive branch] and hence could ever be enforced. However, at the least it appears to be a move by the administration to put pressure on congress to enact some sort of cap and trade legislation--which most thought was on its death bed. One may be all for climate control but from a businessman’s point of view, how can they make decisions to grow [increase employment, invest capital] when they have no idea how much they might soon have to spend on healthcare and carbon emissions? They can’t; and that stymies growth---not a prescription for higher stock prices.

I have observed repeatedly that: ‘Earnings returning to a more normal albeit below average secular growth rate.... ought to provide the propellant for a continued advance in stock price; although the ascent is likely to be a bumpy one. The cognitive dissonance along the way will be driven by ........ what I am assuming to be a political donnybrook over Obama’s agenda.’ Welcome to the donnybrook.

    Bottom line: a great third quarter earnings (and revenue) season could very well mitigate concerns about the Fed, fiscal policy and the dollar, at least in the short term. However, we first have to get to those earnings reports and they are a week away; so the next five or six trading days could be rough especially given this morning’s bad nonfarm payroll number. The level of uncertainty may remain high but barring a dramatic technical deterioration in the Market, our Portfolios will focus individual stocks Buying when our Buy Discipline permits and enforcing our trading Stop Loss prices when necessary.

Schizophrenic day

Steve Cook — Thu, 01 Oct 2009 13:25:00 GMT

Economics

   This Week’s Data

    The final second quarter gross domestic product came in down 0.7% versus expectations of down 1.2% and the prior number of down 1.0%; second quarter corporate profits were off 19.2% on a year over year basis versus a decrease of 24.8% year over year at the end of the first quarter.

    The September Chicago purchasing managers index was reported at 46.1 versus estimates of 52.0 and a 50.0 reading in August.

    Weekly jobless claims rose 17,000 versus forecasts of a 7,000 increase.
    http://www.calculatedriskblog.com/2009/10/weekly-unemployment-claims-551000.html

    August personal income was up 0.2% better than expectations of up 0.1%; August consumer spending jumped 1.3% (due primarily to the successful cash-for-clunkers program) versus estimates of a 1.1% rise.

    The August personal consumption expenditure index (inflation) was up 0.1%; and the core PCE was unchanged.

   Other

    Growing protectionism (medium):
    http://www.forbes.com/2009/09/29/g20-trade-nhl-tires-obama-tariffs-opinions-columnists-thomas-f-cooley.html

    More of your tax dollars at work (long, but you should at least skim it):
    http://www.politico.com/news/stories/0909/27732.html

    The depressing math of unemployment (short):
    http://www.ritholtz.com/blog/2009/10/post-recession-employment-arithmetic/

    The latest statement on the Fed’s ‘exit’ strategy, this from Vice Chairman Donald Kohn (medium):
    http://www.ritholtz.com/blog/2009/09/central-bank-exit-policies/

    A look at the savings rate (graph):
    http://www.businessinsider.com/chart-of-the-day-personal-saving-rate-2009-9

    Crude oil inventories (graph):
    http://bespokeinvest.typepad.com/bespoke/2009/09/crude-oil-inventories-continue-to-rise.html

Politics

Domestic

As long time subscribers know, I railed constantly about the irresponsibility of W’s fiscal policy. Regrettably, Obama makes him look like rank amateur (medium):
http://www.american.com/archive/2009/september/making-bush-look-like-a-piker

    The latest cap and trade boondoggle:
    http://michellemalkin.com/2009/09/30/the-boxer-kerry-green-boondoggle/

    When you tax something, you get less of it (short):
    http://mjperry.blogspot.com/2009/09/500-million-of-missing-tax-revenue-from.html

International War Against Radical Islam

    This from a democratic military advisor; and I agree completely. Either force the Afghan government to meet a set of W-like Iraqi-type benchmarks as a price for continued US support or get out. Otherwise we are staring at another Vietnam:
    http://www.slate.com/id/2231010

The Market

    Technical

    The Averages (DJIA 9712, S&P 1057) after a volatile day closed again within their up trend off the March lows (9365-11202, 1040-1272). Volume picked up significantly while the VIX barely moved--though I should note that it is now in very short up trend (which is bad).

   Fundamental

    Pimco’s strategy for managing cash reserves (long, but you should at least skim it):
    http://www.pimco.com/LeftNav/Viewpoints/2009/Sept+Schneider-Reisz+Cash-Short+Term+QA.htm

      Headlines

    Economic data again dominated the news. The Chicago purchasing managers index (see above) was a big disappointment. Ordinarily investors look at this secondary indicator as interesting but not necessarily of great import; however, yesterday many appeared to be concerned that it presaged a poorer than anticipated Institute for Supply Management’s manufacturing index (a stat they do believe has import) this morning. In addition, this worry trumped any positive impact of the second quarter GDP final number.

    With the sell off following the PMI number, the bears had all they needed to break this Market lower. But they couldn’t get it done. Then when prices traded back into plus territory from being down triple digits, I thought that the bulls would push prices higher. Wrong again.

What’s going on? Investors are likely holding back making any large commitments in either direction ahead of third quarter earnings [and revenues].

          Two other items to keep in mind in the days ahead. (1) the spat of negative economic news over the past two weeks suddenly has investors more uncertain about the recovery; and while it is still way too soon to be changing our forecast, you can count me among the ‘more uncertain’ (2) Obama is getting His first big test as commander-in-chief--the Iranian nuclear/missile program/problem--and investors may be growing nervous about the outcome.
    (Short): http://www.debka.com/headline.php?hid=6288

Are sales data the key to this quarter's earnings reports?

Steve Cook — Wed, 30 Sep 2009 13:27:00 GMT

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers rose 0.1% versus the prior week and 0.9% on a year over year basis; Redbook Research reported month to date retail chain store sales fell 2.2% versus the comparable period in 2008.

    The July Case Shiller home price index rose 1.7%; it was the third increase in a row and prices rose across the country.
    http://mjperry.blogspot.com/2009/09/us-home-prices-increase-for-third-month.html

    The Conference Board reported its September index of consumer confidence at 53.1 versus expectations of 57.0 and 54.1 recorded in August.

    The August Chicago purchasing managers index came in at 50.0, unchanged from July and below estimates of 52.0

    Weekly mortgage applications fell 6.2%.

   Other

    The president of the World Bank sees the role of the dollar as a reserve currency diminishing (medium):
    http://www.nytimes.com/2009/09/29/business/economy/29dollar.html?_r=1

    The International Monetary Fund raises its estimate of world growth (short):
    http://www.reuters.com/article/ousivMolt/idUSTRE58T0XQ20090930

    A look at oil production/demand/reserves (long):
    http://www.aspousa.org/index.php/2009/09/interview-with-sadad-al-husseini/

    Good news from Japan (short):
    http://econompicdata.blogspot.com/2009/09/japanese-industrial-production.html

Politics

Domestic

Late Tuesday two votes were defeated in the Senate Finance Committee on the public option. Numerous democrats voted against it..

Curbing free trade to save it (short):
http://www.cato-at-liberty.org/2009/09/28/curbing-free-trade-to-save-it/

International War Against Radical Islam

The Market

    Technical

    The Averages (DJIA 9742, S&P 1060) remain within their up trends off the March low (9343-11184, 1038-1268). Volume continues at a very low level, the VIX barely moved. Breadth was much better than prices indicated.

    I expressed some concern about the Market’s technical strength because of last Wednesday’s ‘outside reversal’ but clearly nothing has come of it. Nothing to date has been sufficient cause to push prices down beyond a mild couple of day correction.

    Along those lines, there is a graph in this link of past recoveries (click on it to enlarge it). Note that the first serious correction (slowdown), excluding the Great Depression, in the other recoveries didn’t occur till 170-200 days off the bottom. Currently we are circa 145 days depending on how you mark the March bottom.
    http://www.calculatedriskblog.com/2009/09/market-update.html

    Here is a history of the largest single day declines and advances in stock prices. Note that four of the five largest declines occurred in October (short):
    http://bespokeinvest.typepad.com/bespoke/2009/09/92908-the-day-sevens-werent-lucky.html

    Gauging Market strength from the advance/decline data (short):
    http://traderfeed.blogspot.com/2009/09/gauging-trend-status-with-intraday.html

    Thoughts from Trader Mike (short):
    http://tradermike.net/2009/09/september_29_2009_stock_market_recap

   Fundamental

    Five things that could spook the Market in October (long):
    http://www.cnbc.com/id/33072415//

       Headlines

    The economic data dominated early trading. The Case Shiller home price index lifted investor optimism; but that was quickly squelched by the poor consumer confidence index (see above). As an aside, notwithstanding yesterday morning’s sell off following the release of the confidence index, historically the sentiment indices tend to have very little impact on stock price direction.

    There were three earnings reports of large companies yesterday. I stated in last week’s Closing Bell:

‘The first sign that ‘earnings are returning to a more normal........growth’ will most probably be looked for in the upcoming third quarter financial reports, which are not that far away; and the key stat will be revenue growth. Recall that the big knock from the bears during the surprise second quarter earnings season was that business had done a great job cost cutting but the real test of a sustained recovery was revenue growth of which there was little. I suspect if we see sales growth in these coming reports, stocks can continue their up trend; if not, then we may get that larger pull back in stock prices for which the bears have been panting.’

So naturally I was focused as much on their revenue comparisons as I was with the earnings. Walgreen’s revenues were up and in line with expectations; profits were better than estimates--the stock was up big. Nike’s revenues were down; but it was against comparisons with the quarter that the Olympics occurred. Earnings were much better than forecast, the stock was up big. Darden Restaurants sales were less than expected even though earnings were much better than anticipated--the stock was down big,

If we only had to deal with the Walgreen and Darden reports, it would be easy to conclude that the hypothesis regarding revenue was right on. Nike’s release makes it messier. Is the thesis correct and investors are just forgiving of Nike because the comparable period was an unrealistic comparison? Or was the Walgreen/Darden juxtaposition a coincidence? We need more data--actually even if NKE had fit the hypothesis to a T, we would need more data. Nevertheless, my point is that there is a hint that revenues in this quarter’s reports will be a major factor and a determinant of whether the next move up in stocks is up or down. Keep your eyes on the revenue numbers at least until we see if a pattern develops.

Merger Monday

Steve Cook — Tue, 29 Sep 2009 13:26:00 GMT

Economics

   This Week’s Data

   Other

    The case for inflation and gold (medium):
    http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/the-case-for-inflation-and-gold.aspx

    Good news Germany--Angela Merkel wins on tax cutting (supply side) platform (short):
    http://www.clubforgrowth.org/2009/09/das_supply_siders.php

    A look at the consumer price index and how housing is impacting it (short):
    http://www.calculatedriskblog.com/2009/09/housing-tax-credit-and-consumer-price.html

    An update on credit indicators (short):
    http://www.calculatedriskblog.com/2009/09/credit-indicators.html

Politics

Domestic

International War Against Radical Islam

    This is a long piece but it is a worth while read on Obama’s current foreign policy dilemma:
    http://www.stratfor.com/weekly/20090928_obamas_move_iran_and_afghanistan?utm_source=GWeeklyS&utm_medium=email&utm_campaign=090928&utm_content=readmore

The Market

    Technical

    The indices (DJIA 9789, S&P 1062) continue to trade within their up trends off the March lows (9327-11154, 1035-1263). Volume was very low due to the Yom Kippur holiday; and while the VIX was down, it was a surprisingly small decline given the strong Market.

   Fundamental

    A hint at what this quarter’s earnings reports could look like (short):
    http://bespokeinvest.typepad.com/bespoke/2009/09/earnings-revisions-at-a-two-year-high.html

     Headlines

    Two forces seemed to drive the pin action yesterday:

(1)    it was a merger Monday. Abbott Labs is buying the drug unit of Solvay, Xerox is buying Affiliated Computer Services, Johnson & Johnson is buying Crucell and Kraft is reportedly preparing a hostile offer for Cadbury. This corporate action matters because it speaks to valuations, that is, it says a supposedly sophisticated buyer is willing to take some additional risk and pay cash at an above current Market price for another company and a return to normalcy,

(2)    mutual funds and other public reporting funds are doing the typical end of quarter window dressing. In present circumstances, the thesis is that these funds are under invested and want to be more fully invested in their quarter-end report.

An interesting chart on ‘funds on the sidelines’:
http://www.ritholtz.com/blog/2009/09/the-myth-of-sideline-cash/

A day of sound, signifiying nothing

Steve Cook — Thu, 24 Sep 2009 13:25:00 GMT

Economics

   This Week’s Data

    Weekly mortgage applications rose 5.6%.

    Weekly jobless claims fell 21,000 versus expectations of a 5,000 increase; this is the third significant drop in claims in as many weeks.
    http://www.calculatedriskblog.com/2009/09/weekly-unemployment-claims-decline_24.html

   Other

    Another sign of recovery. Americans are on the road again (graph):
    http://mjperry.blogspot.com/2009/09/us-consumers-get-their-driving-mojo.html

Politics

Domestic

George Will on the tariff on tires:
http://jewishworldreview.com/cols/will092309.php3

International War Against Radical Islam

The Market

    Technical

    Yesterday the indices (DJIA 9748, S&P 1060) sold off late in the day but remain within their March to present up trends (9260-11048, 1028-1255). Volume was low; and while the volatility index rose there was no sign of panic. In other words, this was likely just the usual noise endemic to the securities markets.

    TraderFeed’s take on yesterday’s pin action:
    http://traderfeed.blogspot.com/2009/09/evening-briefing-for-september-23rd.html

    The flow of funds into domestic mutual funds (short):
    http://www.zerohedge.com/article/over-7-billion-domestic-equity-mutual-fund-outflows-september-2-billion-outflows-last-week

   Fundamental

    Ten year asset class returns (graph):
    http://www.ritholtz.com/blog/2009/09/10-year-asset-class-returns/

    Earlier this week I linked to an article by former market bear Jim Grant in which he makes a bullish case. Here is the counterpoint from David Rosenberg (long):
    http://www.ritholtz.com/blog/2009/09/is-jim-grant-the-latest-to-be-drinking-the-kool-aid/

    The dollar adjusted market returns (short):
    http://traderfeed.blogspot.com/2009/09/dollar-adjusted-stock-market-effect-of.html

    Dennis Gartman commented on Fast Money recently ‘that is clear that some major entity is keeping the price of good down’. There is evidence that it is the Fed (long but if you own gold, it is a must read):
    http://www.zerohedge.com/article/fed-hiding-gold-swap-arrangements-foreign-central-banks

     Headlines

    Yesterday was a government stage play kind of day that in the end changed nothing. We started with a UN speech by Obama (He sure gives a pretty speech but does this Guy ever work?) which was a very long winded chorus to the Stevie Wonder, U2 et al’s song We are the World. And His vision will probably have the same impact. If you don’t believe it, just listen the 90 minute incoherent tirade by Gadhafi that followed His speech.

    Then Tim Geithner testified on financial regulatory reform. He made two proposals worth repeating:

(1)    a consumer protection agency, which would do most of things that are already the responsibilities of other agencies. What he needs to propose is how to make the current regulatory oversight WORK. But instead this new agency would inject more nannification into the financial system.
http://hughhewitt.townhall.com/blog/g/709c911e-ef66-4ead-a803-acea7876f592

Well, maybe this one wasn’t worth repeating.

(2)    strengthen the financial system so that any one participant can fail without threatening the viability of the entire system. Unfortunately, he offered nothing concrete to fix the problem. Ok, neither were worth repeating.

    Finally, the FOMC released its statement following its two day meeting; and nothing changed--interest rates, the mortgage back security purchase program. It did note that the economy was improving. In other words, the dollar will likely continue to burn.

    In addition, Volcher testifies today. Here are his recommendations (short):
    http://www.ritholtz.com/blog/2009/09/volcker-reinstate-glass-steagall/

    Now we have to get through the G20 meeting without falling asleep.
    http://www.bloomberg.com/apps/news?pid=20601039&sid=aZvhrwaYsZcY

A brief look at the dollar/US stock traderetail

Steve Cook — Wed, 23 Sep 2009 13:28:00 GMT

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers plunged 2.0% versus the prior week though they were up slightly (0.6%) versus the comparable period last year; Redbook Research reported month to date retail chain store sales fell 1.9% versus the similar time frame in August and 2.6% on a year over year basis.

    The Richmond Fed’s manufacturing index advanced for the fifth month in a row (graph):
    http://mjperry.blogspot.com/2009/09/richmond-fed-index-its-over.html

   Other

    The role of taxes in the Great Depression (short):
    http://mjperry.blogspot.com/2009/09/real-lesson-from-great-depression-tax.html

    The case for deflation (long but good):
    http://www.nakedcapitalism.com/2009/09/guest-post-deflation.html

    Asia rebounding (short):
    http://www.calculatedriskblog.com/2009/09/bank-report-asia-rebounding.html

    The cost of cap and trade? No one is saying (medium; must read):
    http://www.zerohedge.com/article/congressman-upton-demands-declassification-censured-cap-and-trade-cost-estimates

    Here’s as good a summary from The Street.com on how the weak dollar/strong stock market relationship is now working:

‘EUR/USD has continued to rally and the negative correlation between the U.S. stock market and the dollar remains in place. The standard explanation for the correlation is that hedge funds and other big traders see the rising stock market as a confidence-building "green light" for them to return to the leveraged trades that made them a lot of money pre-2007 but were unwound quickly once the credit crunch hit.

The idea is to borrow cheaply and use the proceeds -- leveraged up to 20 times -- to invest in higher-yielding assets. In other words, the "carry trade." For the first time in 16 years, short-term U.S. dollar interest rates have fallen under those of Japanese yen, thus making dollar borrowings the cheapest funding vehicle for carry trades into higher-interest rate currencies such as the Australian and New Zealand dollars.

The result is on-going pressure on USD as traders short it (borrow) and buy (invest) into the high yielders. All is well for the carry trades as long as the U.S. dollar stays steady or, preferably, continues to decline. What would catch them out would be strong rally in the dollar. And that brings us back to the correlation between the dollar and the stock market . i.e., a fall in the stock market will cause a rally in the dollar, or perhaps vice versa.’

The question is, when will this inverse dollar/stock market relationship end? The answer largely lies with the Fed, i.e. when will it decide to end its highly expansionary monetary policy? The experts are divided on the answer. My take is that the Fed has a history always erring on the side of ease; so it could reasonably be months if not a year plus before it takes any serious steps. So it makes sense to me to continue to insulate our Portfolios from inflation (weak dollar) until Bernanke proves that he will take the necessary steps to not only prove history wrong but also, not incidentally, put the Fed on a collision course with the administration’s outrageously excessive spending and debt creation policy.

http://www.washingtontimes.com/news/2009/sep/22/the-growing-debt-bomb/ (must read)

That doesn’t mean that the Fed won’t announce a firming in monetary policy this afternoon (indeed rumors are swirling Tuesday evening that the Fed will announce the first step of an exit strategy today; caution: beware of herrings wearing red); and if it does, we will have to make adjustments in our asset allocation strategy. But till it does, nothing changes.

Politics

Domestic

More new taxes (medium):
http://www.forbes.com/2009/09/21/g20-europe-china-agreement-opinions-columnists-brian-wesbury-robert-stein.html

International War Against Radical Islam

    More on US Afghanistan policy from Fred Kaplan (long):
    http://www.slate.com/id/2229227/

    This has all the earmarks of Vietnam unless Obama adopts W’s Iraq policy of forcing serious change on the Afghani government--or else.

The Market

    Technical

    Stock prices bounced back with the Averages (DJIA 9829, S&P 1071) remaining in their up trends off the March lows (9228-11021, 1022-1253). The volatility index was down 4% and is now close to re-establishing the down trend off its October 2008 high. Updating our internal indicator, out of 161 stocks in our Universe, 128 are in firm up trends off their March lows and 125 have successfully challenged their down trend off their 2008 highs.

   Fundamental

      Headlines

    Or lack thereof. Everyone appears to have one eye on the Fed meeting (results out this afternoon) and the G20 meeting on climate change (which can’t be over soon enough) and the other on the dollar which got whacked again yesterday--largely explaining the Market’s move up (see the above short blurb from The Street.com on the dollar/stock market relationship).

Yesterday wasn't as bad as it could have been

Steve Cook — Tue, 22 Sep 2009 13:26:00 GMT

Economics

   This Week’s Data

    August leading economic indicators rose 0.6% versus expectations of +0.7%; offsetting this mildly disappointing number was the upward revision of July’s report from +0.6% to +0.9%.
    http://mjperry.blogspot.com/2009/09/5th-straight-monthly-increase-in.html

    A look at the likely outcome of the upcoming Fed meeting (medium):
    http://money.cnn.com/2009/09/18/news/economy/fed_meeting_walkup/index.htm

   Other

    Why the recovery will be slow (medium)
    http://www.pimco.com/LeftNav/Viewpoints/2009/Crescenzi+Beyond+Inventories.htm

    Shipping volume out of LA keeps rising (graph):
    http://mjperry.blogspot.com/2009/09/la-shipping-volume-increases-5-of-last.html

    A leading global warming proponent reverses himself (short):
    http://mjperry.blogspot.com/2009/09/climate-reversal-global-warming-is.html

    More disturbing news on commercial real estate (short):
    http://www.calculatedriskblog.com/2009/09/moodys-cre-prices-off-39-percent-from.html

    And housing isn’t completely out of the woods (short):
    http://www.calculatedriskblog.com/2009/09/housing-facing-triple-whammy-at-end-of.html

    Prices of credit default swaps are falling sharply (graph):
    http://bespokeinvest.typepad.com/bespoke/2009/09/cds-prices-fell-sharply-last-week.html

Politics

Domestic

David Rockefeller in praise of free trade (medium):
http://www.nytimes.com/2009/09/21/opinion/21rockefeller.html?_r=1&hp

    An anecdote on why tariffs are stupid (short):
    http://gregmankiw.blogspot.com/2009/09/people-respond-to-perverse-incentives.html

International War Against Radical Islam

    With friends like these (on the Justice Department's prosecution [or lack thereof] of terrorists [long]):
    http://article.nationalreview.com/?q=MGQ2OWYyMGVlZWI1ZmM3ZmZhNTU3YTg3NjQ3N2Q2Nzc=

The Market

    Technical

    A study on market performance after a big down market is followed by a big up market (like we have just been through) (graph):
    http://econompicdata.blogspot.com/2009/09/market-down-big-market-up-big-market.html

    The indices (DJIA 9778, S&P 1064) were off yesterday but remain well within their up trend off the March lows (9204-11004, 1016-1248). Volume was very low, and while the VIX was up, there was nothing disturbing about its performance. I was actually pleasantly surprised that stock prices weren’t off more--the market just came off a big options expiration following a couple of weeks of strong performance, the dollar was up (stocks have had a powerful inverse relationship with the dollar of late), European stocks were down and the Baltic Dry index was off.
    http://traderfeed.blogspot.com/2009/09/evening-briefing-for-september-21st.html

   Fundamental

    Bill Gross: sell risky assets and buy Treasuries (medium):
    http://www.nakedcapitalism.com/2009/09/bill-gross-sell-risky-assets-and-buy-treasuries.html
    This may be good advice if you run billions; but it is way too soon for most of us.

    Jim Grant (a bear) reverses himself (long):
    http://online.wsj.com/article/SB10001424052970204518504574420811475582956.html

           Good advice from Doug Kass:

‘Here are six of my strategies to avoid large losses when your tactical view is wrong (my emphasis):
1.    Always stay on top of individual stock fundamentals by talking to management, the competition and company analysts and industry specialists.
2.    Use out-of-the-money puts/calls as protection, especially with high-beta stocks.
3.    Do not press losing positions.
4.    Accelerate the review of every portfolio holding by rechecking the fundamentals at a 5% to 7% loss, and, regardless of those fundamentals, automatically reduce positions as they approach a 10% loss.
5.    Maintain a diversified portfolio. (I limit my shorts to 2% positions and my longs to 3% positions.)
6.    Never employ leverage.’

Waiting on the jobless report

Steve Cook — Fri, 04 Sep 2009 13:20:00 GMT

Economics

   This Week’s Data

    The August Institute for Supply Management’s nonmanufacturing index rose to 48.4 from July’s reading of 46.4. Estimates were for a report of 48.0.
    http://www.calculatedriskblog.com/2009/09/ism-non-manufacturing-index-shows.html

    Nonfarm payrolls fell 216,000 in August versus expectations of a 200,000 loss; unemployment rose to 9.7% versus forecasts of 9.4%.
    http://www.calculatedriskblog.com/2009/09/employment-report-216k-jobs-lost-97.html

   Other

    More of you tax dollars at work. This is stunning:
    http://dailybail.com/home/there-are-no-words-to-describe-the-following-part-ii.html

Politics

Domestic

Another look at the rising cost of healthcare (this is long but it is important to understand);
http://www.american.com/archive/2009/september/forecasting-the-cost-of-u-s-healthcare

    My favorite liberal blogger on Obama’s speech next week:
    http://slate.com/blogs/blogs/kausfiles/archive/2009/09/03/obama-why-give-the-big-speech-now.aspx

    Friday morning humor—this is your tax dollars at work (play the video):
    http://michellemalkin.com/2009/09/03/video-rep-pete-stark-tells-interviewer-get-the-fk-out-of-here-or-ill-throw-you-out-the-window/

International War Against Radical Islam

The Market

    Technical

    The Averages (DJIA 9344, S&P 1003) closed within their up trends off the March low (8947-10689, 985-1205). The VIX fell but remains above the down trend off its October high; in fact, it is now in a very minor up trend (not good). Volume was nonexistent.

   Fundamental

    The latest from Bill Gross (long but a must read):
    http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Gross+Sept+On+the+Course+to+a+New+Normal.htm

    Headlines

    The economic data yesterday was decent though investors didn’t seem to care about most of it. Much of the discussion among the chattering class focused on two things: (1) the retail sales numbers--the general agreement being that when you drilled down into the numbers, they were better than originally thought and (2) jobless report due out this morning (see above)--the overwhelming consensus being that nobody was doing anything ahead of that number.