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Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    The Averages (DJIA 12240, S&P 1300) attempted to rally yesterday, but closed down on the day.  However, they remain well within their intermediate term trading ranges (11863-12919, 1263-1372).  On the S&P (1) the right shoulder of a developing head and shoulders pattern continues to form, (2) yesterday’s close put it below the lower boundary of a very short term up trend, (3) it is now 3 days below its 50 day moving average and (4) a mere 17 points away from its 200 day moving average.
 
    Volume declined, though breadth improved slightly.  The VIX was up again making it the third day above the upper boundary of its trading range. 

    GLD rose fractionally, leaving it near the upper boundary of its intermediate term up trend.

    Bottom line: I assumed that the Market would experience some sort of reflex rally yesterday following Wednesday’s rather nasty pin action.   While the indices were up in the morning, bulls couldn’t keep the momentum going.  That is not a good sign and probably means that stocks will test the 200 day moving average and perhaps the lower boundary of the current trading range.  Be patient and focus on the stocks on our Buy List
if we get that test.

    http://blog.afraidtotrade.com/making-sense-of-the-current-sp500-market-range/

   Fundamental

    Headlines
        
    Yesterday’s economic news was very positive: weekly jobless claims fell versus estimates of a rise and June pending home sales rose versus forecasts of a decrease.  They helped get a reflex rally going; but in the end, politics again reigned supreme.

    The rest of the day was like being in a betting parlor with every ‘expert’ or supposed ‘expert’ handicapping the likelihood of passage of the Boehner plan.  But I think what spooked investors was senator Reid’s statement that if the Boehner plan passed, he would immediately call for a vote and it would be defeated (news flash: Harry gets lucky as the GOP shoots itself in the foot), leaving us with only one plan (the house passed ‘cut, cap and balance’ plan) four days prior to the August 2 deadline.

    In the midst of this political malfeasance, corporate profits continue to surprise to the upside.  As of the close last night, 50% of the S&P companies have reported earnings and the ‘beat’ rate is at about 80%.  So this is a much better performance than I had been anticipating and therefore, is clearly a positive.  It seems that the disconnect between the US economy and the global profitability of US corporation continues to widen.  If it persists, this is clearly cause for a reassessment of the assumptions of our Model.

    What the Fed can do to help (medium):
    http://www.zerohedge.com/news/stop-presses-fed-can-fund-treasury-over-half-trillion-emergency-capital

    Meanwhile, lest we ignore Europe (short):
    http://www.zerohedge.com/news/contagion-spreads-sleepy-denmark-cds-surges-20-overnight
    http://www.zerohedge.com/news/political-crisis-contagion-zapatero-dissolve-government-september-26

    Bottom line: I think that the real risk in the current situation is that the politicians win the battle (i.e. come up with some compromise that allows a rise in the debt ceiling) but lose the war (i.e. the solution is so half assed and chocked full of political accounting gimmickry that the credit rating of the US gets downgraded anyway); or said another way, I have no faith that these assholes will do the right thing.  While the assumptions in our Model are for a ‘muddle through’ scenario, they don’t account for the potential fallout from decline in our credit rating.  At the best, that means stocks are now at Fair Value; but there exists the potential that our growth assumptions may be to high if the credit markets are once again thrown into turmoil.
      
    The repercussions of political irresponsibility (short):
    http://www.minyanville.com/businessmarkets/articles/us-debt-us-debt-ceiling-national/7/28/2011/id/35989?camp=featuredslidealso&medium=home&from=minyanville

    Subscriber Alert

    The stock of Pepsico (PEP-$64) has fallen below the upper boundary of its Buy Value Range.  Accordingly, it is being Added to both the Dividend Growth and Aggressive Growth Buy Lists.  Both Portfolios already own this stock; however, neither position is a full one.  So shares could be Bought; just not at this time.

   Thoughts on Investing--from Robert McConnaughey
 
We have long been advocates for a significant allocation of one’s equity portfolio to dividend-paying stocks. The evidence is clear that dividends have been a crucial part of total returns through history and that dividend payers (particularly sustainable dividend growers) have significantly outperformed their non-dividend-paying peers over the long haul. Couple those higher returns with the lower volatility that comes with the dividend-paying class vs. broader equity markets and it makes a clear case for the power of dividends. We do not see this as a random occurrence. There is no more elegant single gauge of corporate health and strong governance practices than the ability and willingness of corporations to make recurring payments of cash to shareholders in the form of dividends. Income from bonds is well and good, but equity dividends have one key advantage: properly managed, they can grow over time.
 
In addition to this structural belief in dividends, we feel that today is a particularly compelling time to overweight the dividend-paying stocks for several reasons:
 
First, given the avalanche of funds flows toward the perceived safety of bonds, the relative attractiveness of dividends is at historically high levels. Compared to Treasuries, or even high yield debt, yields on stocks are relatively about as cheap as they have been in decades.
 
Second, following the wisdom of that great student of capital markets, Willie Sutton, we are attracted to corporate balance sheets today because that is where the money is. At least in the United States, the collective consumer balance sheet is still in rough shape and government balance sheets through the developed world are not only extremely stressed but also running huge ongoing deficits. In stark contrast, not only are corporations awash in cash, but they are generating historically high free cash flow yields. Given current payout ratios that are well below historic averages, we think the backdrop is set for a period of solid dividend growth. This brings us to another interesting feature of equity income vs. income from bonds. Equity income strategies have an inherent inflation capture through growth in dividends and potential for capital appreciation.
 
Third, demographics favor dividends. Our society is not only aging, but the financial turmoil of recent years has only reinforced the need for reliable income for those citizens in or nearing retirement. Concerns about the sanctity of our Social Security program as well the decline of traditional pension plans have put an increasingly hot spotlight on the need for retirement income from investments. As the investor (and plan beneficiary) population of the U.S. and the world ages and lives longer, they will demand investment income and when yields on fixed-income instruments are at today’s fairly paltry levels, they will turn to equity dividends.
 
Finally, it is important to note that the opportunity in equity dividends is not simply a U.S. phenomenon. In fact, we believe that the case for the relative attractiveness of dividend payers vs. non-income-paying equities may have been even greater in emerging markets. Despite a great deal of progress in many markets over the last 20 years, corporate governance practices in emerging markets still can leave much to be desired. One always wants to “follow the money” to ensure that shareholders are getting a fair shake. There is no proof statement to that end like a healthy return of cash to shareholder s via a dividend program, and with payout ratios even lower in emerging markets than in the developed world, we see even more room for future growth.
  
    News on Stocks in our Portfolios
  


    More earnings reports:

                                                         Reported        Expected

Boeing                                              $1.25            $.97
ConocoPhillips                                  2.41             2.20
Gen’l Dynamics                                 1.79             1.73
Murphy Oil                                          1.60             1.66
Praxair                                               1.38             1.37
UGI                                                      -.06             +.06
Automatic Data Processing           .48               .48
CME Group                                       4.38                    4.17
Federated Investors                          .41               .41
ExxonMobil                                       2.18                    2.35

Economics

   This Week’s Data

    June pending home sales rose 2.4% versus expectations of a 2.0% decline.

    Second quarter GDP came in at +1.3% versus estimates of +1.9%; the accompanying GDP price index rose 2.3% versus forecasts of up 2.0%.
    http://www.calculatedriskblog.com/2011/07/advance-estimate-real-annualized-gdp.html

   Other

    The ECRI indicator now appears to pointing to recession (medium):
    http://www.nakedcapitalism.com/2011/07/ecri-expects-double-dip-scare.html

Politics

    The latest on global warming (medium):
    http://michellemalkin.com/2011/07/28/nasa-satellite-un/










Posted 07-29-2011 8:14 AM by Steve Cook