Prices don't lie, except maybe this time
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?

The Market

    The S&P (1141) was up again yesterday, closing above the former 1120 resistance level as well as its down trend off the October 2007 high (1126);  the DJIA (10606) ended similarly though it was its first close over its October to present down trend.  Most other Market indicators were generally positive: volume was up, the dollar was up (scoreboard: stocks up, gold down, oil down), the VIX was down and breadth measures were mixed.

    Bottom line: despite the nonconfirmation from our internal indicator, if stocks finish the week on an up note then I am changing the Market trend from flat to up.  That said, there are times that technical and fundamental factors (or at least my perception of them) point in different directions.  Generally I operate on the thesis that ‘prices don’t lie’ and accept the fact that I am likely wrong.  This time I am going to choose to stick with my fundamental judgment a bit longer. So even if the technical trend moves into an up trend, our Portfolios won’t be immediate buyers of stocks.


    We got some decent economic news yesterday.  Jobless claims were basically flat and December retail sales were reported up more (see below) than expected.  That put investors in a good mood and this sentiment carried through the day.

    Late in the day, it was reported that the Fed issued an interest rate alert to banks advising them to start protecting their balance sheets against a rise in interest rates which it specifically defined as an increase of 200-300 basis points.  Talking to guys who are much more knowledgeable about Fed speak than me, I got two perspectives: (1) the Fed is telling the banks that rate increases are coming sooner and bigger than most expect and (2) the Fed believes that the more they talk about being tough and raising rates, the more confidence they give bond investors and the more time it buys them before they have to   actually raise rates. However, both camps agreed that Market forces are going to take intermediate and long term interest rates up whatever the Fed does.

    I have opined that a rise in interest rates from current levels would be a positive for stocks long term; however historically, in the first instance, an initial sustained move to the upside has not been good.  This clearly fits into my more sanguine view of the economy and re-inforces my decision to, at least initially, discount the increasingly positive technical performance of the Market.
    Supporting that notion is the latest from Bill Gross (long but today’s must read);

    Two arguments for a better market (both short):

     Thoughts on Investing—5 lessons from 2009 from Tom Petruno

•  When facing economic collapse, don't underestimate central banks' power to forestall Armageddon. Or, as the time-honored Wall Street line goes, "Don't fight the Fed."

Amid the credit-market meltdown of late 2008, the Federal Reserve under Chairman Ben S. Bernanke committed all of its resources to saving the banking system and keeping recession from becoming depression.

As we've seen, the Fed's bag of tricks is nearly bottomless: short-term interest rates at zero, an alphabet soup of lending programs, more than $1.7 trillion of purchases of mortgage and Treasury bonds, etc.

The Fed's intervention was all the more powerful because it was coordinated with every other major central bank on Earth. And unlike the Bank of Japan when that country's economic slide accelerated in the 1990s, the Fed opted against timidity.

Mission accomplished? We know we avoided a new depression in 2009. We don't know if the fix is permanent -- or whether the cost will be severe inflation down the road.

What should be clear from markets' reactions this year, though, is that you're still facing lousy odds if you bet against central banks that are in full-on rescue mode.

* Keep the faith in the world's emerging markets. For much of this decade, Americans have been advised to invest overseas because that's where economic growth was likely to be fastest in the long run -- particularly in developing economies such as China, India and Brazil.

The story line still holds up. If anything, it's more appealing now than a year ago. No surprise, then, that many emerging markets, after falling more sharply in 2008 than the U.S. market, also have come back much faster this year.

The average emerging-markets stock mutual fund is up 68% in 2009 after losing 55% last year.

Obviously, emerging markets are more volatile than developed markets, and that isn't going to change soon. But the world is a much different place from even a decade ago. It isn't just that emerging economies are growing faster; they also have accumulated vast wealth that gives them economic critical mass.

We are the debtor now; they are the creditors. Why would you not want a long-term stake in the creditors?

* You can still trust basic portfolio diversification. In other words, making sure your portfolio has a broad mix of investments remains the best strategy for achieving growth without undue risk to your nest egg.

In the fall of 2008 nearly every type of asset was collapsing, largely because hedge funds and other big investors had to sell whatever they could to raise cash as credit dried up and lenders called in loans.

But that was an extraordinary anomaly. And even then, bonds, for example, generally lost a lot less than stocks, which is how markets are supposed to work.

By early this year the lock-step movement of assets was over. Many emerging stock markets, for example, were holding up even as U.S. shares continued to plummet in January and February. The price of gold rose nearly 7% in those two months. Municipal bonds also were rallying.

Simply put, broad-based diversification raises the likelihood that you'll always have some assets doing well, at least partly offsetting those that aren't. And if some chunk of your portfolio is holding up in tough times, you will be less inclined to sell your losers at the wrong point -- i.e., at or near the bottom.

Diversification is such a simple concept, and so easy to accomplish. It's amazing to me how many investors think there must be some trick to it.

* When the facts change, be prepared to change your mind
. That's paraphrasing John Maynard Keynes' famous quote. I'm applying it here to the economy.

Last spring, U.S. economic data began to suggest that the recession was bottoming. Remember Bernanke's reference to "green shoots"?

Many stock market bears didn't believe that things could get better any time soon, and wanted more proof of an economic turnaround. But global markets didn't wait for confirmation. They usually don't. Stocks began to rebound in March and kept going in April and May. As we now know, the economy began to grow again in the third quarter.

I'm not suggesting that markets are always prescient. Nor am I trying to minimize the horrid state of the labor market even in the face of the economy's return to growth.

But hard-core bears in spring and summer refused to accept that plenty of economic indicators were turning for the better. And in a world awash in cheap money from central banks, all it took to entice many investors back to severely depressed markets was the belief that things had stopped getting worse.

Human nature doesn't change: Investing is forever a battle between greed and fear. This year, greed regained the upper hand.

* Don't invest solely by looking in the rearview mirror. After a year like 2008, it may be hard to take your mind off how much you've lost. That's understandable, but it also can obscure the opportunities in front of you.

Classic rearview-mirror investing leads to buying what has recently performed best. That's the opposite of what people know they should do, which is to buy low.

I think the greater problem now with the rearview mirror is that many people can't stop thinking about how much they're down. Stop counting your losses, and focus more on what your portfolio needs to meet your long-term goals. You'll feel better.

News on Stocks in Our Portfolios

    Positive comments on Qualcomm (Dividend Growth and Aggressive Growth Portfolios) from The

SAN DIEGO (TheStreet) -- Apparently it's bakeoff season in tech, and the latest blue ribbon goes to Qualcomm (QCOM Quote).
Apple (AAPL Quote) has chosen Qualcomm as its chip supplier for the new version of the iPhone headed to Verizon (VZ Quote) this summer, according to Northeast Securities analyst Ashok Kumar. Kumar confirmed the decision with the manufacturers and suppliers involved with the phone.

The win is the second high-profile victory for the San Diego tech shop this week. On Tuesday, Google (GOOG Quote) announced that its Nexus One phone -- made by HTC -- will be powered by Qualcomm's Snapdragon chip.

"It's looking like Qualcomm is beginning to be the one to beat," says Kumar, referring to the company's rising status in the smartphone race.

Apple representatives were not immediately available for comment. And a Qualcomm rep said "nothing has been disclosed yet."
The iPhone win, while huge for Qualcomm, doesn't involve its Snapdragon platform, but a 3G wireless technology chip for EV-DO, says Kumar.

Initially, Apple sought a chip that would allow it to sell a world phone, one that was compatible with the two leading wireless technologies -- GSM and CDMA.

But Qualcomm and others failed to deliver. Instead, Apple elected to go with Qualcomm in its Verizon iPhone, which is expected to arrive soon after AT&T's (T Quote) exclusive contract with Apple expires in June.

The loser in this deal is Germany's Infineon (IFNNY Quote), the chip supplier to the AT&T iPhone.

Qualcomm shares are up 3% so far this year, continuing what was a 25% gain for 2009.


   This Week’s Data

    December retail sales were reported up between 2-3%, better than anticipated.  Many retailers also raised their guidance for 2010.

    Nonfarm payrolls fell 85,000 in December versus expectations of no change.


    An update on the growth of money supply which is positive as far as it goes.  What is missing in these charts is the current amount of money relative to what is needed to reach full capacity.

    And a response (short):

    New vehicle sales versus the scrappage rate (chart):

    China begins to tighten monetary policy (long):



More uncomfortable math regarding the healthcare bill (short):

  International War Against Radical Islam

   Charles Krauthammer on the Christmas bomber and our government’s reaction (medium):

    In yesterday’s Morning Call, I opined that politics are likely to be more important in the calculus of stock valuations this year than economics.  My focus was on the domestic side.  In this article, Victor Hansen looks at international politics (medium/long):

Posted 01-08-2010 8:30 AM by Steve Cook