Transaction Alert

On Thursday May 21, 2015, we executed the following transactions:

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Industrial Production Index

Below is a table with the number of instances when the Industrial Production Index declined at least five months in a row.  We have also noted whether or not there was a coincidence with the period of decline in the Industrial Production Index with the National Bureau of Economic Research (NBER) definition of a recession.

Analyst Estimates: May 15, 2015

Below are the price projections based on analyst earnings estimates for the first 20 stocks on our recent U.S. Dividend Watch List dated May 15, 2015. These estimates project the price change for the respective stocks in the next 12 months.

GMCR: Downside Targets

On October 25, 2011 when Green Mountain Coffee Roasters (GMCR) was trading at $63.85, we projected conservative and extreme downside targets of $59.93 and $37.21, respectively.  Subsequent price action for the stock brought the price as low as $17.11.  After achieving the downside target the stock rose as high as $158.87 by November 2014.  The potential gains of acquiring GMCR below either downside target was +165% and +326%.

The problem with this modeling of the past is having the fortitude of buying the stock and watching it fall –66% before the subsequent rise.  Can you handle a decline of –50% or more in your investments?  If you can’t sleep at night with losses of –50% or more then don’t bother reading any further as what follows is speculation of what would happen if history were to repeat (NOTE: history does not repeat).

Alternate reading on portfolio losses of –50% or more by Charlie Munger.

Dow Theory: Industrial Production Tipping the Scales

This is our first update to Dow Theory review since October 17, 2014.  At the time, we closed with the following commentary:

“All reasonable interpretations of Dow Theory should indicate that we are in a bear market.

“Most Dow Theorists would suggest that investors sell all stock holdings in order to avoid losses.  However, we only use Dow Theory as an asset allocation tool.  Therefore, we will add cash to our holdings and trim some positions.  Outright selling of all stock positions is not conducive to the concept of compounding income, which is our long-term goal.

“Finally, all is not lost.  In order to change the view that we are in a bear market, the Dow Industrials, Transports and Russell 2000 only need to exceed their previous all-time peaks.  This partially explains the reason why it may not be advisable to sell all positions based on a Dow Theory bear market indication.”

Our assessment of a Dow Theory bear market indication was supported by an October 19, 2014 posting by Dow Theorist Tim Wood.  In his review of Dow Theory, Wood said:

“This all said, on Friday, October 10, 2014, the Transports closed below their August 7th Secondary Low Point. On Monday, October 13, 2014, the Industrials followed with a close below their August 7th Secondary Low Point. In the wake of this development, I have sat quietly to see what, if anything, would be written on this development. The current Dow Theory chart can be found below. As a result of this joint close below the previous secondary low points, an orthodox Dow Theory Primary Bearish Trend change has been triggered (Wood, Tim. Dow Theory Update. October 19, 2014.)”

Seven months later, the changing market conditions indicate that commentary on Dow Theory is necessary.

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