8/29/07

Economics

An anecdotal look at the crisis in the housing industry:

http://www.poorandstupid.com/2007_08_26_chronArchive.asp#9132243690101203397

The Fed released of the minutes from its August 7 meeting. Two points:

(1) the release contained a lot of the usual language including that inflation remains its primary concern; but importantly, it acknowledged that there could be problems in the credit markets and it stood ready to provide assistance,

(2) this meeting occurred before the credit meltdown. Granted there were plenty of signs around suggesting trouble ahead; but given the temerity of most bureaucrats, it is not surprising that there were no preemptive measures taken in advance of the breakdown in liquidity in the credit markets. Indeed, we thought that the Fed’s immediate action following the manifestation of this problem was a positive---as did the Markets when it happened. Further, it seems reasonable to us based on what the Fed has already done to think that it will take whatever additional necessary action is needed to alleviate any bottlenecks that have developed.

However, our above defense of the Fed’s actions notwithstanding, it is clear to us that the demand for money is exploding (this is can be seen in the titanic flow of investable funds into only the lowest risk investments (US Treasury Bills and cash), leaving virtually no funds to be invested in anything else [hence the liquidity problem]; therefore, more money will likely be required [demanded] to finance the higher risk [but not sub prime investments] and the Fed will have to respond by injecting funds into the banking system [one easy and oft mentioned means of which is to lower the Fed Funds rate]. If that doesn’t happen, we believe that the risk of bear case on the economy [recession] will rise dramatically. For the moment, we think that the Fed has earned the benefit of the doubt; but it appears that action will be needed and soon.

Rising defaults on credit cards:

http://bigpicture.typepad.com/comments/2007/08/rising-defaults.html

Politics

Domestic

International War Against Radical Islam

Signs are increasing of a possible terror attack:

http://hughhewitt.townhall.com/blog/g/c044bc4f-952f-4116-acbe-6f5186d2986b

In case you missed these comments by Ahmadinejad:

http://www.breitbart.com/article.php?id=070828173812.btj6abce&show_article=1

The Market

Technical

To reminder you, the lower boundary of the current DJIA up trend is approximately 12922--which means that a test of that level is another 120 points down or less than one half of yesterday’s plunge. We put no probabilities on whether 12922 can hold; we are just pointing out the next sign post.

Fundamental

We absolutely hate tempting fate and, as a result, stewed over how to present our conclusion for what for all practical purposes looked like a pretty devastating day. But here is what happened (or didn’t happen): (1) only one of the 43 stocks on our Buy Lists traded below the lower boundary of its Buy Value Range, (2) none of the stocks that are in that price no-man’s land between the lower boundary of their Buy Value Range and their Stop Loss Price traded near their Stop Loss Price, (3) and no stocks in our Universes that weren’t already trading in their Buy Value Range traded down below the upper boundary of their Buy Value Range.

We have been working the current version of our Valuation Model for over 15 years and we can not remember a time when the Market had corrected as much as 10%, was close to re-testing its low on a highly volatile day and there was virtually no changes to be made in our Buy Lists or Portfolios; and we have no clue what it could mean. Maybe we will get blasted out of our shorts today; maybe the stocks/sectors of the Market where we focus have already made their bottom and it is now other stocks/sectors turn to do so; maybe it means nothing.

The bottom line for today is there is nothing to do (supporting one of our favorite theses that sometimes the best thing to do is nothing). Infosys Technologies (INFY-$46) is the lone culprit that traded below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Aggressive Growth Buy List. However, the Aggressive Growth Portfolio will continue to Hold INFY.

EPS: 2006 $1.50, 2007 $1.92, 2008 $2.35; DVD: $.55 YLD 1.1%

http://finance.yahoo.com/q?s=INFY

News on Stocks in Our Portfolios

The Bank of Nova Scotia (Dividend Growth Portfolio) reported its fiscal third quarter earnings per share of $1.02 versus $.93 recorded in the comparable period in 2006. It also raised its quarterly dividend from $.42 to $.45.

EPS: 2006 $3.58, 2007 $4.05, 2008 $4.35; DVD: $1.74 YLD 3.7%

http://finance.yahoo.com/q?s=BNS

More Cash in Investors’ Hands