9/5/07

Economics

Politics

Domestic

International War Against Radical Islam

The Market

Technical

The S&P closed at 1490 last night, once again approaching the 1500-1527 level. As you know this has been an inflection point for the S&P for the last six months. Originally, this level acted as a major resistance point dating back to the 2000 high; then after the index busted through it to the upside, the S&P returned several times to test that level as support. Ultimately, it couldn’t hold 1500-1527, traded below it and has since once again tested it twice as a resistance level.

Clearly investors are conflicted when stocks trade around 1500. We don’t pretend to know the reason why, although 1500 is right on our Fair Value and it isn’t unreasonable to assume that equity prices will tend to meander around Fair Value. However, our main point here is that when the index approaches this level, volatility tends to increase; that doesn’t necessarily mean that this time the pattern will repeat itself--but we bring it up so that you are aware.

Fundamental

Over the weekend, we dug into the GDP numbers released last week and were disappointed to discover that second quarter domestic non-financial corporate profits declined 1.4% (this is the profit number companies report as taxable income to the IRS) versus the 8%+ number recorded in their public accounting. This discrepancy needn’t be as concerning as it might first appear because (1) companies tend to report the lowest number possible to the IRS and (2) the domestic non-financial earnings figure clearly leaves out international profits. That said, we were surprised by the magnitude of the domestic corporate earnings shortfall and it acts as yet another weight on the probability of the US successfully negotiating a ‘soft’ landing.

News on Stocks in Our Portfolios

Donaldson Co (Aggressive Growth Portfolio) reported its fourth fiscal quarter earnings per share of $.53 versus expectations of $.48 and $.43 reported in the comparable 2006 quarter.

EPS: 2006 $1.55, 2007 $1.80, 2008 $2.00; DVD: $.36 YLD 1.0%

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

A positive write up on Hershey (Dividend Growth Portfolio):

http://www.marketwatch.com/news/story/story.aspx?guid={7411FCC0-79DB-4199-8458-549C4A8620BE}&siteid=nbs&symb=

Franklin Electric (Aggressive Growth Portfolio) is acquiring the pump division of Monarch Industries Ltd for an undisclosed sum.

EPS: 2006 $2.43, 2007 $2.35, 2008 $3.16; DVD: $.47 YLD 1.0%

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

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