10/16/07

Economics

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

At the Market Open this morning, the Dividend Growth Portfolio will Sell approximately 20% of its position in British Petroleum. I know all the arguments against such a move:

(1) there is rising geopolitical risk in the Middle East (this time Turkey and Iraq) reflected in the move up in the oil price to $88 a barrel and if it materializes prices will go even higher [the Street is a buzz with talk of $100 a barrel oil]: To be sure the Turkey/Kurdish Iraqi situation could explode at any moment. Even without any conflict, global growth could keep the supply/demand balance in favor of sellers.

However, my nature is to be contrary and when all that investors see are higher oil prices, I think one has to consider the flip side--my ongoing admonition about the risk of a disruption in global oil supplies notwithstanding. Macro economic forces like substitution, conservation and increased production have always worked when prices rise; indeed, the last time oil prices spiked, they ultimately gave back 80% of that increase. Of course, I have no clue when those forces will re-appear; but I do know that I will kick myself around the block if and when they do work their magic and I didn’t take some money off the table when oil/oil stock prices were on a Titan III shot. That said even after this sale, the Dividend Growth Portfolio’s position in oil stocks [BP, COP, XOM] will still be 10% of the entire portfolio. Plus, the Portfolio owns a position in gold which will also probably go up if oil prices explode.

(2) the stocks have incredible momentum: which is when it is the easiest to take profits.

(3) BP [$76] is still short of its current Sell Half Price [$83]: but the Dividend Growth Portfolio has already taken profits in ConocoPhillips and ExxonMobil; so the size of the BP position pre-sale [$57,000] is out of balance with the other two [$45,000]. Therefore from a portfolio management perspective, given the objective of continuing to take profits in a sector that has experienced tremendous appreciation, I would rather have three positions that are roughly equal in size [risk] than have one huge holding and two smaller ones.

On the likelihood of a Fed Funds rate cut in October--Bernanke, in his own words:

http://www.bloggingstocks.com/2007/10/16/ben-bernanke-never-promised-you-a-rose-garden/

News on Stocks in Our Portfolios

I want to correct an impression that I gave in yesterday’s blog comments on the announcement by Citigroup and a couple of other large banks that they were creating a $100 billion fund to [at least partially] address the sub prime mortgage problems in which I characterized it as providing ‘added visibility as to how the financial system will adjust to the needed corrections in the sub prime mortgage lending market’--the impression clearly being that this was a definite positive. And to be sure, it may well be; but as the day wore on, more details of the proposed fund were fleshed out and I had time to talk with guys in the bond market who know a heck more about the sub prime market than I do, it was clear to me that this proposed fund may not accomplish all that much. The two most important points are:

(1) if Citigroup, in the wake of having just written off $5.5 billion in sub prime related debts [which at the time most Street analysts assumed included the ‘kitchen sink’], now finds it prudent/necessary to participate in a $100 billion fund whose purpose is provide liquidity to the sub prime market, it could be an indication that the dimensions of the sub prime are (a) still largely unknown and (b) perhaps much larger than the most recent Street expectations.

Remember that I had originally said that the most disturbing aspect of the sub prime problem was that there was no way of knowing the magnitude of the problem until and unless the financial institutions acknowledged the extent of their exposure; but then as the large players in the industry announced write offs and quantified non performing assets, I thought that the problem was coming under control. That judgment may have been wrong--with yesterday’s announcement, a lot of smart guys in the bond markets are now speculating that the worst of the liquidity problems may not be behind us.

(2) there is universal confusion about exactly what the purpose of the $100 billion fund is and how it is going to work. That of course just contributes to the negative speculation.

At this point, I am not saying that the creation of this fund is bad news; I am saying that it may not be as good a news as I implied in yesterday’s blog and that it could be quite negative. This clearly doesn’t help my growing unease with current stock price valuations and it raises the risk that the recently initiated positions in the financial stocks may have been premature. At the moment, the Portfolios are taking no action but my attention will be focused on the financial stocks until we get a better read on how this new $100 billion fund is going to function and more broadly on the size of the sub prime problem.

US Bancorp (High Yield Portfolio) reported third quarter earnings per share of $.67 versus $.66 recorded in the third quarter of 2006. Despite a sizeable provision of credit losses, these results were better than expected.

EPS: 2006 $2.61, 2007 $2.60, 2008 $2.80; DVD: $1.62 YLD 5.2%

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

Johnson & Johnson (Dividend Growth Portfolio) reported third quarter operating earnings per share of $1.06 versus expectations of $.99 and $.98 reported in the comparable quarter last year. JNJ took a large nonrecurring write down; it also raised earnings per share guidance for 2007 by a couple of cents.

EPS: 2006 $3.76, 2007 $4.10, 2008 $4.45; DVD: $1.62 YLD 2.7%

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

More Cash in Investors’ Hands