11/14/07

Economics

fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.). The Farm Bill is now in the Senate:

http://www.washingtontimes.com/article/20071113/EDITORIAL/111130002/1013/editorial

Some interesting statistics on the relative size of the US economy:

http://www.poorandstupid.com/2007_11_11_chronArchive.asp#8274128601439941327

Results of a recent study on income inequality:

http://www.opinionjournal.com/editorial/feature.html?id=110010855

And this on taxing the rich:

http://author.nationalreview.com/latest/?q=MjE5NQ==

a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.) On Barney Frank’s proposed legislation to deal with the sub prime problem:

http://article.nationalreview.com/?q=MTAwZmRkZTM5OGU0MzM2NWJkZGNmZDU5ZjY0ZDVjZDE=

Politics

Domestic

International War Against Radical Islam

More good news from Iraq:

http://news.yahoo.com/s/ap/20071112/ap_on_go_ca_st_pe/iraq_security_gains

The Market

Technical

I hate days like yesterday. I hated it because after two weeks of highly volatile intra day price swings, the Market decided to go one direction in a big way. I hated it because it made no sense technically, except as a monstrous short covering rally. I hated it because I have learned that ‘most of the time’ it is a losing proposition to make Buy/Sell decisions intraday in a volatile Market especially one in a technical no man’s land. And, of course, I hated it because yesterday wasn’t ‘most of the time’ and I wasn’t smart enough to buy stocks on the Market open.

Fundamental

Putting aside for the moment how the Market traded, there are still two fundamental factors that are impacting Market Valuation: (1) the economy, which as you know, I believe is a long term positive for equity values, with the caveat that (2) what we still don’t know about the problems in the sub prime market doesn’t seriously impair US lending institutions. On the latter, investors did receive some welcome news yesterday from three major financial houses: Goldman Sachs, JP Morgan and Bank of America. Executives from each company reported that internal audits had analyzed their sub prime exposure and that it was, at the worst, manageable. I am going to make the assumption that the recent experience of Citigroup and Merrill’s CEOs [not initially reporting the total firm losses in sub prime loans and then losing their job because of it] was not lost on them. Hence, I believe that it is a step toward the clarity investors need to quantify the sub prime problem; and for us it means that there fewer unquantifiable risks in our Valuation Model. That’s positive. But before getting jiggy with this, remember that there is still much that we don’t know, so caution is an imperative.

Bottom line: while I have no clue if the Market has seen its lows (though my gut tells me it hasn’t), the downside risk is lessening. As a result, the stocks below will be Added to the designated Buy Lists, our strategy will be to cautiously (at least until I can get a better sense of the Market) average into holdings. Plus the following purchases will be made this morning at the Market (you will see that caution is the operative word):

In the Dividend Growth Portfolio: a one third position in American International Group (AIG-$59), a one third position in Canadian National RR (CNI-$51)

In the High Yield Portfolio, a one half position in Plains All American LP (PAA-$52). In addition, as a result of the continued revaluation of slower growth utility stocks, Progress Energy (PGN-$48) and WGL Holdings (WGL-$34) are being Removed from the High Yield Buy List.

In the Aggressive Growth Portfolio, a one third position in Nordstrom (JWN-$35), a one third position in Reliance Steel (RS-$51).

Added to the Dividend Growth Buy List:

American International Group (AIG-$59)

Wells Fargo (WFC-$33)

Eli Lilly (LLY-$52)

Graco (GGG-$38)

Canadian Nat’l RR (CNI-51)

Added to the High Yield Buy List:

Duke Realty (DRE-$29)

US Bancorp (USB-$32)

Plains All American LP (PAA-$52)

Added to the Aggressive Growth Buy List:

Moody’s (MCO-$41)

American Eagle Outfitters (AEO-$23)

Best Buy (BBY-$46)

Nordstrom (JWN-$35)

Walgreen (WAG-$39)

Reliance Steel (RS-$51)

Accenture (CAN-$37)

Fastenal (FAST-$40)

Forward Air (FWRD-$31)

News on Stocks in Our Portfolios

A positive write up on Peabody Energy (Aggressive Growth Portfolio):

http://www.bloggingstocks.com/2007/11/14/peabody-energy-corp-btu-the-fuel-of-the-future-is-coal/

More Cash in Investors’ Hands

Comerica is buying back 10 million shares of stock.

Ethan Allen is buying back 2 million shares of stock.