11/9/07

Economics

Politics

Domestic

International War Against Radical Islam

The Market

Technical

The DJIA closed (13266) below the lower boundary (now at 13324) of its uptrend. As you know, before declaring a trend definitely broken, my inclination is to let either time or distance confirm that. For the DJIA, I am willing to wait another day or so to see if the Average can rally before being convinced that its uptrend since July has been broken. However, if the worse case develops, here are a couple of landmarks to watch: the August intra day low around 12500, the August low close around 12844, the lower boundary of a longer term uptrend going back to 1982 around 12100.

The S&P closed (1474) above the lower boundary (1465) of a questionable uptrend. As much as my gut tells me that the 2000-present trading range (750-1527) is the operative trend, until the S&P breaks 1465 I am going to leave open the question of which trend is dominant. Focusing on the downside, the S&P August intra day low was around 1372 and the low August close was around 1407.

Where does that leave me? I was impressed by the come back (from 200 points down) stocks made yesterday to finish down only 30 points; but they still finished down. That kind of intra day pattern if sustained only means that stocks would be going down slower than they would if we just got a big flush. In the end, technically, I think this Market looks vulnerable.

Fundamental

Fundamentally, I am much less conflicted. I am unconvinced by the bears’ case and think that the economic data provides only flimsy support for their arguments. That said, Market volatility is so high, it only makes sense to me to give ‘no quarter’ in the application of our Price Disciplines and to the extent that we err, to do so on the side of caution.

Which means on the positive side, we focus on strong companies with a major international presence and that are relatively recession (which is a risk--but not my forecast) proof. However, were it to occur, the earnings stability of a consumer staple and healthcare company like Johnson and Johnson (Dividend Growth Portfolio) historically has been prized by investors in such a scenario.

Johnson & Johnson is a major manufacturer and marketer of health care products. Its major divisions are: Consumer (baby care, non-prescription drugs, sanitary protection and skin care), Medical Devices (wound closures, minimally invasive surgical instruments, diagnostics, orthopedics and contact lenses) and Pharmaceuticals (contraceptives, psychiatric, anti-infective and dermatological).

Management’s business strategy is to:

(1) manage costs and improve margins: Recently, it announced it planned a 3-4% reduction in its work force and a restructuring of its pharmaceutical and Cordis [stent] divisions.

(2) invest in future growth areas: The company has recently licensed an anti-viral and three HIV/AIDS products and is investing in new antibiotic and dermatological drugs. In addition, it also acquired Pfizer’s consumer products division and almost immediately improved margins.

(3) return value to shareholders: JNJ has consistently raised its dividend and engaged in stock buy backs [it is presently buy back $10 billion in stock].

These efforts have resulted in an amazing 28-30% return on equity with almost no debt for the past 15 years. In addition, JNJ has grown its earnings and dividend at a 14-15% annual rate. While profit and dividend growth may slow somewhat, its strong, well diversified product line should continue to grow rapidly, supplemented by acquisitions. Plus JNJ stock offers a 2.5% dividend yield.

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

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