12/18/07

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.) How the earmark process works on the Defense budget:

http://article.nationalreview.com/?q=MTc1NzYxMTM5ZmIwMzZjNzc1Zjc1ZjA4ODkyMmEzMTc=

Politics

Domestic

International War Against Radical Islam

The Market

Technical

In my opinion, the Market technicals look terrible. Yesterday, stocks closed below a very short term rising trend with the August/November lows the only visible support--and that is 500-600 DJIA points from yesterday’s close. Also, look at a chart of the DJIA going back to June and tell me it doesn’t look like a head and shoulders formation.

That said, I am not going to let technical analysis push me into an investment decision; BUT, the technical red light is flashing.

Fundamental

Not surprisingly, this pessimistic technical outlook just heightens my gloomy assessment of the Fed’s recent action (or lack thereof) as relayed in last week’s Closing Bell. (Although it was just announced that the European Central Bank added huge reserves overnight and that is a positive. (http://www.marketwatch.com/news/story/european-central-bank-doles-out/story.aspx?guid=%7BC2C0AF14%2D9F98%2D477C%2DBFF4%2D9F2BB5C62DCD%7D&siteid=bnb ).

However, once again, it makes no sense to let the emotions of the moment precipitate action. It is our Price Disciplines that act as a governor.

Unfortunately, I can’t remember a day when the stock prices of three long term holdings broke down. Yesterday, the stock prices of VF Corp (Dividend Growth Portfolio) and ASTA Funding (Aggressive Growth Portfolio) fell below the lower boundary of their Buy Value Ranges--and not just by a little bit--and Hospitality Properties Trust (High Yield Portfolio) hit its Stop Loss Price. In coming to an investment decision, I considered several things: (1) the price moves of these three stocks were significant and while VFC and ASFI didn’t touch their Stop Loss Price, they got close enough for government work, (2) if yesterday’s Market action looked and felt like a giant flush in a bottoming process, I’d be worried about getting whipsawed if our Portfolios sold these stocks--but it didn’t look or feel that way; in fact as I said above, technically the Market indices look vulnerable to at least the August [12500]/November [12700] intraday lows, (3) our Price Disciplines are right more often than they are wrong, (4) as detailed in the investment strategy summary at the end of the Closing Bell, I have already made the decision that tightening our Stop Loss Discipline [lessening the amount of any acceptable loss] would be appropriate in the current Market environment and finally (4) when our Price Disciplines dictate multiple transactions in a short period of time, it has always seemed prudent to me [OK, it’s a cowardly act] to execute those transactions over time [the general thesis being that no matter how much confidence I have in the Price Disciplines, nothing is perfect].

Bottom line: this morning at the Market open, our Portfolios will Sell one half of each position of VF Corp (VFC-$69) and ASTA Funding (AFFI-$28) and the High Yield Portfolio will Sell its entire position in Hospitality Properties Trust (HPT-$33)..

In other action, the stock prices of Commerce Bancshares (CBSH-$43) and Paychex (PAYX-$38) fell slightly below the lower boundaries of their respective Buy Value Ranges. Accordingly, CBSH and PAYX are being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio never Bought CBSH; hence no further action will be required. The Dividend Growth Portfolio will continue to Hold PAYX.

The stock price of Ingersol Rand (IR-$44) has declined below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Dividend Growth Buy List. As you might suspect, the Dividend Growth Portfolio will not purchase shares in IR at the time.

I close with the disclaimer from last week’s Closing Bell: “That said, I could be dead wrong about all of the above: the Fed’s policy moves may prove prescient, the freeze up in liquidity could be thawing as I write this and stocks may be only a moment of clarity away from regaining their footing. Furthermore despite my pessimism, I have to keep in mind that (1) stocks in general are trading at or below Fair Value as measured by our Valuation Model, and (2) the Buy Lists hold a large number of names which historically is a sign that stocks are much closer to their lows than their highs.” (although the Buy Lists are shrinking because stocks are falling below the lower boundaries of their Buy Value Ranges).

News on Stocks in Our Portfolios

Illinois Tool Works (Dividend Growth Portfolio) lowered its earnings per share estimate for the fourth quarter from $.86-.90 to $.82-.86 due to weakness in its North American market.

Eli Lilly (Dividend Growth Portfolio) raised its quarterly dividend per share from $.425 to $.47.

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