The Bottom line
Statistical Summary
Current Economic Forecast
2007
Real Growth in Gross Domestic Product (
Inflation: 2 - 2.5 %
Growth in Corporate Profits: 5-7%
2008
Real Growth in Gross Domestic Product (GDP): 3-3.25%
Inflation: 1.75-2%
Growth in Corporate Profits: 7-9%
Current Market Forecast
Dow Jones Industrial Average
2007
Current Trend (revised):
Medium Term Uptrend 11700-15200
Long Term Uptrend 11485-19372
Year End Fair Value: 13000
2008
Year End Fair Value: 14000
Standard & Poor’s 500
2007
Current Trend (revised):
Medium Term Uptrend 1354-1594
Long Term Uptrend 1225-2400
Former Long Term Trading Range 750-1527
Year End Fair Value: 1500
2008
Year End Fair Value: 1625
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 10%
High Yield Portfolio 40%
Aggressive Growth Portfolio 17%
Economics
The economy is a positive for Your Money--the recent investor manic depressive focus on high inflation/high interest rates notwithstanding. This week’s economic data generally supported the notion that the most difficult part of the ‘soft’ landing is behind us, though we wouldn’t term the recovery (if indeed we are in one) vibrant.
(1) weekly mortgage applications rose 6.6%--despite higher interest rates. The statistics on the housing market continue their directionless churn.
(2) business inventories rose .4% versus expectations of an increase of .3%; however, business sales were up .7%, driving down the business inventory to sales ratio--again an indication of higher future production,
In other business related news, May industrial production was reported unchanged versus expectations of a .1% increase--a little disappointing but this number was primarily the result of lower electricity production due to mild weather; reflecting slower production, capacity utilization was reported at 81.3 versus estimates of 81.5.
The New York Fed reported its June manufacturing index rose to 25.8 versus expectations of 10.0 and 8.0 recorded in May.
All in all, these numbers suggest that while business maybe emerging from the ‘soft’ landing, it is not exploding out of the blocks.
(3) consumer spending continued to show signs of a rebound: the International Council of Shopping Centers reported weekly sales of major retailers up 1% with the year over year increase coming in up 2.1%; Redbook Research reported month to date retail chain store sales down 1% versus last month but up 1.7% versus the comparable period in 2006; the Commerce Department reported May retail sales up 1.4% more than double expectations of a rise of .6%, ex autos, the results were similar, with May up 1.3% versus expectations of up .6%.
On a more disappointing note, the preliminary June University of Michigan index of consumer sentiment was reported at 83.7 versus expectations of 87.0 and May’s final reading of 88.3.
(4) weekly jobless claims were unchanged from the last report versus expectations that they would rise by 6,000--employment remains strong,
(5) the government reported the May budget deficit at $67.7 billion versus expectations of $70.5 billion; for the fiscal year as of the end of May, the deficit stood at $148.5 billion versus $227 billion for the similar period in 2006. Tax receipts don’t lie--nobody over pays them; and they are smoking--an awfully good sign that the economy is also.
In this week’s release of the Fed’s beige book [the every six week anecdotal look at the economy], it concluded that growth across all sectors of the economy, except housing, was healthy and inflation was subdued,
In other inflation related news, the May Producer Price Index [PPI] came in at +.9%, higher than the estimated +.6%; on a more positive note, the core PPI was reported at up .2% in line with expectations--that puts core PPI up 1.6% over the last 12 months,
Ditto the May Consumer Price Index [CPI] which was reported up .7% versus expectations of a rise of .6% while the core CPI was up .1% versus estimates of up .2%; the twelve month increase in CPI now stands at up 2.2% [Fed comfort range is 1-2%].
These inflation reports are positive but not as positive as they could have been had the headline numbers been a little more tame.
Bottom line, with every week’s economic news, the evidence grows that the ‘soft’ landing has occurred, that the economy is on the rebound and that inflation is moderating. Short term, we continue to believe that there is little basis for the recent on again, off again high interest rate/high inflation fears. To be sure, interest rates have increased and may rise further; but strong economic growth not inflation pressures are responsible--and that is a positive not a negative. Longer term it is likely that by the time we receive the second quarter summary statistics, the economy is weaker than expected will no longer be a risk.
The Economic Risks:
(1) the economy is weaker than expected.
(2) Fed policy (reading the data correctly).
(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).
(4) protectionism (Free trade is a major positive for world and
(5) 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.).
(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)
Politics
The political environment remains a neutral for Your Money--though we continue to have no idea why.
The Market
Technical
The DJIA remains in an uptrend. Importantly we think, bears couldn’t hold it below the 13400 level for more than a single day’s close, increasing 13400’s significance as a support level. The S&P traded back above 1527; but we think the question of whether it is in an uptrend or a trading range remains to be answered. As we suggested in our Friday blog, we do think that the moon shot is over; though we do so somewhat hesitantly--especially given Thursday and Friday’s price action. Clarity always comes with time and distance; as to the latter, for guidance we will be watching DJIA 13400 on the downside and 13676 (the DJIA closing high) on the upside and on the S&P 1527 on the downside and 1539 (the S&P closing high) on the upside.
Fundamental
DJIA S&P
Current 2007 Year End Fair Value 13000 1500
Fair Value as of
Close this week 13641 1532
Over Valuation vs. 5/31 Close
5% overvalued 13343 1538
10% overvalued 13979 1611
15% overvalued 14614 1684
20% overvalued 15249 1758
Our two operating assumptions are:
(1) while the downside price risk for stocks appears to have subsided, we think that this recent correction took the starch out of the steep upward price momentum. Whether or not we thought the rationale for the down draft had any intellectual basis to it, it still likely had the affect of refocusing investor attention on the mathematics of equity valuation, and
(2) we believe that stocks are somewhat over valued. That leads us the conclusion that stocks may either trade in a range and allow the fundamentals to catch up or possibly drift down toward their fundamental value.
We, of course, can’t rule out the possibility that prices could regain their upside momentum--but from a practical standpoint, if they should, that would simply mean that more of our stocks would be hitting their Sell Price than might otherwise occur.
Our current investment strategy is to
(1) use the present heightened volatility to our advantage by taking profits when prices spike to the upside and buying the stocks of great companies when prices plummet,
(2) continue to focus on improving the quality of our Portfolios by Selling the stocks either of companies that fallen below the minimum standards of our Quality Discipline or that have performed poorly over an extended period.
