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 11797-14189
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. There was a dearth of data this week; and what there was, wasn’t so good.
(1) much of the bad news was in housing. May housing starts fell 2.1% and weekly mortgage applications dropped 3.4%. These are not promising numbers and clearly argue against the notion that we have put forth that the housing market is churning but not declining. The bulls [somewhat desperately] point out that [a] as disappointing as housing starts were, they came in better than expected {-3.1%} and [b] ignoring the contradiction, the decline was actually a positive because it means builders have lowered production in order to work off inventories. Forgetting these rather weak arguments, we are not going to alter our view after only a single week’s worth of data.
The only redeeming feature in this week’s construction data was that May building permits were up 3% versus expectations of an increase of .5%. While the permits for residential construction were weak [in line with the above numbers], nonresidential permits were strong--and that fits with our oft repeated thesis that strength in other sectors of the economy will mitigate the softness in housing.
(2) further, the weekly retail sales statistics didn’t have us feeling all warm and fuzzy. Weekly sales of major retailers reported by the International Council of Shopping Centers fell .1% and the month to date retail chain store sales reported by Redbook Research declined .8% though both organizations reported year over year increases of 1.9%.
(3) nor did the employment number as weekly jobless claims rose 10,000 versus expectations of an increase of 3,000.
(4) however, the business sector received a standout number though granted it was from a secondary indicator--the Philadelphia Fed reported its June manufacturing index at 18 versus expectations of 7. This is a very strong number and is more evidence of a recovery in the industrial activity.
(5) finally, in another of the few non-disappointing data points, the May index of leading indicators was up .3%, in line with expectations.
Bottom line, a bit of wind has been taken out of the sails of those (like us) that thought that the worse of housing and that the maximum degree of economic ‘softness’ was behind us. That is not to say that it is not; as we said above, one week’s data is not going to prompt us to change our forecast. However, the weak housing starts, employment and retail sales numbers do nothing to improve our conviction of a stronger economy in the second half of 2007.
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
Investors continue to view the political environment as a neutral to Your Money--or are they? This week witnessed non stop attempts by our elected representatives to wreak havoc on the economy, culminating on Friday with news that they were considering changing the taxation of the income of private equity firm’s general partners. The Markets didn’t like it (along with several other factors); so is the worsening political economics in the
It is too soon to say; but if you haven’t seen the polls lately, you should pay attention. Despite the miserable approval ratings for Congress, voters nonetheless say that they believe that Democrats can run the government better than Republicans. And if you haven’t seen the polls, have you taken a look at the Democrat’s near term legislative agenda? It will give you a quick read of their objectives (higher taxes, higher spending, more regulation, more protectionism). As always we make no judgments on the social value of the Democrat’s political agenda, but the economics of their policies in our opinion would be negative for capital formation and the growth of corporate earnings; and those are among primary determinants of the pricing of Your Money. Yes, W can and likely will veto those measures. But if the electorate truly prefers the levers of power in the hands of the Democrats, it is not long till they will have the opportunity to put them solidly in Democratic hands; and it is even less time before the consequences of that starts getting discounted in equity prices.
And can anyone say ‘
The Market
Technical
The DJIA is in an up trend currently defined by a channel with the approximate boundaries of 11797 and 14189. However, on Friday, it did fail to hold the 13400 support level--which we have been watching closely along with resistance at 13676 on the upside for near term indications of direction and momentum. The S&P remains unable to stay above 1527 (2000 high) which suggests to us that the two brief breaks above 1527 were anomalies and therefore leaves this index in its seven year trading range of 750-1527. If the DJIA can’t soon trade back above 13400 and if the S&P’s non-confirmation of the DJIA’s uptrend continues, we think that confirms that the moon shot is over and that any further progress on the upside is likely to be a struggle.
Our own internal technical indicator--the ratio of Buy rated stocks to the Sell Half rated stocks--has deteriorated further in the last two weeks. It is still not in the red zone but neither does it portend Market strength.
Fundamental
As the table below indicates, both the DJIA and the S&P are slightly overvalued as calculated by our Valuation Model. Given another week in which stocks could not regain upward price momentum, fundamentals seem to be reasserting themselves and that suggests either a period of side ways price action while the fundamentals catch up or a drift downward in price to Fair Value.
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.
DJIA S&P
Current 2007 Year End Fair Value 13000 1500
Fair Value as of
Close this week 13360 1503
Over Valuation vs. 6/30 Close
5% overvalued 13387 1544
10% overvalued 14025 1617
15% overvalued 14662 1690
20% overvalued 15300 1764
