8/17/07

Economics

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

Here are the factors that we are weighing:

(1) So does a DJIA 340 point decline represent capitulation? And does a reversal and a close almost on the 12855 number indicate the worst is over?

(2) Does the fact that many of the financial stocks, which led this Market down, were up even at yesterday’s Market lows mean that (a) they are leading the Market up and (b) all or most of the bad news in these stocks has been discounted?

(3) Is the Fed’s recent injections of liquidity plus today’s lowering of the discount rate sufficient to normalize transactions in the non-sub prime credit markets?

We are not smart enough to answer any of those questions; but it feels like investors are struggling to find a bottom. In fact two of the conditions we mentioned in yesterday’s blog as preconditions for committing funds may have been addressed (“but to act we need either more information on sub prime loans from financial institutions, a resumption of normalized transactions from the non-sub prime financial sector, assistance from the Fed to effect those normalized transactions or an exhausted Market that has discounted the worst case (capitulation).” our emphasis added) That doesn’t mean that there isn’t more bad economic/financial sector news to come. Nor does it mean that the extreme volatility of recent weeks is going away--indeed with option expiration today, volatility may be off the charts.

A little history on that point:

http://usmarket.seekingalpha.com/article/44874

However, we are impressed enough with what looks like an emotional reversal and the Fed’s action today (lowering the discount rate) that we going to commit a little cash. Therefore, the Dividend Growth Portfolio will buy back a portion of the positions that it Sold in Synovus Financial (SYN-$28), Wilmington Trust (WL-$39) and Bank of Nova Scotia (BNS-$45). Remember that some while back, the Dividend Growth Portfolio Sold one half of its position in each of these stocks--hence each stock is now a one-half position. The new purchases will be approximately one half of the aforementioned sale; in other words, the Dividend Growth Portfolio is raising its position in SYN, WL and BNS from one half to three quarter sized holdings.

The Dividend Growth Portfolio is also Buying a one half position in Federated Investors Inc (FII-$33). The price of FII’s stock had fallen below the upper boundary of its Buy Value Range. Accordingly, it is being added to the Dividend Growth Buy List.

The High Yield Portfolio is buying back one half positions in Duke Realty (DRE-$32) and Mack-Cali Realty Co (CLI-$35). You will recall the High Yield Portfolio Sold all of its positions in both of these stocks.

The High Yield Portfolio is also initiating a one half position in Citigroup (C-$48)--a stock recently Added to the High Yield Buy List.

These are clearly tentative steps attempting to balance what appears to be the Market’s attempt to make a bottom with the uncertainty that still surrounds the credit market problems. But the bottom line is that our Price Discipline simply won’t allow us to ignore the growing number of companies being Added to our Buy Lists. (We will Add more stocks to our Buy Lists later today; but we wanted to get our actions out to you before the Market opens.)

News on Stocks in Our Portfolios

A positive report on Synovus Financial:

http://www.thestreet.com/p/_htmlrmm/rmoney/investing/10374504.html

More Cash in Investors’ Hands

8/16/07

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.).

http://www.realclearpolitics.com/articles/2007/08/dead_men_farming.html

Adding to the near panic in the Market, today’s economic data are dismal:

July housing starts fell 6.1% versus expectations of a decline of 4.5%.

July building permits dropped 2.2% versus expectations of a decrease of .5%

Both terrible, we will have to revise our expectations for 2007 economic growth down.

Weekly jobless claims rose 6,000 versus expectations of an increase of 2,000--this is the second disappointing report in a row.

Politics

Domestic

International War Against Radical Islam

News from Iraq you won’t see or hear in the main stream media:

http://gatewaypundit.blogspot.com/2007/08/al-qaeda-in-iraq-has-lost-75-of.html

The Market

Technical

DJIA 12855 is now the level to watch; and it closed right on that number. In our mind, it is more important for the DJIA to hold 12855 than 13200 because it is the lower boundary of the current medium term up trend. If stock prices continue below 12855 not only does that mean that DJIA is back in a 5-7 year trading range but also all that is really left is lower boundary of the long term up trend (11757). For the S&P, watch 1330, that is the lower boundary of the medium term up trend.

Fundamental

As bad as the technical outlook is right now, fundamentals are still on track. Today’s poor housing numbers notwithstanding, yesterday’s (1) CPI report was in line with expectations--importantly the declining likelihood of an inflation threat gives the Fed more flexibility, (2) July industrial production--up .3% versus expectations of up .2%, (3) July capacity utilization at 81.9 versus expectations of 81.7. Further, a lot of very smart investors have been buying stocks over the last week, Warren Buffett, Carl Icahn, Eddie Lampert and Hank Greenberg to name a few.

The problems are that (1) because the financial institutions that own the lower quality credit instruments are still not being forthcoming about the depth of their problem, investors are increasingly unwilling to risk capital in ANY market segment; and, therefore, there are mounting remain liquidity problems throughout the credit markets, (2) over the last 5-6 years a whole slew of new financial instruments have been developed which were supposed in theory to increase financial leverage but mitigate the associated risk; well that ain’t working and it is causing liquidation of even high quality securities [high quality securities can be over leveraged more easily than low quality securities], (3) the yen is strengthening against the dollar and that is causing the liquidation of the so called ‘yen carry trade’ [borrowing yen cheap {1% interest rate and less} and investing that money elsewhere {if yen is rising versus the dollar, the yen carry trade is losing money on the currency translation}; that means that US stocks and bonds are being sold to pay off those yen loans.

Notice that these problems have less to do with anything fundamentally wrong with the asset value and earnings generating capacity of most of corporate America and much to do with fancy financial instruments and their accompanying investment banking fees. As justifiable as the painful consequences for this risky behavior may be to those who participated, as we noted above, whole sectors of the financial markets that are only tangentially connected to sub prime loans are increasingly unable to fund their normal credit operations (which means that what we all consider typical everyday sources of credit are close to shutting down); in our opinion, if it gets much worse, aggressive Fed action will almost certainly be needed.

Our bottom line is that (1) the US economy is in good shape, (2) Wall Street, on the other hand, is suffering mightily the consequences of inappropriate risk taking--there are even early signs of capitulation, (3) so we need to continue to avoid those financial institutions that participated in the risk taking and to build the list of stocks of those high quality companies that are being unfairly penalized, (4) but to act we need either more information on sub prime loans from financial institutions, a resumption of normalized transactions from the non-sub prime financial sector, assistance from the Fed to effect those normalized transactions or an exhausted Market that has discounted the worst case (capitulation).

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

8/15/07

Economics

The consumer price index for July was reported up .1%, in line with expectations; the core number was up .2%, also in line with expectations. The reported statistics continue to confirm our forecast.

Politics

Domestic

International War Against Radical Islam

In case you missed this in the morning news; the escalating confrontation with Iran:

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/14/AR2007081401662_pf.html

The Market

Technical

The major indices banged through their support levels (DJIA 13200 and S&P500 1449). The question for us is, will they rebound tomorrow? If so, that would constitute another successful challenge of those levels--which we would view as a positive. If not, next stop DJIA 12855 (and the next support below that is 11982) and S&P 1359.

Hang on to your cash. Continue to avoid the financials. Remember our annual income is growing even through this current mess; and our Price Disciplines will save us from large losses and as well as point us to buying opportunities when we return to an orderly Market.

Fundamental

More on the sub prime mess from Barry Ridholtz:

http://bigpicture.typepad.com/comments/2007/08/ratings-agencie.html

News on Stocks in Our Portfolios

A positive write up on General Dynamics (Dividend Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=5687

More Cash in Investors’ Hands

8/14/07

Economics

July retail sales were up .3% versus expectations of a rise of .2%; ex autos, July sales increased .4% in line with expectations; June retail sales were revised from down .4% to down .2%. both the July sales and the June revisions are positive signs that the consumer is not collapsing.

On the other hand, last week’s sales by major retailers as reported by the International Council of Shopping Center fell again, this time by .9%; though sales were up 2.3% on a year over year basis. The brutally hot weather country-wide was blamed for the disappointing results.

June business inventories rose .4% in line with expectations; June business sales declined .3%--a mildly disappointing number.

The producer price index (PPI) rose .6% in July versus expectations of an increase of .2%--oil was mostly to blame. The core PPI was up a modest .1% versus expectations of up .2%. Our inflation forecast remains on target.

The June trade deficit rose $58.1 billion versus expectations of an increase of $61.1 billion--the recent weakness in the dollar the explanation.

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

The announcement by Goldman Sachs that it was investing an additional $3 billion in a quantitative arbitrage fund (‘quant’ funds have also been victims of the sub prime problem) helped stabilize the Market. Great spin, but it has little to do with the current credit problems. It is still NOT time to buy the financials.

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

8/13/07

Economics

protectionism (Free trade is a major positive for world and US economic growth.).

http://www.realclearpolitics.com/articles/2007/08/free_trade_will_past_trump_fut.html

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 latest on earmarks.

http://www.opinionjournal.com/diary/

Politics

Domestic

A look at the Canadian health care system:

http://abducens.townhall.com/

International War Against Radical Islam

The Market

Technical

An interesting (and bullish) article on insider trading:

http://www.nytimes.com/2007/08/12/business/yourmoney/12stra.html

Fundamental

Cramer’s take on the sub prime problem:

http://nymag.com/news/businessfinance/bottomline/35813/

News on Stocks in Our Portfolios

ASTA Funding (Aggressive Growth Portfolio) reported its third fiscal quarter earnings per share of $1.03 versus $.80 reported in the comparable quarter of 2006.

EPS: 2006 $3.23, 2007 $3.57, 2008 $4.00; DVD: $.16 YLD 0.4%

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

More Cash in Investors’ Hands