9/14/07

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.). The transportation bill:

http://www.captainsquartersblog.com/mt/archives/013024.php

A couple of very positive pieces of news yesterday:

(1) in the last week, approximately $8 billion in commercial paper was not able to be refinanced--which compares with approximately $70 billion a week in CP that couldn’t be rolled over during the last three weeks. This follows the news Wednesday that American Express had refinanced approximately $2 billion in CP with little trouble, and

(2) the weekly data released by both the Fed and the European Central Bank indicated that each had injected substantial funds into their respective monetary supplies.

If you have been following our rantings about the need for liquidity injections by the Fed to forestall a recession, then it is easy to deduce how important we think that these developments are. Item (2) above directly addresses our concern; item (1) above is anecdotal evidence that either (2) is working and/or that markets are adjusting and isolating the sub prime problem. We clearly need to await further data to be sure that these developments aren’t just flukes; but taken together the AXP refinancing, the dramatic increase in this week’s CP roll over rate and the central bank injection of liquidity are fairly significant signals that the freeze up in non sub prime business financial transactions is thawing.

This, of course, means that we have to completely re-write the Economics section of this week’s The Closing Bell in which we strongly condemn the Fed for its lack of response to the liquidity problems in the commercial paper market and conclude that if the Fed didn’t take action by the end of next week, the chances of the US economy avoiding a recession were, in our opinion, no better than 50/50--but the alternative (not re-writing it) is so much worse.

If we are correct this won’t mean that the economy isn’t slowing more than we originally expected; but it will mean that there is a decent probability of avoiding a recession.

One final point: long time subscribers will recall that at the beginning of Bernanke’s reign we constantly complained about the ineffective way the Fed was communicating with the Street. Well, here we go again: the credit markets have been in vapor lock, the Fed takes steps to correct it but for no apparent reason remains mute; certainly, once the data is out everyone will know--but that is beside the point. That point being that a word from the Fed that it recognizes the problem and is taking action just might prevent credit market participants who are under psychological as well as financial stress from making potentially harmful decisions that they otherwise wouldn’t make.

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

Here is an opposing view on what the Fed should be doing with regards to the credit crunch:

http://www.poorandstupid.com/2007_09_09_chronArchive.asp#4536475116948792401

And here is one on what happens to stock prices after the Fed cuts the Fed Funds rate (must read):

http://www.hussman.net/rsi/fedfundscut.htm

News on Stocks in Our Portfolios

Staples’ (Aggressive Growth Portfolio) Board of Directors will propose amending the company’s charter removing the provision that requires a 2/3 majority versus a simple majority to approve a significant corporate transaction; in other words, the company would be making itself easier to acquire.

EPS: 2006 $1.26, 2007 $1.47, 2008 $1.70; DVD: $.29 YLD 1.6%

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

Microsoft (Aggressive Growth Portfolio) has raised its quarterly dividend per share from $.10 to $.11.

EPS: 2006 $1.20, 2007 $1.42, 2008 $1.70; DVD: $.39 YLD 1.4%

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

UPS (Dividend Growth Portfolio) has been granted authority to expand operations in Japan.

EPS: 2006 $3.86, 2007 $4.15, 2008 $4.50; DVD: $1.68 YLD 2.2%

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

A positive article on the outlook for gold:

http://www.seekingalpha.com/article/47072-is-gold-ready-to-break-new-cycle-highs

More Cash in Investors’ Hands

9/13/07

Economics

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

http://article.nationalreview.com/?q=ODNhNTAyOTQyZjk5NjIwYTZjYWI0Yjk1YzIyNDhkMTY=

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.clubforgrowth.org/2007/09/update_on_senate_pork_debate.php

http://www.realclearpolitics.com/articles/2007/09/americas_absurd_farm_subsidies.html

Politics

Domestic

International War Against Radical Islam

That Israeli air raid over Syria was apparently to attack a nuclear installation paid for by Iran and supplied by North Korea:

http://www.ynetnews.com/articles/0,7340,L-3448829,00.html

The Market

Technical

Technical thoughts:

http://www.bloggingstocks.com/2007/09/12/marketwatch-technican-sets-sandp-breakout-levels/

Fundamental

In an environment where the US economy appears to be hovering between a ‘soft’ landing and a recession and the global economy continues to grow, large international consumer staple companies will likely be investor favorites. We remind you that we have two quality giants that fit this description on our Dividend Growth Buy List:

Johnson & Johnson ($62)

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). This company has maintained 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. We believe that its strong, well diversified product line will continue to grow rapidly, supplemented by acquisitions.

EPS: 2006 $3.78, 2007 $4.10, 2008 $4.45; DVD: $1.62 YLD 2.7%

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

Proctor & Gamble ($67)

Proctor & Gamble makes detergents, toiletries, foods, paper and industrial products which include Tide, Swifter, Cascade, Febreze, Dash, Cheer, Bounce, Pantene, Olay, Head & Shoulders, Herbal Essences, Secret, Prilosec, Sure, Always, Tampax, Pampers, Luvs, Charmin, Bounty, Crest, Iams, Actonel, Pringles and Folgers. The company has an outstanding return on equity ranging between 35-40% over the last fifteen years; though it has utilized more leverage than we like to see-42%. PG has grown its earnings and dividends 10-11% consistently over the last ten years. We believe that it can continue to grow sales, earnings and dividends by adding new products through development or acquisition and leveraging its fixed costs through higher unit sales.

EPS: 2006 $2.64, 2007 $3.02, 2008 $3.45; DVD: $1.41 YLD 2.0%

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

We would also include the caveat that the Dividend Growth Portfolio already owns the stocks of both of the aforementioned companies AND has approximately 10% of its assets in cash. We would not go into next week (FOMC meeting, earnings reports from major financial institutions, triple witching) without at least that much cash.

Finally, as the probability of the risk that the economy is weaker than expected rises, we are stepping up the pace of our normal Quality Discipline review process in particular focusing on companies that are largely domestic durable goods producers. One company that stands at the top of our list of worrisome Holdings and whose stock price has continued decline after it traded below the lower boundary of its Buy Value Range is Polaris (PII-$45). While its stock price is fractionally (less than a point) above its Stop Loss Price, we are again electing discretion over valor; and, accordingly, the Dividend Growth Portfolio is Selling its PII position this morning on the Market open.

Cramer’s take on the credit market freeze up:

http://www.thestreet.com/p/_htmlrmd/rmoney/jimcramerblog/10379337.html

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

9/12/07

Economics

protectionism (Free trade is a major positive for world and US economic growth.). Hopefully this is good news:

http://thehill.com/business--lobby/rangel-levin-walk-fine-line-on-peru-trade-deal-2007-09-07.html

a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.). Yesterday, OPEC announced an increase in production of 500,000 barrels a day primarily at the insistence of the Saudis--and the price of oil rose suggesting that (1) investors’ recognize that historically the Saudis consistently lie about the real level of their production, (2) and even if they do raise production, it might not matter in light of either the terrorists’ attacks on pipelines in Mexico and Iran or the continued strength in the global economy or both. For now our oil stocks are looking good; however, they are at the upper end of their Value Range.

Exxon Mobil (Sell Half-$93.50); ConocoPhillips (Sell Half-$86); BP (Sell Half-$82)

Politics

Domestic

International War Against Radical Islam

The Market

Technical

We were pleasantly surprised by the Market action yesterday especially since we assumed that it would likely sell off if Bernanke didn’t provide some hope of easier monetary policy in his speech yesterday (which he didn’t). We are not sure whether the strong up day was a delayed technical bounce off of last Friday’s 249 point decline or an indication that stocks had successfully completed a second test of the recent August 16^th low (DJIA 12860). Clearly we will have the answer to that soon. Watch DJIA 12978 for support and DJIA 13520 as a point of resistance.

Cramer’s take on yesterday’s action:

http://www.thestreet.com/p/_htmlrmd/rmoney/jimcramerblog/10379056.html

Fundamental

A bit of good news yesterday which may have contributed to the rally: American Express [AXP] was able to refinance $2 billion in commercial paper with virtually no problem. [this obviously addresses one of our biggest concerns: the rising inability of US businesses to finance working capital which could lead to lower sales and employment]. This was the first positive data point we have had from the commercial paper [CP] market in the last month; and we needed one because there is another approximate $300 billion in CP that needs to be refinanced over the two weeks. At the moment, we aren’t sure if AXP’s successful transaction is the result a gradually improving adjustment of the Markets to the credit freeze up, the Fed pumping money into the system, just a fluke or some combination of them all. We will obviously know more with time, but right now count this a plus.

Here is a good explanation of what is going on in the commercial paper market. We were surprised to discover that sub prime problem [financial institutions are not being forthcoming on the volume of sub prime debt they own and how they are pricing it] was playing a greater role in the CP liquidity problem than we had originally thought. However, it doesn’t change the solution [easier short term money supply policy from the Fed].

http://www.thestreet.com/p/_htmlrmd/rmoney/bonds/10379010.html

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

9/11/07

Economics

Politics

Domestic

International War Against Radical Islam

The Market

Technical

With the Market down 249 points on Friday, we had expected stock prices to demonstrate some strength yesterday, especially after two Fed bank officials suggested that recession was more of a risk than inflation (meaning a rate cut of perhaps 50 basis points was coming next Tuesday). It may be that investors are waiting for a speech by Bernanke scheduled for this morning before taking any action. If nothing comes of Bernanke’s comments, there may be some more downside to come--at the very least a probe to below 13000. At the moment, patience is a virtue and cash isn’t bad.

Fundamental

News on Stocks in Our Portfolios

A positive write up on Brown Forman (Dividend Growth Portfolio):

http://www.seekingalpha.com/article/46976-why-i-m-long-brown-foreman

And another on Johnson & Johnson (Dividend Growth Portfolio):

http://www.seekingalpha.com/article/46913-citigroup-finds-johnson-johnson-undervalued-considering-catalysts-ahead

More Cash in Investors’ Hands

9/10/07

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.). More on earmarks:

http://thehill.com/leading-the-news/chambers-set-to-do-battle-on-earmarks-2007-09-07.html

Another view that the Fed needs to act and soon (must read):

http://author.nationalreview.com/latest/?q=MjE0OA==

Some statistics on those US citizens without medical insurance:

http://www.poorandstupid.com/2007_09_02_chronArchive.asp#3705934459919115485

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

News on Stocks in Our Portfolios

A positive write up on Abbott Labs (Dividend Growth Portfolio):

http://www.zacks.com/newsroom/commentary/index_pdf.php?id=5866

(click on the pdf link below the headline)

A positive outlook for coal stocks (Peabody Energy-Aggressive Growth Portfolio):

http://www.thestreet.com/p/_htmlrmw/rmoney/technicalanalysis/10378494.html

Alcon (Aggressive Growth Portfolio) is buying back an additional 2 million shares.

EPS: 2006 $4.35, 2007 $5.25, 2008 $5.90; DVD: $2.06 YLD 1.5%

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

More Cash in Investors’ Hands