The Closing
Statistical Summary
Current Economic Forecast
2007
Real Growth in Gross Domestic Product: 2.0- 2.5%
Inflation: 2 - 2.5 %
Growth in Corporate Profits: 6-8%
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:
Medium Term Uptrend 13293-14860
Long Term Uptrend 11757-23751
Year End Fair Value: 13250
2008 Year End Fair Value: 14250
Standard & Poor’s 500
2007
Current Trend:
Medium Term Uptrend (?) 1462-1595
Long Term Uptrend 1225-2400
Former Long Term Trading Range (?) 750-1527
Year End Fair Value (revised): 1525
2008 Year End Fair Value (revised): 1640
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 15%
High Yield Portfolio 30%
Aggressive Growth Portfolio 17%
Economics
The economy is a positive for Your Money. This week’s economic data provided a welcome reprieve from recent disconcerting statistics: housing numbers were positive but not terribly relevant, the consumer data (in particular, October’s powerful jobs report) improved from recent disappointments, industrial activity also showed signs of a rebound and the macro economic data were gang busters (real third quarter gross domestic product [GDP] was up strongly [indeed for the last four quarters, real GDP growth is up 2.6%--above the high end of the current SSI 2007 estimate {2-2.5%}] and inflation under control). Bottom line: the ‘soft’ landing remains the most likely economic scenario while inflation is under control and hence not an obstacle to the Fed in the exercise of monetary policy.
(1) the only number in housing was weekly mortgage applications which jumped 3.8%; however, the increase was largely a function of refinancing activity [reminder: secondary indicator],
(2) the consumer data, save the consumer confidence index which is a secondary indicator, was generally upbeat:
(a) the International Council of Shopping Centers reported weekly sales of major retailers up .1% and up 2.5% on a year over year basis. However, Redbook Research reported month to date retail chain store sales fell .3% versus the same period in September but up 1.9% versus the comparable timeframe in 2006,
(b) October consumer income rose .4% in line with expectations,
http://kudlowsmoneypolitics.blogspot.com/2007/11/bullish-indicator.html
(c) October consumer spending increased .3% versus expectations of +.4%,
(d) weekly jobless claims fell 4,000 versus expectations of a decline of 3,000; even more positive, October nonfarm payrolls rose by 166,000 versus expectations of an increase of 80,000 [the unemployment rate remained at 4.7%]--I still can’t get to a recession scenario when everyone has a job [and an income],
(e) finally, the Conference Board’s October index of consumer confidence was reported at 95.6 versus expectations of a reading of 99.4 and 99.8 recorded in September. While long term a decline in consumer confidence is not a promising indication for consumer spending, it is important to note that historically to be a harbinger of recession, the confidence numbers have to decline 20-25%. Hence, October’s reading is mildly disappointing but not an indication of catastrophe.
(2) industrial statistics pointed to a rebound in business activity though there was also some negative news:
(a) September construction spending rose .3% versus expectations of a decline of .4%--the strength coming from commercial structures,
(b) September factory orders also surprised to the upside--increasing .2% versus expectations of a .5% decrease,
(c) the Institute for Supply Management released its October manufacturing index reading at 50.9 versus expectations of 52.0 and 52.0 recorded in September--clearly a disappointment; but remember anything over 50.0 reflects economic expansion,
(d) lastly another secondary indicator, the October Chicago purchasing managers’ index reading came in at 49.7 [anything below 50 marks a contraction] versus expectations of 53.0 and 54.2 recorded in September--not encouraging but of much less significance than any of the above.
(4) the macro economic data was very upbeat:
(a) third quarter real gross domestic product [GDP] rose 3.9% versus expectations of up 3.4% and 3.8% in the second quarter; the year over year increase stands at 2.6%. This latter number means that unless fourth quarter GDP growth falls off a cliff, our 2007 full year economic growth forecast will be right on target--the ‘soft’ landing scenario is very much in tact,
(b) in the same report, the core personal consumption expenditure index [ex food and energy] rose 1.8% versus expectations of up 2.0%, leaving it within the Fed’s inflation target of 1-2%.
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
Both the domestic and international political environments are negatives for Your Money.
The Democrat’s 2008 budget (again, you may agree with the social policy, but this is not good for Your Money):
http://www.heritage.org/Research/Budget/bg2081.cfm
The military situation in
The Market
Technical
The DJIA is in an up trend defined by the approximate boundaries of 13293 and 14860. The S&P is in an up trend defined by the boundaries of 1462 and 1595; unfortunately, no sooner had I commented about last week’s positive S&P performance (remember it sold below 1527, then quickly rebounded), that it once again failed to hold above 1527 (closing this week at 1509). It keeps the old trading range (750-1527) in play.
Fundamental
The DJIA (13595) finished this week about 3% over valued (13187), the S&P (1509) slightly under valued (1519).
A couple of observations:
(1) last week I mentioned the split personality of the Market (hate financials, housing, consumer discretionary; love oil, materials, industrial, technology) and then in Thursday’s Subscriber Alert, I said that it looked like investors were starting to whack their favorites. Clearly, any additional narrowing in the breadth of the Market is not positive.
(2) that said, it makes no sense to me that the malaise plaguing the financial stocks [etc] would be spreading at the moment when the economy appears to be recovering [see The Economy above] from its August/September stumble--suggesting that any additional whackage to the non financial, retail, housing stocks may be a buying opportunity,
(3) furthermore, if indeed the very strong GDP and jobless numbers mentioned above are indications of an improving economy, this week’s Fed interest rate cut could be its last as it shifts its focus back to inflation and the growing problem of the weak dollar. That would mean that interest rates may be as low as they are going to go; that means that any interest rate driven stock needs to have something else going for it besides just lower rates; and that means that I need to adjust the upper boundary of the Value Range on some of the low growth utilities with very high yielding stocks in the High Yield Universe. In fact, I have already started that process and on Monday morning the High Yield Portfolio will Sell its holdings of CHG Energy and Laclede Group.
There is a caveat to this ‘declining likelihood of further interest rate cuts’ scenario, of course, and that is if there is another liquidity freeze up. However, even if that were to happen and the Fed cuts interest rates again, an economy where liquidity is a problem is not apt to be one to which utility stocks will respond positively.
Our investment strategy is:
(1) use our Price Disciplines to take advantage of the ongoing heightened volatility to upgrade the quality of our Portfolios by Selling our weakest holdings and to take profits in those stocks rising into their Sell Half Range when prices spike to the upside and buying the stocks of great companies when opportunities present themselves [and the Markets dip],
(2) pay very close attention to the Stop Loss Discipline, occasionally moving the Stop Loss price above its historic level,
(3) insure that our Portfolios can ride out any further turmoil brought on by trouble in the credit markets
DJIA S&P
Current 2007 Year End Fair Value 13250 1525
Fair Value as of
Close this week 13595 1509
Over Valuation vs. 11/30 Close
5% overvalued 13846 1595
10% overvalued 14506 1670
Under Valuation vs. 11/30 Close
5% undervaluation 12528 1443
10%undervaluation 11868 1367
The Portfolios and Buy Lists are up to date.
Company Highlight:
Rayonier Inc is an REIT that owns, leases and manages timberland, sells timber at auction, sells land, manufactures cellulose specialty fibers (cigarette filters, packaging, impact resistant packaging, rayon, pharmaceuticals, cosmetics, detergents and absorbent materials) and manufactures and sells lumber used for residential and industrial construction applications. The company has earned a return on equity between 14-18% over the last five years and grown dividends and profits at a 10%+ rate. Further, it has a relatively low (for an REIT) debt to equity ratio of 42%. Despite its exposure to the housing market, the company’s performance fiber business is expected to make up for any shortfall and provide 6-7% growth over the next 2-3 years. Couple with a 4%+ yield, the stock provides an attractive total rate of return. As a note, earnings will spike up in 2007 as the result of a large land sale.
FFO: 2006 $3.73, 2007 $4.30, 2008 $4.15; DVD: $1.94 YLD 4.3%
http://finance.yahoo.com/q?s=RYN
Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 38 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.
