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 (?) 13324-14917
Long Term Uptrend 12100-25564
Year End Fair Value: 13250
2008 Year End Fair Value: 14250
Standard & Poor’s 500
2007
Current Trend:
Medium Term Uptrend (?) 1465-1598
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. There were not many economic statistics released this week; but what there were, were generally positive. I am heartened by this second week of improving data which lend credence to the ‘soft’ landing, moderating inflation scenario; they include strong employment and worker compensation numbers along with a consistently upbeat picture of business activity.
(1) once again weekly mortgage applications [secondary indicator] was the only housing related data released: that number declined 1.6% from the prior week,
(2) consumer data was mixed, though third quarter worker compensation was very positive:
(a) the International Council of Shopping Centers [ICSC] reported weekly retail sales of major retailers rose 1.0%--a big bounce back from the prior two weeks; year over year, sales were up 2.4%. On the other hand, Redbook Research reported month to date retail chain store sales fell .4% [the third decline in a row] versus the similar period in October though they were up 2.1% versus the comparable timeframe in 2006. In addition, Thursday retailers reported generally disappointing October sales [up 1.6% according to ICSC]--in fact, the worst October in 12 years. However, it was the warmest October in over 100 years and that had to impact apparel sales,
(b) weekly jobless claims dropped 13,000 versus expectations of a 2,000 decline; this positive performance comes in spite of a rise of 3,000 jobless claims resulting from the
(c) the University of Michigan’s preliminary November index of consumer sentiment was reported at 75.0 versus expectations of a 79.5 reading and the final October number of 80.9--not a very promising indication of consumer attitudes; plus I stated in a prior post that historically to be an accurate predictor of recession, sentiment indicators had to drop 20-25%--look at the chart in the link below, not very encouraging,
http://bigpicture.typepad.com/comments/2007/11/consumer-sentim.html
(d) finally, but most importantly, third quarter worker compensation rose at 4.7% annual rate [more jobs and higher pay does not make for a recession].
(3) business activity statistics were very strong:
(a) the October Institute for Supply Management’s [ISM] non manufacturing index came in at 55.8 versus expectations of 54.1 and 54.8 recorded in September. This is a positive in itself but even more so in light of the disappointing ISM manufacturing index reported last week [remember that the non manufacturing sector of the economy is 80% of total output],
(b) preliminary third quarter productivity increased 4.9% on an annualized basis versus expectations of up 3% and +2.2% reported in the second quarter [fairly impressive]; even better, juxtaposed against the 4.7% rise in worker compensation mentioned above, that means that third quarter unit labor costs fell .2% [annualized] versus expectations of a rise of 1.1%--a positive for inflation,
(c) last, wholesale inventories jumped .8% versus expectations that they would be up.3%; however, wholesale sales rose an even stronger 1.3%, driving down the inventory to sales ratio to 1.1, a record low [note: historically, inventories almost always spike up ahead of a recession].
(4) the only one macro economic statistic released this week was the September trade deficit which came in at $56.5 billion versus expectations of $59.0 billion and $57.6 billion reported in August. On its own, a positive; but it will also have the impact of raising the growth rate of third quarter gross domestic product even higher than the preliminary report of +3.9%.
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 a negative for Your Money.
This week’s domestic highlights include a trifecta:
(1) Congress over riding W’s veto of the pork laden Water Resource Bill which is 2 times the amount either house had originally proposed,
http://www.washingtonpost.com/wp-dyn/content/article/2007/11/08/AR2007110801110.html
http://www.ibdeditorials.com/IBDArticles.aspx?id=279417686718145
(2) the equally pork infused Farm Bill which is due on W’s desk shortly.
(3) the House passed a ‘patch’ to the alternative minimum tax [a tax cut] but failed to offset it sufficiently with either other taxes or spending reductions, i.e. the ‘pay-go’ tax pledge is dead.
Discouraging signs that our elected representatives have chosen to ignore fiscal responsibility.
The international news this week: unrest in
The Market
Technical
Technically, in my opinion, it looks like the Market has rolled over. The DJIA has now closed two days (and about 2%) below the lower boundary of the uptrend that had been in place since July. As I said in Friday morning’s Blog, I am inclined to give the DJIA another day or two to rally before declaring the uptrend dead (now defined by the approximate boundaries of 13324 and 14917), but a 2% drop below a support level is pretty good sign that the breach is for real. Next stop, test the August lows (12500--12800)
The S&P closed below the lower boundary of the 1465--1598 uptrend. As you know, since it fell below 1527 a week or so ago, my prejudice has been to assume that the 750-1527 trading range was dominant. However, as long as the S&P stayed above 1465, that assumption remained questionable. That uncertainty now seems to be eliminated; although as with the DJIA, I will give it a couple of days to rebound. Barring that, next stop, test August lows (1372--1407).
Fundamental
The DJIA (13042) finished this week, slightly undervalued (13187), the S&P (1453) almost 4% undervalued (1519).
So is now the time to Buy? First, a couple of thoughts:
(1) I suggested in an earlier post, that the oil, gold and dollar trade which has been dominating headlines and contributing to investor nervousness, is, in my opinion, losing touch with the underlying economic fundamentals. That is not say that short term oil can’t go to $150 a barrel, gold to $1000 an ounce and the dollar to zero nor am I saying that there aren’t some long term factors in place that would result in higher oil and gold prices; but it looks to me like their short term price spikes are being driven by speculators not investors; and that means at some point their price trends will be reversed which should be of some psychological relief to equities. When that happens, I don’t know; but I don’t think it makes sense to continue to bet these trends. (The sole caveat to this is if there is a blow up in the
(2) investor concerns notwithstanding, recession just doesn’t seem to be the most likely economic scenario. As I have noted, in the last two weeks we have seen a reversal in the sluggish data that has worried me off and on over the last couple of months. The global economy is strong; and save the housing sector, the
(3) sub prime is the wild card. While I don’t believe that this problem will ultimately deal a crippling blow to the economy, the assumptions behind that judgment can certainly be questioned. However, whatever the case, until we know the depth and breadth of this problem, I am unsure whether investor psychology will turn around. That and stocks’ poor technical performance have kept me from being an aggressive buyer.
(4) that said, with all the whackage going on, you still must be wondering, what is happening with our Buy Price Discipline? I mentioned in a prior post that there are a number of stocks, particularly in the financial and retail sectors, that have come down hard, many hitting their
Nevertheless, there are lots of stocks that now qualify for Addition to our Buy Lists; so this weekend I am building a pre-Buy List list. This will tell you which companies that our Valuation Model is pointing to as values, some of whose long term earnings prospects don’t seem to have been damaged and some that I am still working on; in other words, which stocks COULD go on our Buy Lists. My point here is that our Valuation Model is working and generating Buy candidates but for (research) time and Market psychology reasons, I have been hesitant to Add them to the Buy Lists--BUT given the volatility of the Market, that could change in an instance.
The pre-Buy List list will be in Monday morning’s Blog.
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,
(4) build our Buy List and be ready to act.
DJIA S&P
Current 2007 Year End Fair Value 13250 1525
Fair Value as of
Close this week 13042 1453
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:
Plains All American Pipeline LP is a publicly traded master limited partnership which engages in the transportation, storage, terminalling and marketing of crude oil, refined products and liquefied petroleum gas in the US and Canada. The partnership has grown its cash flow, profits and distributions at a 6-8% rate over the last 5 years while earning a 10%+ return on partners capital. Management intends to maintain that record through both internal growth and acquisitions. The combination of a 6%+ yield plus a distribution stream growing at 6%+ offers an attractive alternative to fixed income securities for those investors that can assume the added risk.
FFO: 2006 $4.11, 2007 $4.70, 2008 $4.65; DVD: $3.29 YLD 6.1%
http://finance.yahoo.com/q?s=PAA
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.
