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 (revised)
Real Growth in Gross Domestic Product (GDP): 2.0-2.5%
Inflation: 1.75-2%
Growth in Corporate Profits: 3-5%
Current Market Forecast
Dow Jones Industrial Average
2007
Current Trend:
Medium Term Trading Range 12523-14203
Long Term Uptrend 11757-23751
Year End Fair Value: 13250
2008 Year End Fair Value: 14050
Standard & Poor’s 500
2007
Current Trend:
Long Term Trading Range 750-1527
Long Term Uptrend 1225-2400
Year End Fair Value (revised): 1525
2008 Year End Fair Value (revised): 1615
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 15%
High Yield Portfolio 26%
Aggressive Growth Portfolio 16%
Economics
The economy is a positive for Your Money though it continues to become less of one. This week we received a little good news in housing, the industrial sector data continued to provide support for economic expansion but the consumer was the weak spot. Of particular (worrisome) note was the poor nonfarm payroll number.
While this pattern of data is not atypical of an economy that is decelerating but not declining, the current unnecessarily tight Fed policy (slow/no growth in the monetary base and an inverted yield curve) serves to accelerate any downward momentum in economic activity. Bottom line: if the Fed doesn’t ease significantly and soon, a recession seems certain.
(1) housing data offered some positive news for the first time in a long time: [a] while weekly mortgage applications {secondary indicator} fell 12%, [b] November existing home sales {remember that existing home sales account for 90% of all home sales} were up .4% versus expectations of a flat number; also inventories fell {a necessity for an improved housing market} 3.6% though they are still above year ago levels,
(2) on the other hand, statistics measuring the consumer did not make for good reading [a] the International Council of Shopping Centers reported weekly sales of major retailers fell .2% but rose 2.3% on a year over year basis while Redbook Research reported month to date retail chain store sales dropped .7% versus the comparable period in November but increased 1.4% versus the similar timeframe in 2006 and [b] weekly jobless claims rose 10,000 versus expectations of decline of 2,000; while December nonfarm payrolls grew by only 18,000 versus estimates of an increase of 70,000; and the unemployment rate rose to 5%. I have long maintained that recessions don’t occur when everyone has a job {and an income}; so these are a very troubling numbers.
(3) finally, the industrial sector remains stable though not robust: [a] the December Institute for Supply Management’s {ISM} manufacturing index {manufacturing accounts for 20% of economic output} was reported at 47.7 versus estimates of 50.5 and 50.8 recorded in November {anything under 50 signifies contraction}, [b] however, the ISM’s December nonmanufacturing index {80% of economic output} came in at 57.1 versus expectations of 58.0 and 58.9 reported in November, [c] November construction spending rose .1% versus estimates of a decline of .5%, and [d] November factory orders were up by .9% versus expectations of an increase of 1.5% and a decline of 4.7% in October.
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, though this has a positive sound to it--George Will on Charlie Rangel on taxes:
http://jewishworldreview.com/cols/will010308.php3
On the other hand, two economic populists won the
The Market
Technical
The DJIA (12800) is in a trading range defined by 12523 (the August intra day low) and 14203; the S&P (1411) similarly is in a long term trading range of 750-1527 and a shorter term trading range (roughly comparable to the current DJIA trading range) of 1370-1573.
The Market action this week suggests that stock prices are headed for a challenge of the August/November lows. Should this occur, technically speaking, it should be viewed with concern. Historically, triple bottoms are a rarity; more generally, the third time proves a charm, which is to say, stock prices fall through the double bottom support level and go on to make lower lows. This isn’t a prediction; but it does make me more hesitant to commit funds as prices approach the August/November lows.
Fundamental
The DJIA (12800) finished this week about than 3.8% below Fair Value (13316) while the S&P closed (1411) almost 8% undervalued (1532).
I know that I am repeating myself; but the issues that are front and center in my mind this week are:
(1) the continued tight Fed monetary policy at a time when the economy is struggling to overcome the depressing effects of the lack of liquidity in bank lending and the commercial paper market. I am less concerned about a slower economic growth rate or even a recession, since our Valuation Model tends to give less weight to cyclical fluctuations in earnings. What worries me is a loss of investor confidence in the Fed which I think would raise the risk premium investors price into equities--that would have an impact on our Valuation Model.
(2) the seeming revival of economic populist sentiment among even conservative voters as reflected in Mike Huckabee’s
That said, stock prices are clearly starting to reflect these concerns; so it is important not to let this week’s Market performance get us too ‘bear-ed up’. As always, it is our Price Disciplines that bring reason and structure to the decision making process at a highly emotional juncture in the Market.
Our investment strategy remains:
(a) continue to use our Sell Price Discipline to take profits in those stocks moving into their
(b) recognize that there are both technical and fundamental factors that argue for caution and therefore to proceed carefully with our Buying, keeping a larger than normal cash position in anticipation of valuation and strategy changes that could result from a potentially new domestic economic agenda,
(c) continue to pay very close attention to the Stop Loss Discipline, occasionally moving the Stop Loss price above its historic level.
DJIA S&P
Current 2008 Year End Fair Value 14050 1615
Fair Value as of
Close this week 12800 1411
Over Valuation vs. 1/31 Close
5% overvalued 13981 1608
10% overvalued 14647 1685
Under Valuation vs. 1/31 Close
5% undervaluation 12650 1455
10%undervaluation 11984 1378
The Portfolios and Buy Lists are up to date.
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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.
