Wednesday, January 16, 2008

1/16/08

Economics

A look at the Fed and what it should be doing now from a noted economist:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/13/ccschwartz113.xml&CMP=ILC-mostviewedbox

protectionism (Free trade is a major positive for world and US economic growth.) The Democrats of free trade:

http://www.detnews.com/apps/pbcs.dll/article?AID=/20080114/OPINION01/801140313/1008

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Stocks returned to their wayward ways yesterday. The DJIA (12501) took out its November and August lows (12523); the S&P (1380) took out its November low but remains above its August low (1370--in yesterday’s Morning Call, I mistakenly quoted 1406, the November low, as the August low). As you know, I tend not to view a one day break in a support or resistance level as an absolute; but if the DJIA remains below 12523 several days or it plunges again, the break I think will be confirmed.

Which would clearly not be great news. Of even more concern to me is that the DJIA uptrend line off of its 1982 lows is now around 12400 with the S&P around 1265. If the Averages break those levels, from a technical point of view, things will, in my opinion. look pretty grim. The next support levels appear to be around DJIA 10000 and S&P 1059. That doesn’t necessarily mean that prices will go to those levels if the 1982-present trend line is broken; it does mean that between 12400 (1230) and 10000 (1059) investors were never challenged by a meaningful sell off--which would have established a support level where buyers demonstrated that they were willing to purchase stocks in the face of a decline.

On the other hand, we could be in the midst of the flushing action characteristic of some bottoms. The good news is we will likely know shortly.

Fundamental

We received more visibility in the resolution of the sub prime problem yesterday: Citigroup is writing off $18 billion in bad loans, cutting its dividend and accepting an additional $15 billion from outside investors, while Merrill Lynch is writing off another $15 billion and collecting $9 billion more from outsiders. This may not be great news for these two companies; but I would argue that, yesterday’s Market performance notwithstanding, long term it is good news for the economy and the Market as a whole because it reduces uncertainty, it provides further definition to the magnitude of the sub prime problem and indeed it shows a path to its resolution. I would further argue that the Market can’t recover until news events like these (recognition of losses [i.e. mistakes] and steps being taken to correct them) take place.

That said there were a number of high profile Wall Street gurus alleging that Citigroup hasn’t written off all its bad loans, that it should have laid off more people and that it should have cut its dividend by a greater amount. If they are correct and the rest of the financial community is by and large playing Citigroup’s game--meaning that they aren’t owning up to the ultimate magnitude of their mistakes and more corrective action will be necessary, leading to another round of write offs, lay offs and earnings/dividend cuts--then the next six months are not going to be fun for investors.

The sub prime problem aside, the other burr under investors’ saddle is the growing perception that a recession is upon us or already started. As you know I have been resisting altering my forecast to reflect that for what I believe are decent reasons: (1) housing is a small part of total national production, (2) the sub prime problem is a small part of that small part, (3) the consumer has been sluggish but not moribund, (4) business activity has remained fairly strong in part due to a thriving world economy, (5) spreads between low and high quality bonds have narrowed suggesting lenders’ increased willingness to make loans. I may ultimately succumb and lower my forecast; but even if I do, any slowdown in economic growth, for all the reasons I listed above, will likely be minimal. The point here is that when I plug a flat to slightly down economy into our Valuation Model, I simply don’t get radically lower equity prices. (Larry Kudlow looks at the likelihood of recession):

http://kudlowsmoneypolitics.blogspot.com/2008/01/kudlow-101-recession-indicators.html

So I am reminded of the old Wall Street saw that I have repeated numerous times in these notes that the stock market has discounted nine of the last five recessions. While humorous, it speaks to a truth that stocks are not always efficiently priced. Certainly, that is what our Valuation Model is currently saying. Unfortunately, no matter how inefficiently equities may be priced right now, there is nothing to prevent them from becoming more inefficient. (Barry Ridholz thoughts on efficient markets):

http://bigpicture.typepad.com/comments/2008/01/how-rational-ar.html

And so, I continue to use our Stop Loss Discipline in order to keep our losses small--even at the risk of Buying a stock back later at a higher price. Remember your portfolio doesn’t know what it doesn’t own. It only knows if it has a loss; opportunity costs never enter the calculation except in your imagination.

I am also focusing on building the Buy Lists. In fact, a number on new names are being Added today (see below). I want to re-emphasize that in doing so, I am not advocating Buying them today. I am constructing a Buy List--which will change over time if the Market continues to get whacked--that we will use when the turn in the Market comes.

Subscriber Alert

On the Market open this morning, the High Yield Portfolio will Sell a second third of its position in Realty Income Trust (O-$22),

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

The stock price of Nordstrom (JWN-$30) has traded near its Stop Loss Price. Therefore, given the current negative volatility in the retail stocks, the Aggressive Growth Portfolio will Sell one third of its position in JWN at the Market open this morning.

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

The stock prices of Bank of Nova Scotia (BNS-$47) and Chevron (CVX-$88) have traded below the upper boundary of their Buy Value Range. Accordingly, they are being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio already owns BNS, so no further action will be taken. The Dividend Growth Portfolio will not buy shares of Chevron at this time.

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

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

After Selling near its Stop Loss Price (and being Sold by the Dividend Growth Portfolio), the stock price of American International Group (AIG-$58) has rebounded above the lower boundary of its original Buy Value Range. Therefore, it is being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio will not buy AIG at this time.

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

I want to spend a minute more on AIG. I mentioned last Friday that some of the financial stocks appeared to be bottoming and pointed to AIG as an example. It could, of course, get whacked again and once more fall below the lower boundary of its Buy Value Range. But after being Stopped Out of this stock, what if (1) financial stocks are indeed putting in a bottom (and hence will soon recover) and (2) AIG’s economic fundamentals haven’t changed materially (which I don’t believe that they have)? I can either admit that the Valuation Model doesn’t always work with precision and put AIG back on the Buy List or I ignore AIG altogether and risk missing a price recovery in a high quality stock. My decision is to always deal directly with a mistake, try to learn from it if possible but never let pride get in the way of making money.

The stock prices of Rayonier (RYN-$41) and LCA-Vision (LCAV-$16) have fallen below the upper boundary of their respective Buy Value Ranges. Accordingly, RYN and LCAV are being Added to the High Yield Buy List. The High Yield Portfolio already owns LCAV, so no further action will be taken. The High Yield Portfolio will not Buy shares of RYN at this time.

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

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

The stock prices of CME Group (CME-$597) and Landstar (LSTR-$41) have fallen below the upper boundary of their respective Buy Value Ranges. Therefore, these two stocks are being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio already owns CME, so no further action will be taken. The Aggressive Growth Portfolio will not Buy shares of LSTR at this time.

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

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

News on Stocks in Our Portfolios

US Bancorp (High Yield Portfolio) reported fourth quarter earnings per share of $.53 versus expectations of $.59 and $.62 recorded in the comparable 2006 quarter. The bank took two separate charges: (1) $.04 write off on losses from asset backed securities [the sub prime exposure], and (2) $.09 resulting from litigation with American Express.

Asset quality remains high. USB also raised its quarterly dividend per share from $.40 to $.425.

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

More Cash in Investors’ Hands

1 comment:

Ritholtz said...

I dont know about this Ridholz guy, but Ritholtz said something simialr