1/31/08

I have an early morning meeting, so this being sent at 7:30am; hence any news reported after that time is not going to be reflected in these comments.

1/31/08

Economics

Regarding yesterday’s sub par GDP report, the history of subsequent GDP growth following a below 1% quarterly performance:

http://bespokeinvest.typepad.com/bespoke/2008/01/l.html

One last comment on the lunacy of the tax rebate:

http://www.ft.com/cms/s/0/28b464a2-cf50-11dc-854a-0000779fd2ac.html

A look at those GDP figures released yesterday:

http://mjperry.blogspot.com/2008/01/year-toyear-real-gdp-growth-was-25.html

Yesterday the Fed lowered both the Fed Funds and the discount rate by 50 basis points--that needed to be done for all the reasons we have talked about; score that a positive. To summarize the accompanying press release: the Fed (1) is worried about growth, (2) is not worried about inflation, and (3) is prepared to lower rates again if necessary.

A couple of observations:

(1) in the last two weeks the Fed has began to demonstrate that it understands the problem,

(2) however its statement notwithstanding, the problem is not economic growth [or the lack thereof]; it has been and is the lack of liquidity in the banking system which can lead to poor economic growth. That problem was spawned by the sub prime crisis but was exacerbated by an inappropriate Fed monetary policy: [a] an inverted yield curve [the cost of money was higher than the price of money] and [b] virtually no growth in the monetary base. The former has now been addressed; but the latter [at least through the latest set of data available] has not and still needs to be. [I quiver with anticipation.]

(3) no better proof that the credit market not the economy is the causal factor is the Market action yesterday--despite the Fed rate move and a subsequent 176 point jump in the DJIA, when Fitch announced that it was reviewing the ratings of one of the monoline insurers [the insurers of the securitized mortgage instruments], investors clocked that Average 200 points--investors are worried about the freezing up of liquidity in the banking system,

(4) the resolution of the financial viability of monoline insurers is likely to be the last major hurdle to overcome before investors re-gain confidence in the financial system. Although this doesn’t sound good:

http://bigpicture.typepad.com/comments/2008/01/financial-secto.html

To be sure the pessimists point at this as not the last but rather just one in a continuing series of problems [credit card debt, auto loans being the next crisis areas] that will ultimately cripple the economy. I think that there is enough strength in the economy to make that scenario a low probability.

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

Subscriber Alert

After the close, it was reported that Eli Lilly is in talks with FDA officials concerning a settlement (fine) estimated at $1 billion for having encouraged doctors to prescribe Zyprexa, an antipsychotic drug, for uses not approved by the FDA. When I bought this stock, the primary factor driving the Valuation Model for LLY was the huge increase in Zyprexa revenues projected to climb though 2011 accompanied by an improving pipeline of new drugs. I have known that the company and the FDA have been in talks about Zyprexa’s marketing since 2004; but not much seemed to be happening, so I, in retrospect quite wrongly, assumed nothing would happen. Clearly a $1 billion penalty for Zyprexa materially alters that equation. As a result, the Dividend Growth Portfolio is Selling one half of its LLY position on the Market open this morning. It will average out of the remainder.

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

The stock prices of Alcon Labs (ACL-$139), Avon Products (AVP-$34), and Sun Hydraulics (SNHY-$23) have fallen below the upper boundary of their Buy Value Ranges. Accordingly, these stocks are being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio already owns ACL, so no further shares will be purchased. The Aggressive Growth Portfolio will not Buy shares of AVP or SNHY at this time.

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

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

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

News on Stocks in Our Portfolios

McGraw Hill (Dividend Growth Portfolio) raised its quarterly dividend per share from $.205 to $.22.

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

Altria (Dividend Growth Portfolio) reported fourth quarter earnings per share of $1.03 versus $1.40 recorded in the comparable 2006 quarter; it should be noted that the $1.40 is not adjusted for the spin off of Kraft. The company is expected to announce the spin off of Phillip Morris’s international operations soon; but no details have thus far been announced. The company did say that after the spin off in 2008, its new domestic company operations will buy back $7.5 billion in stock and its international company will buy back $13 billion in stock.

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

United Parcel Service (Dividend Growth Portfolio) reported its fourth quarter operating earnings per share of $1.13 versus $1.04 reported in 2006’s fourth quarter.

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

More Cash in Investors’ Hands

Aflac is buying back 30 million shares.