Saturday, January 26, 2008

The Closing Bell

The Closing Bell

1/26/08

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 11600-14203

Medium Term Up Trend (?) 12429-16584

Long Term Trading Range 7100-14203

Year End Fair Value: 13250

2008 Year End Fair Value: 14050

Standard & Poor’s 500

2007

Current Trend:

Medium Term Uptrend 1269-1722

Medium Term Trading Range 1062-1527

Long Term Trading Range 750-1527

Year End Fair Value (revised): 1525

2008 Year End Fair Value (revised): 1615

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 27%

High Yield Portfolio 27%

Aggressive Growth Portfolio 33%

Economics

The economy still may be a positive for Your Money. As you know, for some time I have believed that the key to avoiding recession lies with the Fed, specifically the need to grow the monetary base and lower short term interest rates. As you also know, I was very critical of the Fed as well as W last week for what I considered an unconscionable lack of economic leadership. Well, virtually the only economic news this week was the Fed’s 75 basis point cut in the Fed Funds rate and the federal government’s ‘bail out’ plan.

I commented on both in the Morning Calls this week; I won’t be repetitious, but to summarize: (1) while the rate cut was unquestionably a positive, I don’t believe that by itself it will forestall recession. The demand for money has expanded [meaning cash is being hoarded and, therefore, it takes more money to conduct a given level of business]; so the Fed has to begin growing high powered money to prevent a contraction of economic activity [it is a hopeful sign that last week the 3 and 6 month growth rates in the monetary base were both positive; the first time in a long time], and (2) the government’s tax rebates will likely prove ineffective though the provisions for accelerated depreciation for small businesses and the increase in the size of mortgage loans qualifying for government insurance are a positive.

Meanwhile, as I said there was little economic data released this week.

(1) the housing statistics were mixed though the evidence continues to offer scant hope that the decline in activity is bottoming: [a] December existing home sales were down 2.2% versus expectations of a fall of .4%; inventories also decreased {which is a positive but further declines are needed} as did the median home price--the first drop since 1968, [b] and weekly mortgage applications, a secondary indicator, was up 8.3%--the third increase in a row,

(2) data on the consumer was somewhat mixed with employment remaining a bright spot in the economy: [a] the International Council of Shopping Centers reported weekly sales of major retailers rose .7% and increased 1.6% on a year over year basis; Redbook Research reported month to date retail chain store sales fell .2% versus the comparable week in December and up .7% versus the similar timeframe in 2007, [b] weekly jobless claims fell 1,000 versus expectations of an increase of 19,000.

Bottom line: I am sticking with the slowing growth but no recession and moderating inflation forecast.

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 US economic growth.).

(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 environment are negatives for Your Money.

The Market

Technical

The DJIA (12099) is in a short term trading range defined by 11622 (last Tuesday’s and Wednesday’s low)/11900 and 14203 (the 2007 high). On a longer term basis, I am also focused on the 2002 low (circa 7100) and rising trend line off the 1982 low (currently at 12429). With the S&P (1325) I am watching the boundaries of up trend off the 1982 low (circa 1269-1722) and the 750-1527 2002-present trading range. The operative numbers to be watching next week are DJIA 12429 and DJIA 11622/S&P 1269.

Fundamental

The DJIA (12207) finished this week about 8.3% below Fair Value (13316) while the S&P closed (1330) around 13.2% undervalued (1532).

There is not much to add to the blow by blow narrative of this week’s Morning Calls except to reiterate that I believe that the Market likely bottomed this Tuesday/Wednesday. However, my confidence in that conclusion will remain low until DJIA returns to the 1982-present up trend. Till that happens, our investment strategy to:

(a) use any price declines to buy positions in great quality companies whose stocks have either remained within their Valuation Range or have briefly traded below it but quickly rebounded,

(b) insure that my research on the Valuation Model especially for those stocks that have broken below or are near their Stop Loss Price is up to date and the Values generated by the Model reflects the current economic reality,

(c) build our Buy Lists, drawing largely from stocks on our Watch Lists as we review their financials and gain confidence in their Value Range [see (a) and (b) above],

(d) use positive days in the Market to Sell stocks that have traded into that ‘no man’s land’ between the lower boundary of their Buy Value Range and the Stop Loss Price but have been unable to recover into their Buy Value Range,

(e) be mindful that the Market may very well not have bottomed; so our Stop Loss Discipline and a large cash position [see Percentage Cash in Our Portfolios above] remain critical until the DJIA can re-establish an up trend,

(e) on a longer term basis, 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.

DJIA S&P

Current 2008 Year End Fair Value 14050 1615

Fair Value as of 1/31/08 13316 1532

Close this week 12207 1330

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

15%undervaluation 11318 1302

The Portfolios and Buy Lists are up to date.

Company Highlight:

Bucyrus Int’l designs, manufacturers, markets and services draglines, electric shovels and rotary blast hole drills used in surface mining. The company has earned a 15%+ return on equity over the last four years while growing profits per share from $.45 to $3.10 and dividends per share from $.04 to $.20. BUCY should continue to grow as a result of strong world wide demand in particular from China, India and Russia, a recent expansion in capacity, the extension of its product line and on going cost control measures. The company’s debt/equity ratio is higher than I would like; it is the result of an acquisition and is expected to fall dramatically in the next couple of years. Value Line rates BUCY B++; its stock provides a .3% yield.

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

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.

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