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 (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 (?) 12516-16584
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 23%
High Yield Portfolio 24%
Aggressive Growth Portfolio 25%
Economics
The economy may be a positive for Your Money. The economic data this week once again contained good news and bad news. The positives were an encouraging employment report, continued strength in factory orders and a great productivity number; the negatives included feeble housing and consumer spending data, a surprisingly puny report on service sector activity and the pathetic attempt (the stimulus package) by our political class to help the economy. At the risk of being labeled as too Pollyannaish, I still think that the data point to a slowing economy not a recession; further, as I noted earlier in the week, even if we are entering a recession, the employment numbers, industrial sector indicators and the corporate profit picture (as of the close of business Friday, the year over year fourth quarter profits of S&P companies, ex the financials, were up about 20%) argue that, if there is a down turn, it will be a mild one.
(1) two secondary stats on the housing market showed a mixed picture: [a] December pending home sales dropped 1.5% versus expectations of a 1% fall and [b] weekly mortgage applications rose 3%, the fourth increase in a row; inside that number, the volume of re-financings dropped while applications for new home sales were up,
(2) data on consumer spending remain weak while employment rebounded: [a] the International Council of Shopping Centers reported weekly sales of major retailers rose 1.7% {reversing last week’s big 1.2% decline} and increased 1.6% on a year over year basis; Redbook Research reported month to date retail chain store sales fell .4% versus the comparable period in December but rose .5% versus the similar timeframe in 2007, [b] in addition, the reports by retailers on their January sales were generally disappointing, [c] finally, weekly jobless claims fell 22,000 versus expectations of a decrease of 28,000,
(3) industry indicators were also mixed: [a] December US factory orders were reported up 2.3% versus expectations of up 2.6% and 1.5% recorded in November, [b] the Institute for Supply Management’s January non-manufacturing index dropped dramatically to 41.9 versus forecasts of 52.5 and December’s reading of 53.9 {a reading under 50.0 signifies economic contraction}-- it should be noted that the formula for computing this index was changed for January’s calculation, [c] fourth quarter productivity was reported up an impressive 1.8% versus expectations of up .7%, [d] while fourth quarter unit labor costs increased 2.1% versus estimates of a rise of 3.6%, and [e] lastly, December wholesale inventories were up .8% versus expectations of up .3%; unfortunately, wholesale sales fell .7%; as disappointing as this appears, it is at least partially an offset to November numbers: wholesale inventories up .8%, wholesale sales up 1.9%.
One side comment on inflation: this week’s productivity and unit labor cost numbers are very positive signs that inflationary pressures are not building. Further, commodity prices notwithstanding, the prices of homes and stocks are both down big and that is not inflationary (I ask a subscriber the other day which environment he thought most inflationary: [a] the price of his home down 10% and the price of gasoline up 20% or [b] visa versa). On the other hand, the price of gold as well as the TIPS spread are flashing inflationary signals, the latter being very bothersome from my point of view. All said, I remain convinced that inflation will not be a problem.
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. Rhetoric aside, the legislative records of the most likely winners of Presidential nominating process of both parties (Clinton, Obama, McCain) on economic issues (taxes, free trade, energy policy, regulatory policy) is depressing.
http://www.usnews.com/blogs/capital-commerce/2008/2/6/wall-street-is-unprepared-for-a-dem-sweep.html
The vote on the fiscal stimulus package:
The Market
Technical
The DJIA (12182) is in a short term trading range defined by 11622 /11900 and 14203--having been unable to hold the boundaries of the 1982-present trend (circa 12500-16500) for a second time. There remains an outside chance that the DJIA could regain the necessary momentum to propel it back into the 1982-present up trend--but it needs to do so quickly and with force. At the moment the 11622/11900 to 14203 trading range is the operative trend. With the S&P (1331) I am watching the boundaries of the up trend off the 1982 low (circa 1269-1722) and the 750-1527 2002-present trading range.
Fundamental
The DJIA (12182) finished this week about 9% below Fair Value (13383) while the S&P closed (1331) around 13.6% undervalued (1540).
This was a pretty lousy week for stocks; so I am not going to try to put too much lipstick on this pig---but I was encouraged by (1) the lack of negative investor response to the poor housing and retail data; now if we can just get more clarity on the sub prime problem, in particular the shoring up of the monoline insurers finances, we could have the worst of the stock price decline behind us and (2) the price action of our holdings; by and large, stocks either in our Portfolio or on our Buy Lists remain well above or hung tough around the lower end of their Buy Value Range. Hopefully that is a sign that good quality companies have found their bottom whatever happens to the rest of the Market.
That said, as I stated in Friday’s Morning Call, that doesn’t mean that we run out and spend all of our cash reserves. While I do believe that the Market has bottomed, I also believe that the Market will test that bottom and I believe that the prior two statements have no better than a 60/40 chance of being correct. Nevertheless that estimate is above what it was last week, so I will continue to put money to work as Market declines. Our investment strategy is 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 reflect 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
(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,
(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
Close this week 12182 1331
Over Valuation vs. 2/29 Close
5% overvalued 13981 1608
10% overvalued 14647 1685
Under Valuation vs. 2/29 Close
5% undervalued 12650 1455
10%undervalued 11984 1378
15%undervalued 11375 1309
The Portfolios and Buy Lists are up to date.
Company Highlight:
Manulife Insurance provides life insurance, pension products, annuities and mutual funds to individuals and groups in the Canada, the US and Asia. The company has earned a 13-15% return on equity and grown dividends and earnings in excess of 20% over the last five years. Fueling future growth is the expansion of its variable annuity and life insurance products into
http://finance.yahoo.com/q?s=MFC
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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