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-again)
Real Growth in Gross Domestic Product (GDP): .5-1.5%
Inflation: 1.75-2%
Growth in Corporate Profits: 0-5%
Current Market Forecast
Dow Jones Industrial Average
2008
Current Trend:
Short Term Trading Range 12263(?)-13133
Medium Term Trading Range 11600-14203
Long Term Trading Range 7100-14203
Year End Fair Value (revised): 13650-14050
2009 Year End Fair Value (revised): 14050-14893
Standard & Poor’s 500
2008
Current Trend:
Short Term Trading Range 1325-1439
Long Term Trading Range 750-1527
Long term Up Trend 1317-1797
Year End Fair Value (revised): 1570-1615
2009 Year End Fair Value (revised): 1615-1711
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 13%
High Yield Portfolio 13%
Aggressive Growth Portfolio 12%
Economics
The economy is a neutral for Your Money. Economic data this week was sparse; and what there were didn’t provide much additional clarity to our analysis. The most notable statistics were (1) May retail sales and April business sales, both of which were pleasant surprises, (2) weekly jobless claims which was a disappointment and (3) the May consumer price index which came in a little higher than expected--but that’s a positive in that I believe that the Fed needs to tighten monetary policy to not only fight inflationary impulses but also to lend support for the dollar; and this report provides an additional rationale for it. Bottom line: our forecast remains an economy slowing to a very low rate of growth but with the risk of recession receding; while the risk of inflation rising gathers momentum.
(1) this week’s only housing news was weekly mortgage applications [secondary indicator] which rose 10.9%--the first increase in a number of weeks,
(2) measures of consumer health were pretty dismal: [a] the International Council of Shopping Centers {ICSC} reported weekly sales of major retailers up 1.7% and up 1.8% on a year over year; maintaining its contrary short term pattern versus the ICSC, Redbook Research reported month to date retail chain store sales down 1% versus the comparable period in May but up 2.1% versus the similar time frame in 2007, [b] May retail sales as reported by the Commerce Department jumped 1% versus forecasts of a .5% rise, [c] weekly jobless claims increased 25,000 versus expectations of +13,000, [d] the University of Michigan reported its June preliminary index of consumer sentiment at 56.7 versus estimates of 60.5 and the final May reading of 59.8,
(3) the single data point of business activity reported this week was positive: April business inventories rose .5%, in line with expectations; however, business sales were up 1.4%, pushing the business inventory to sales ratio down to a near record low
(4) macro economic statistics reported little that wasn’t anticipated: [a] the April US trade deficit was up modestly to $60.9 billion versus expectations of $60.0 billion and $56.5 billion recorded in March; this despite record oil prices, [b] the May Federal budget deficit came in at $165.9 billion versus estimates of $160 billion; this number reflects the tax rebates, [c] the May consumer price index {CPI} rose .6% versus estimates of up .5%, while the core CPI increased .2%, in line with expectations, [d] finally, the Fed released its periodic Beige Book {a once every six weeks anecdotal look at the economy}; its bottom line: the economy is weak in particular some segments (housing, autos} and there are rising inflationary pressures from certain sources {oil and food}. No new news here.
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, with the international situation improving somewhat; while domestically, it just keeps getting worse.
More evidence of success in
http://www.commentarymagazine.com/blogs/index.php/rubin/11481
The Market-Disciplined Investing
Technical
As you know, this week the DJIA has really been cruel to part time technicians like me--faking me out early in the week by recovering from last Friday’s plunge below its April 2008 low (12263), holding for a day, selling off big on Wednesday, making a feinted attempt to recover on Thursday, then rebounding strongly of Friday (12307) ending once again above the April 2008 low (12263). The S&P (1360) never broke its April 2008 support level (1325).
With Friday’s DJIA performance, the temptation is to conclude that the lower boundary of a trading range for both Averages is now their respective April 2008 support levels (DJIA 12263-13133; S&P 1325-1439). That could indeed be the case; however, after this week’s volatility, I am going to be a bit more reticent before pronouncing (for sure this time) the April 2008 low as the support level for both indices current trading range.
One thing I will be watching (aside from the April 2008 support levels) is the very short term but easily identifiable descending trend line from the May 2008 high of both indices (circa DJIA 12379, S&P 1386). Penetrating those down trend lines will re- enforce the short term trading ranges delineated above; not doing so would suggest that stocks could be gathering some downside momentum.
And you thought I was confused:
http://bigpicture.typepad.com/comments/2008/06/what-do-higher.html
Fundamental-A Dividend Growth Investment Strategy
The DJIA (12307) finished this week about 9.1% below Fair Value (13550) while the S&P closed (1360) around 12.4% undervalued (1553).
While it seems reasonable to assume that if stocks are as undervalued as our Valuation Model suggests, we should see a recovery sooner or later. And we certainly could see stocks at higher prices than at present. However, there are two fundamental factors bothering me that could continue to hold back a return to Fair Value; and they relate specifically to the future real rate of return on capital (Your Money): inflation and the likelihood of a change in the direction of
The former, in my opinion, is the lesser of the two problems. Yes, we will probably see a higher rate of reported inflation near term--the current trend in oil and other commodity prices almost guarantee it. However, vice chairman of the Fed Donald Kohn’s statement this week notwithstanding (see Thursday’s Morning Call), I think Bernanke realizes the risks that inflation poses to the longer term health of the economy and will lead the Fed to a tighter monetary policy (which should quell inflation) between now and year end. The risk of course is that he won’t; but for the moment I am prepared to give him the benefit of the doubt.
It is the political risk that is truly worrisome--the risk that higher taxes on capital (think letting W’s tax cuts expire, think windfall profits tax), more regulatory burdens on corporate assets (think cap and trade) and the restraint of free trade (think Columbia, South Korea) pose to the ability of corporate America to stay competitive globally, earn a reasonable return on Your Money by historical standards and return it to you. As you know I have already factored a lower long term return on capital into our Valuation Model. But the more I read and listen to the Presidential candidates define their positions, the more I worry that I may not have been aggressive enough. For the moment I am sticking by my original adjustments; but warning that they may be too optimistic. The investment point here is that, in my opinion, stock valuations are bucking a head wind that is likely to only get worse as November approaches. While stocks may be under valued even on the assumption of a sub par rate of return on capital, they may struggle to return to even that Fair Value calculation as other investors adjust their own expectations.
Our investment strategy is to:
(a) use any price declines to buy positions in great quality companies whose stocks are trading within their
(b) 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 [i] there remains an outside chance that the Market may not have bottomed and [ii] that notwithstanding, a number of our Holdings have traded into their Sell Half Range, so our Sell Disciplines remains critical,
(d) on a longer term basis, recognize that there are 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 13850 1593
Fair Value as of
Close this week 12307 1360
Over Valuation vs.6/30 Close
5% overvalued 14228 1636
10% overvalued 14905 1714
Under Valuation vs. 6/30 Close
5% undervalued 12872 1480
10%undervalued 12195 1402
15%undervalued 11518 1324
The Portfolios and Buy Lists are up to date.
Company Highlight:
Nokia is the world’s largest manufacturer of cellular phones as well as a leading producer of infrastructure equipment and systems for wireless and fixed networks. NOK has grown profits and dividends at a 20%+ pace over the past 10 years earning in excess of a 30% return on equity. This trend should continue as a result of:
(1) new product introductions,
(2) continued expansion into emerging markets,
(3) cost synergies from its recent merger with Siemen’s equipment business,
(4) continued problems at Motorola, a key rival.
Nokia is rated A+ by Value Line, has a mere 1% debt to equity ratio, and its stock yields 2.5%. In addition, the company has impressive cash flow which should allow it to increase dividends, buy back stock and make additional acquisitions.
http://finance.yahoo.com/q?s=NOK
More mixed analysis on NOK versus the new smart phone:
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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