8/26/08

Economics

Chart porn on existing home sales (reported yesterday):

http://bigpicture.typepad.com/comments/2008/08/money-markets-s.html

And new data on commercial real estate loans:

http://econompicdata.blogspot.com/2008/08/commerical-real-estate-charge-offs.html

A not very encouraging look at the leading economic indicators:

http://bigpicture.typepad.com/comments/2008/08/ecris-weekly-le.html

Some scary data on housing prices from one of the hardest hit areas of the country:

http://econompicdata.blogspot.com/2008/08/subprime-saga-merced-ca.html

Inflation watch: the price of eggs 1890 to present:

http://mjperry.blogspot.com/2008/08/over-100-years-food-prices-have-fallen.html

How about the price of natural gas?:

http://mjperry.blogspot.com/2008/08/divine-intervention-drilling-boom.html

Politics

Obama as a reformer:

http://article.nationalreview.com/?q=NmI0NmM2NWZmMmUyNjQ2ODJhYWRjMTJiNWY4YmYyYmI=

Joe Biden’s voting record on economic issues:

http://www.clubforgrowth.org/2008/08/joe_bidens_record_on_economic.php

Domestic

International War Against Radical Islam

The Market

Technical/Fundamental

A graphic on the seasonal trading pattern of stocks August through year end:

http://bespokeinvest.typepad.com/bespoke/2008/08/stock-market-se.html

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Well I guess that there is now no reason for me to be confused about the viability of the July 2008 to present up trend. As you know, yesterday both DJIA (11386) and the S&P (1266) closed down big; and, in my mind, barring some sort of dramatic rally today, I think we erase those trend lines off the charts. Near term that means the visible support levels are the July 2008 intraday low for the DJIA (10809) and the January 2008 intraday low (1267) and the March 2008 intraday low (1256) for the S&P. Bottom line: (1) I still think that the July lows marked the bottom, (2) however at the moment, I am sticking with my conclusion in this weekend’s Closing Bell: until stocks find a support level, our investment strategy will put deploying cash on hold.

Some charts that argue against my conclusion:

http://econompicdata.blogspot.com/2008/08/djia-continued-downside.html

Two other points:

(1) Technical: I review the price action of all the stocks in our Universes each day after the close. As of the end of trading yesterday, the vast majority of the stocks in our Portfolios were holding up much better than the indices. So technically speaking while the pin action is somewhat discouraging, I don’t see reason for worry at this moment. That is not to say that there are no areas of concern. Right now, our weakest performing positions are: Dividend Growth Portfolio--KO, MMM, EMR, XOM; High Yield Portfolio--T, MMLP. BP; Aggressive Growth Portfolio--FTO, COL.

(2) Fundamental: I think that yesterday’s lousy pin action was mostly related to the financial sector. First of all, the credit markets are sick; and it just doesn’t seem likely that we can get a sustained rally until credit spreads improve. http://bigpicture.typepad.com/comments/2008/08/money-markets-s.html Adding to this general malaise is the Fannie Mae/Freddie Mac problem. I stated last week that I was surprised that stocks were rallying in the face of mounting investor anticipation of some sort of cathartic event at Fannie Mae and Freddie Mac; but I concluded that this positive stock performance seemed to be because investors were also anticipating a quick resolution of yet another major chink in the financial system via a government mandated fix of some sort involving a write off of bad loans and/or the write off of the equity holders and/or the break up or dramatic restructuring of the companies. Well, none of that happened over the weekend; and I think that the Market was disappointed adding to the unease over the very high credit spreads. If that analysis is correct, then the Market may stay disappointed until some action is taken and that may be a long way off. Unfortunately, given the political clout that Fannie/Freddie have, they may be able to forestall any tough corrective action, raising a risk that nothing ever happens. And that maybe the biggest risk to my optimism that the July low was the bottom.

Company Highlight

Illinois Tool Works manufactures components and fasteners for the automotive, construction and industrial applications; specialty products; machinery for the automotive, construction, food and beverage and industrial markets in over 45 countries. It has generated a 14-17% return of equity and has grown earnings and dividends at a 12-14% rate over the past 10 years. ITW should continue to deliver these results because:

(1) the company’s aggressive acquisition program (estimated to be $1 billion in 2008),

(2) management’s proven experience at integrating underperforming businesses and transforming them into significant contributors to the company’s financial performance,

(3) ITW’s rapid expansion into foreign markets in particular Asian emerging growth countries,

(4) its relative immunity from economic malaise due to its geographic and product diversification.

Illinois Tool Works is rated A+ by Value Line, has a debt to equity ratio of about 13%, has a significant ongoing stock repurchase program and its stock yields approximately 2.2%.

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

News on Stocks in Our Portfolios

A mixed review of ATT (High Yield Portfolio):

http://www.thestreet.com/p/_htmlrmm/rmoney/telecom/10434511.html

More Cash in Investors’ Hands