Economics
Recent Data
August industrial production fell 1.1% versus expectations of a .3% decline and a .1% increase in July; capacity utilization for the same period came in at 78.7 versus estimates of 79.5 and 79.9 recorded in July.
The September Empire State Manufacturing survey index reading was -7.4 versus forecasts of +.5%; looking at the internals of this index, there was a bright spot in new orders which were 4.5 versus expectations of -2.2.
Clearly, these are disappointing data from what has been the strongest sector of the economy.
The August consumer price index was reported down .1% (yeah, it was oil); core CPI was up .2%. Both were in line with estimates.
Other
Some positive notes on what looks like a negative day:
http://mjperry.blogspot.com/2008/09/resilience-of-american-finance.html
http://mjperry.blogspot.com/2008/09/factual-evidence-shows-significant.html
http://mjperry.blogspot.com/2008/09/when-it-comes-to-economy-we-have-become.html
Politics
Domestic
International War Against Radical Islam
The problem with
http://www.slate.com/id/2200134/#
The Market
Technical/ Fundamental
Technical thoughts on the market:
http://traderfeed.blogspot.com/2008/09/few-thoughts-about-current-stock-market.html
Charts on the S&P and the financial sector:
http://bespokeinvest.typepad.com/bespoke/2008/09/sp-500-and-the.html
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Yesterday the DJIA (10917) closed above its July 2008 intraday low (10809) while the S&P (1192) finished below its similar level (1198). The next support level for the S&P lies in the lower boundaries of the October 2007 to present downtrend (1152) and the May to August downtrend (1115).
In yesterday’s Morning Call, I held out the hope that by the close we would have a clearer technical picture than we had at the start of the day. I don’t feel like we do. On the positive side, (1) the DJIA held above its July 2008 low, (2) the volatility index spiked to above 30 [which is usually a sign of a bottom], (3) volume was typical of a bottom, (4) historically [4 out of 5 times] when stocks experience a day like yesterday, it marked a bottom and (5) despite the problems of Lehman Bros, Merrill Lynch and AIG and a big drop in oil prices, only a couple of our financial and oil stocks performed poorly. The bad news is that (1) the S&P didn’t hold its July 2008 low, (2) there was no price reversal and (3) most disconcerting, the stock price of a number of our Portfolios’ holdings pushed through their pre-set Stop Loss Prices.
What to do? If it was clear that a bottom had been made, our Portfolios would be buying today. If was clear that the July lows had been broken and further downside appeared ahead, our Portfolios would be Selling all or a portion of those holdings mentioned above whose stock prices fell below their Stop Loss. Unfortunately (at least for me) it is not enough of either. Plus today we get (1) Goldman Sachs earnings report and of more interest the narrative about its financial condition that will accompany, (2) the Fed meeting and (3) hopefully additional clarity in AIG’s crisis.
My dilemma is that if yesterday was the ‘flush’ and today is the ‘bounce’, any sale would be stupid. Of course, if yesterday was just the beginning of the ‘flush’ any sale will look like genius. As always, I am erring on the side of preserving principal. So this morning at the Market open:
Subscriber Alert
The Dividend Growth Portfolio will Sell (1) sufficient shares in T Rowe Price (TROW-$54) to reduce this position to a three quarter size holding (2) sufficient shares of Chevron (CVX-$80) to reduce this position to a one half size holding (3) it entire position in McGraw Hill. On MHP, it seems to me that ultimately S&P (which McGraw Hill owns) and Moody’s are going to be held responsible for their role in this financial crisis. They will almost surely survive; but I have no idea how much pain the shareholders will have to endure. This is a potential problem we don’t need at this time.
The High Yield Portfolio will Sell sufficient shares in Realty Income Trust (O-$24) and Universal Corp (UVV-$50) to reduce these positions to one half size positions.
The Aggressive Growth Portfolio will Sell sufficient shares in Charles Schwab (SCHW-$23) and Staples (SPLS-$24) to reduce these positions to one half size holdings. It will sell sufficient shares of Medtronic (MDT-$53) to reduce this position to a three quarter position.
I made the statement last week and 600 points ago that I would rather sell today with the objective to preserve capital and look stupid if the Market rallies afterward than not sell and lose money. Ditto today.
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As a final comment with much longer term implications than anything said above, to ultimately correct the problems that led to this mess that we are in, something needs to be done about (1) the rules on short selling, particularly the naked short sell [selling a stock that can’t be delivered to the buyer], (2) the unbelievably, irresponsible high leverage ratios investment banks were/are able to assume and (3) the current application of the ‘mark to market’ accounting treatment of highly illiquid securities.
A look at the mark to market problem:
http://www.thestreet.com/p/_htmlrmd/rmoney/marketcommentary/10437271.html
A look at the risk management (high leverage) problem:
http://www.capitalspectator.com/archives/2008/09/nirvana_for_nib.html
Company Highlight
McDonald’s operates or licenses more than 31,000 fast food restaurants world wise. Over the past ten years, the company has grown profits at a 9% pace but dividends at 20% annualized while earning a 25%+ return on equity. Looking forward, the pace of advance of dividends should slow somewhat although earnings growth is expected to rise as a result of:
(1) despite the recent rise in commodity prices, the company’s purchasing power and menu diversity should fuel margin expansion,
(2) global growth not only in the number of restaurants but also in same store sales,
(3) introduction of new higher margin products [coffee, chicken],
(4) shorter term, the trade down from casual dining to less expensive fast food.
MCD is rated A++ by Value Line, carries a 42% debt to equity ratio, has an ongoing stock repurchase program and its stock yields 2.4%.
http://finance.yahoo.com/q?s=MCD
9/08
News on Stocks in Our Portfolios
A positive write up on McDonald’s (Dividend Growth Portfolio):
http://www.zacks.com/rank/zcommentary/?id=8586
More Cash in Investors’ Hands
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