Economics
Recent Data
The International Council of Shopping Centers reported weekly sales of major retailers fell 1.6% but rose 1.3% on a year over year basis; Redbook Research reported month to date retail chain store sales increase 1.4% versus the comparable period in 2007. These numbers are portraying a weak consumer.
The Federal Open Market Committee met yesterday and left the Fed Funds rate unchanged. In the accompanying statement, it nodded toward economic weakness but left inflation as its primary risk. As you know, I have been concerned about inflation but have also acknowledged that this risk is subsiding rapidly. So I am not sure this emphasis on inflation is the right move. On the other hand, the Fed has pumped about $130 billion of liquidity into the financial system in the last two day and that doesn’t count reserves being injected by foreign central banks--and that is a positive.
Here’s the statement:
http://online.wsj.com/mdcapp/public/page/2_3024-info_fedparse_shell.html
This morning: (1) weekly mortgage applications rose 2.4% largely on the back of lower interest rates, (2) August housing starts fell 6.2% versus expectations of a drop of 1.6%, and (3) August building permits declined 8.9%. Bottom line: no improvement.
Other
Ten little known facts about US trade:
http://www.chamberpost.com/2008/09/top-ten-overloo.html
More optimistic words in a negative environment:
http://www.clubforgrowth.org/2008/09/wise_words_from_brian_wesbury_1.php
Politics
Domestic
Some levity in current situation might help. This is hilarious:
http://www.clubforgrowth.org/2008/09/saturday_night_live.php
Immigration in an Obama versus McCain presidency--from the best Democratic blogger I know:
http://www.slate.com/id/2200209/#ilwmccain
Here is what our elected representatives (the House) have given us as an energy policy:
http://www.cqpolitics.com/wmspage.cfm?docID=news-000002952290
And here is the roll call vote:
http://clerk.house.gov/evs/2008/roll599.xml
International War Against Radical Islam
The Market
Technical/ Fundamental
Not very positive:
The latest chart on credit spreads:
http://bespokeinvest.typepad.com/bespoke/2008/09/high-yield-spre.html
A rally off a Fibonacci support level?
http://bespokeinvest.typepad.com/bespoke/2008/09/big-picture-poi.html
Update on the percentage of stocks above their 50 day moving average:
http://bespokeinvest.typepad.com/bespoke/2008/09/percentage-of-1.html
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On Tuesday the DJIA assaulted its July 2008 low (11809) and bounced, closing above that level. The S&P which had closed Monday below its July 2008 low (1198) also declined further in yesterday’s trading but like the DJIA finished the day above the July low. The good news is that the July lows have held and they did it on decent volume; but yesterday’s stock price advance just wasn’t characteristic of the bounce following an emotional sell off.
The likely reason is that American International Group dominated the headlines all day and its financial future remained unresolved as of the close. I don’t think it a stretch to rationalize that stocks really couldn’t move strongly to the upside in the absence of a solution to this dilemma.
Of course, after the close the Fed announced that it is going to make bridge loan to American International Group ala Fannie/Freddie; that is, it will put up $85 billion to provide capital (and secure the bond ratings) of AIG in exchange for 80% of the company. This, I think, ought to help lift the weight that prevented a stout bounce back in the Averages yesterday.
So now that we have it, what does it mean?
(1) It appears to be a culmination of a major re-ordering of our financial system; and I am not sure there are that many problems left with which to deal. After all, three of the top five investment banks are no longer. It doesn’t seem likely that Goldman and Morgan Stanley are in danger. Plus Fannie/Freddie which were disasters waiting to happen are gone. What’s left? Washington Mutual, Wachovia, maybe Citigroup. They might fail, but their problems are well known and they are much less leveraged than the investment banks. I don’t see their demise, were they to happen, as earthshaking as anything that we have been through this week.
(2) It raises the probability that the July 2008 lows marked the bottom of this cycle.
(3) I would have thought that it also increases the likelihood that our sale of shares at the open yesterday will turn out to have been wrong. However, as this is being written, stock futures are down. Frankly, I am more than a little surprised by this for the reasons outlined above. Indeed last night I would have bet anything that today we would see the spike in stock prices that would mark the bounce off the bottom. So what do I know? That said, I am making a list of the positions that our Portfolios will start re-building plus Adding some new stocks to our Buy Lists should stocks turnaround.
One final note: there are a lot of positive aspects to this Fed bridge loan to AIG. For one, it quite likely prevented a freeze up in the global financial system. Secondly, it keeps moral hazard (risk takers suffer the consequences for accepting an inappropriate level of risk) in the equation by wiping out most of the shareholder equity. However, as I said yesterday, I am bothered by the lethal combination of mark to market accounting coupled with the naked short sale rule. In AIG’s case, it had plenty of assets to support its liabilities; however, its liquidity was negatively impacted persistently by (1) the necessity of putting up extra capital because of the daily mark down of asset values and (2) the inability to raise that capital because the short sellers were destroying its credibility. I don’t have an answer to this problem; but our financial system is not going to regain long term stability till we solve it.
Subscriber Alert
Here is the list of potential Buy candidates (note that most are add-on shares to replace those that were sold generally at much higher prices to protect profits):
The Dividend Growth Portfolio: Home Depot (HD-$28), MDU Resources (MDU-$29), UGI (UGI-$27), Praxair (PX-$86), Emerson Electric (EMR-$43), General Dynamics (GD-$85), Linear Technologies (LLTC-$30), Automatic Data Processing (ADP-$44), T Rowe Price (TROW-$58), ConocoPhillips (COP-$72), ExxonMobil (XOM-$76), Chevron (CVX-$82) and Marathon Oil (MRO-$42). These will be 100-200 share additions taking these holdings to 2/3 to ¾ of normal size. Wells Fargo (WFC-$35) and Nucor (NUE-$47) are being Added to the Dividend Growth Buy List.
The High Yield Portfolio: Kimco Realty Trust (KIM-$38), Rayonier (RYN-$47), Realty Income Trust (O-$26), BP (BP-$52), Dow Chemical (DOW-$35), Gannett (GCI-$17), Universal Corp (UVV-$51). As with Dividend Growth Portfolio these are all 100-200 share additions. Worthington Industries (WOR-$17) is being Added to the High Yield Buy List.
The Aggressive Growth Portfolio: Franklin Resources (BEN-$95), XTO Energy (XTO-$50), Lowe’s (LOW-$24), Peabody Energy (BTU-$50), Accenture (ACN-$37), Donaldson (DCI-$42), Sun Hydraulics (SNHY-$30),l, Amphenol (APH-$45), Staples (SPLS-$25). Harley Davidson (HOG-$40) is being Added to the Aggressive Growth Buy List.
The Dividend Growth Buy List
Company Close 9/16
Aflac $58.44 $55-63
Automatic Data Processing 44.43 41-47
Colgate Palmolive 78.50 64-74
Federated Investors 33.06 30-35
Home Depot 27.58 27-31
Hormel Foods Corp 36.60 31-36
Johnson & Johnson 69.80 63-71
Manulife Financial 33.50 31-36
McDonald’s 64.69 59-68
Paychex 32.58 31-36
T Rowe Price 58.29 55-63
UGI Corp 27.12 24-28
News on Stocks in Our Portfolios
Positive comments on Abbott Labs (Dividend Growth Portfolio):
http://www.zacks.com/newsroom/commentary/index_pdf.php?id=8606
Positive comments on 3M (Dividend Growth Portfolio):
More Cash in Investors’ Hands
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