The Disciplined Dividend Investor: 9/18/08

So much for the July 2008 lows and the hope of a rolling bottom. Both indices busted through their July intraday lows and remain firmly within the October 2007 to present downtrend (DJIA 10659-12579; S&P 1154-1375) and the shorter term May to August down trend (DJIA 9985-11296; S&P 1112-1263). Barring a big rally tomorrow, we need to be focused on lower support levels: the DJIA 2006 double bottom (10663--note its proximity to the lower boundary of the October 2007 to present down trend) and the S&P 2004 bottom (1062).

Two other factors to note: (1) the volume yesterday was lower than the prior two days, suggesting that the panicky puking out of stocks may have more to go, (2) the volatility index spiked to near 35, suggesting the opposite of (1) (see below).

I said in yesterday’s Morning Call that I thought that (1) given the Market’s performance on Tuesday, the likelihood that the worst of this Market cycle was behind us and (2) the reason being that the Fed’s action in the AIG crisis cleared the decks of the last of the major problems in the financial system. Wrong and wrong. If there is anything redeemable from that Morning Call is that (1) I felt uneasy enough with Market’s pin action that our Portfolios held off committing any cash and (2) the sales that we made last week which I thought were going to look really stupid now look like sheer genius [our Portfolios cash positions are now: Dividend Growth Portfolio 27%, High Yield Portfolio 29%, Aggressive Growth Portfolio 26%].

Yesterday’s Market really began to have the feel of the panics of 1970, 1974, 1987 and 2002. CNBC aired one depressing analysis after another. Worries about the collapse of the financial system are pervasive. Bad news is bad news and good news is bad news. The price of gold is spiking; Treasury bills are spiking--the 30 day cash management bills sold at a yield of .1%; the volatility index is spiking--now over 30; but be aware that it hit 55+ in the 2002 plunge.

A chart of volatility index:

http://bespokeinvest.typepad.com/bespoke/2008/09/vix-spikes-to-3.html

To be fair and balanced there are some positive things happening: (1) Morgan Stanley is reviewing merger alternative with several partners. (2) Washington Mutual has hired Goldman Sachs to find a buyer. (3) yesterday the SEC changed the naked short sale rule, which as you know from past comments, I think was a necessity. Here’s the new rule: [ http://www.sec.gov/news/press/2008/2008-204.htm]. (4) The Fed is making another massive injection of liquidity into financial system. [http://www.breitbart.com/article.php?id=080918083207.wh5hl7iv&show_article=1], (5) Voices are growing louder for the suspension or reform of the ‘mark to market’ rule. More : [http://www.thestreet.com/p/_htmlrmm/rmoney/investing/10437857.html]. (6) In addition, talks are gathering steam for the revival of the Resolution Trust.

Cramer on what can go right:

http://www.thestreet.com/p/_htmlrmd/rmoney/jimcramerblog/10437993.html

Traderfeed sees some technical positives:

http://traderfeed.blogspot.com/2008/09/quick-note-on-weak-market.html

Granted, I have no idea if any or all these will take place. But necessity is the mother of invention; and just like we saw no way out of an AIG bankruptcy on Tuesday, it took a day for a solution to arrive--the point being that there are a lot of very smart people working on solving the problems we are facing.

To be sure, I am not saying everything is fine. Indeed, our Sell Discipline is telling us to Sell stocks at the open this morning. Given what looks to be a positive opening, I am going to use it to lighten up on a few holdings.

Remember a couple of things: (1) many of these sales are to preserve profits, (2) sooner or later, the philosophy of that ‘I’d rather sell and buy back 5% higher than not sell and lose another 10-20%’ is by definition going to be the wrong move; I know that I have been saying that for the last 1500 DJIA points, but one day unless I get blind lucky, it will happen. If that is unacceptable to you, don’t sell. (3) our Price Disciplines will continue to protect us on the downside, (4) we have 25%+ in cash and the stocks we own raise their dividends [the cash return to you] on a consistent basis [meaning your cash flow is going up every year no matter what the Market does]; and even more important, the companies that they represent have the financial wherewithal to continue to pay those dividends, barring the end of the world, (5) the world is not coming to an end; but if it is, you have bigger concerns than what stock prices do today.

Subscriber Alert

Each of these sales will reduce the indicated holding to stipulated size:

Dividend Growth Portfolio: (1) to one half of normal: Manulife Financial (MFC-$32), Ingersoll Rand (IR-$32), Automatic Data Processing (ADP-$42); (2) to a three quarter of normal: Emerson Electric (EMR-$41), T Rowe Price (TROW-$53), VF Corp (VFC-$53). In addition, Northern Trust (NTRS-$70) is being Added to the Dividend Growth Buy List but no shares will be purchased at this time.

High Yield Portfolio: (1) to one half of normal: Bank of Nova Scotia (BNS-$40), (2) to a one quarter position: Plains All American Pipeline (PPA-$36) and Penn Virginia Resource Ptrs (PVR-$18). In addition, WP Carey & Co (WPC-$26) and Reynolds American (RAI-$47) are being Added to the High Yield Buy List but no shares will be purchased at this time.

Aggressive Growth Portfolio: (1) to a one half of normal position: SEI Investments (SEIC-$21); (2) to a three quarter of normal: Franklin Resources (BEN-$89), Avon Products (AVP-$40), Stryker (SYK-$62), Sun Hydraulics (SNHY-$29) and Accenture (ACN-$36). In addition, CME Group (CME-$321) is being Added to the Aggressive Growth Buy List but no shares will be purchased at this time.

Company Highlight

Philip Morris International is a recent spin off from Altria. It manufacturers, sells and distributes a wide range of tobacco products in markets outside the US. Operating profits from this segment of the old Altria business grew at an 11% annual rate. PM expects earnings to grow at a 10-11% rate in the future; given its commitment to payout 65% of profits, the dividend growth should match growth of earnings. The company is expected to earn a return on equity in the 50-60% range. Management believes earnings will advance based on:

(1) strengthening its brand through product innovations such as smoother taste, new tobacco blends and innovative packaging which provides pricing power,

(2) acquisitions [8 in the last three years] in particular into Asian markets [China, India, Bangladesh and Vietnam] where it had little exposure,

PM is rated B++ by Value Line, has a debt to equity ratio of about 30%, is in the midst of a $13 billion stock buy back program and its stock yields 3.5%.

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

9/08

News on Stocks in Our Portfolios

Positive comments on Peabody Energy (Aggressive Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=8611

More Cash in Investors’ Hands