Economics
Recent Data
The International Council of Shopping Centers reported weekly sales of major retailer down 1.0% versus the prior week but up 1.3% on a year over year basis; Redbook Research reported month to date retail chain store sales up 1.2% versus the comparable period in 2007. These numbers were negatively impacted by the effects of Hurricane Ike.
Other
Next year social security recipients will likely receive the largest COLA since 1982:
http://www.seniorjournal.com/NEWS/SocialSecurity/2008/20080915-LargestSocialSecurityCOLA.htm
How Fannie/Freddie contributed to the meltdown. The author lays the whole problem at the feet of the Democrats which I think is wrong. The SEC (Republican) bears its share of the blame:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0
Another take (this is a bit long but worth the read):
http://www.techcentralstation.com/
Here is a 1999 article (short) on Fannie Mae’s new program of lending to less creditworthy individuals:
http://mjperry.blogspot.com/2008/09/flashback-to-1999-origins-of-credit.html
What went wrong with the investment banking model:
http://econompicdata.blogspot.com/2008/09/downfall-of-investment-banking-model.html
A closer look at those that don’t have health insurance:
Politics
Domestic
McCain’s judgment:
http://online.wsj.com/article/john_fund_on_the_trail.html
International War Against Radical Islam
The Market
Technical
Yesterday the indices (DJIA 10853; S&P 1188) closed in the exact same position as they did last Monday--the DJIA remained above its July 2008 low (10809) while the S&P fell below it (1198). I don’t need to remind you what followed. There were two differences between yesterday and last Monday: (1) volume was anemic yesterday versus much higher levels last week [a positive], (2) the volatility index which was already high last week was even higher at the close yesterday [a negative].
In the end, the determining factor is not the technical performance of the Averages but rather that of the individual stocks that our Portfolios own. Once again, while our holdings suffered whackage like everyone else, few stocks actually look technically weak or traded below their Stop Loss.
With the S&P breaking below its July 2008 low, I am uncomfortable enough to hold any new buying in abeyance and once again eyeing closely our stocks’ Stop Loss prices. However, the Buffett/ Flowers news (see below) has resulted (as of the time this is being written) in a spike up in the futures’ prices suggesting that the S&P could recover above its July low. For the moment, our Portfolios will do nothing; but given the current news dominated Market, that could change in an instant. Stay tuned.
Fundamental
A couple of things happened yesterday that bear mentioning:
(1) Paulson and Bernanke testified before the Senate Finance Committee and it served as a testament that when it comes to Kabuki theater, the Japanese are amateurs. These guys spent the weekend together; they had to have talked about/discussed/argued over every major issue that was talked about/discussed/argued over in hearings. Yet Paulson in the public presentation provided a paucity of details as to how the plan would work; and afterwards Dodd & Co, rightfully so, observed exactly that. Stocks were not happy.
Which raises the question, what in the world were they doing last weekend? Which suggests that either [1] they have a pretty good idea of what the structure of the plan is going to look like and all the huffing and puffing at the end of the hearing was largely posturing for the voters for the sake of the Senators appearing to be the grand protectors of the tax payer’s dollars or [2a] they totally disagree about how this problem is going to get solved and are willing to play ‘chicken’ in the public arena and risk wrecking the system and therefore [2b] these guys are all morons and my thesis of ‘necessity is the mother of invention’ is a giant wet dream.
Whatever the reason, the danger in this game is that while our governing class postures, another bank [think Washington Mutual] could explode and panic ensue. The Market was suggesting so yesterday.
Bottom line: it appears that my faith that what needs to be fixed, will be fixed is going to be severely tested in the next couple of days. Once again, I have both a Sell list and a Buy list at the ready.
Cramer’s take on Paulson’s plan:
(2) Warren Buffett announced that he was investing $5 billion in Goldman Sachs; and J.C. Flowers [a private equity firm] was approved by regulators to buy a small Missouri bank now in bankruptcy--what is more important is that this regulatory approval means that Flowers can buy other [defunct or near defunct] banks. Importantly, both Buffett and Flowers are value buyers. These actions are a decent sign that professional investors who make a living discovering value believe that there are discernable values in the financial sector. Isn’t that good news?
It is; but it raises the question, if values are there, how does this square with the need for the Paulson plan? The answer is because Goldman and the Missouri bank are one step removed from the conditions that the Paulson’s plan is attempting to create; that is, Goldman has either drastically written down or sold most or all of its questionable assets and the Missouri bank by virtue of its bankruptcy has made the valuation of its questionable assets moot [presumably Flowers is valuing them a zero]. In other words, because there is no valuation issue, Buffett and Flowers were willing to invest.
One aspect [placing a value then buying distressed assets] of Paulson’s plan attempts to address this valuation issue. Granted it could just as easily be done by the abolition of the mark to market rule--both deal with the valuation issue. But we need one or the other to stop the downward spiral in valuation of nonmarketable, nonliquid assets which keep forcing firms to raise additional capital.
The difference in the mark to market solution and Paulson’s plan is that Paulson’s plan goes one step further. Even if today the mark to market rule were suspended, many financial institutions would still have a liquidity problem, that is, banks may have sufficient capital to avoid insolvency but they have no liquidity [money with which to conduct normal business]. Paulson’s plan cures that by allowing the government to buy those nonmarketable illiquid assets, which provides liquidity as well as opening the door for new investment [ala Buffett or selling shares to the public].
In addition, it allows the government once it owns the depressed mortgages to renegotiate the terms, keeping homeowners in their homes and the houses out of foreclosure. The rate of return in holding these mortgages to maturity may not be spectacular but it is not zero or negative.
The point here is that the Buffett/Flowers transactions give some evidence as to what private capital will do once some [valuation] certainty has been introduced into the system.
Barry Ridholtz take:
http://bigpicture.typepad.com/comments/2008/09/i-got-75b-but-i.html
(3) the House voted to allow the prohibition to off shore drilling expire. This is hopefully a positive step toward cutting our dependence on foreign oil and increasing employment. However, I don’t think that this issue will be settled until after the November elections, which is to say, if we get a Democratic president and a Democratic controlled congress, it is apt to be back on the table.
Options
At the Market open this morning, the Dividend Growth Portfolio will Sell Walmart November 62.50 Calls @ $.75 against one quarter of its position.
Company Highlight
Pfizer is a major producer of pharmaceuticals, hospital products and animal health lines. The company has earned a 20%+ return on equity and grown profits and dividends at a 14%+ rate for the last 10 years. However, PFE is facing patent expiration of over one half of its drug sales by 2011; because of that the stock has experienced lack luster performance over the past several years. The investment attraction of this stock is yield (7%) and the likelihood that it will grow at a 5-6% annual rate. That said, management is working hard improve its financial outlook by:
(1) continuing to build its huge drug research program focusing in particular on its biotech business,
(2) increasing acquisitions, also directed growing its biotech business,
(3) an aggressive cost reduction strategy.
PFE is rated A++ by Value Line and has only about 10% of its capitalization as debt.
http://finance.yahoo.com/q?s=PFE
9/08
News on Stocks in Our Portfolios
Positive comments on FactSet Research (Aggressive Growth Portfolio):
More Cash in Investors’ Hands
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