Economics
Recent Data
July construction spending was down .6% versus expectations of a.5% decline and -.4% recorded in June. Residential construction continued to have a major negative impact on this number; it was down 2.3% for the period.
The August Institute for Supply Management’s manufacturing index came in at 49.9 versus expectations of 49.5 and a 50.0 reading in July.
Bottom line: no surprises which is probably somewhat disappointing to the Bulls after the positive we got last week in durable goods and GDP.
Other
An interesting look at income disparity as determined by which party controls the White House (this may cause cognitive dissonance):
http://econompicdata.blogspot.com/2008/09/income-growth-equality-by-presidential.html
Chart porn on the TIPS spread (good news for those worried about inflation):
http://bespokeinvest.typepad.com/bespoke/2008/09/inflation-fears.html
A look at how the
http://mjperry.blogspot.com/2008/09/economic-facts-us-economy-doing-quite.html
Politics
Domestic
Palin on energy:
http://article.nationalreview.com/?q=NzYyMmU0ODE1ZjFlMjZkODcwNTdiOTgzYjI4ODdlYWI=
McCain’s tax plan:
http://online.wsj.com/article/SB122031215585888783.html?mod=opinion_main_commentaries
International War Against Radical Islam
Rumors on
http://article.nationalreview.com/?q=ZGUxMzhhYjgxOGIyYzA1MGM2ODJhZWYzZjQ4Nzk2NWI=
The Market
Technical
This volatility is something isn’t it? Yesterday both indices (1) despite a huge move up in the morning, failed to top their August highs, (2) then reversed direction and closed below the upper boundary of the May/August down trend (recall that Friday the DJIA have failed to hold above that down trend line, while the S&P closed above it).
I think that this puts the August highs of both indices as identifiable resistance levels (DJIA 11866, S&P 1311). The support levels remain unclear. For the DJIA, there are two: the July intraday low (10809) and the lower boundary of the October 2007 to present down trend (circa 10686). For the S&P, there are numerous support levels: the January 2008 intraday low (1267), the March 2008 intraday low (1256), the July 2008 intraday low (1198) and the lower boundary of its October 2007 to present down trend (1161).
The very short term key to Market direction is, in my opinion, whether the S&P can hold its January/March lows. If so, the downside in stock prices may be limited. If not, at least a test of the July 2008 lows seems likely.
Two other points:
(1) I have mentioned this before, but remember September is statistically the worst month for stock performance by a significant margin.
(2) the volatility index soared yesterday, breaking out of an easily identifiable month long decline. That is not good news; when the VIX starts climbing, stocks usually start declining.
Fundamental
One of the most distinguishing features of yesterday’s pin action was the very serious whackage among the commodity stocks. Given that when I started my after-the-close review of all of our holdings, I made two assumptions:
(1) that the prices of a number of our oil/commodity stock holdings probably violated either the lower boundary of their
(2) that as a first step, I would Sell sufficient shares of the stocks defined in (1) above to reduce their positions to one half of their normal size.
By the time I finished my review, a $3 billion commodity hedge fund (Ospraie) announced that it was closing its doors and would return investors’ money. Question: do you think that [a] they liquidated those assets before making the announcement or [b] will wait till later? (Hint: the answer is [a]) My guess is that much of the terrible price performance yesterday can be attributed to this fund’s sales--and to be sure, others on the Street knew that this was going on and contributed to the deluge by selling and/or shorting stocks/commodities in their funds as the process unfolded.
The point here is that because yesterday’s terrible pin action in the commodity stocks was probably heavily influenced by the liquidation of the aforementioned hedge fund, I am going to violate a normally firm rule and NOT sell BP and Peabody on the thought that there will be a sharp snap back in these stocks today. Clearly, this could be a risky move; but I think it’s worth it. We will know soon enough how smart it is; and if I am wrong, I’ll take my lumps and correct it tomorrow.
That takes care of today; but the larger issue is, of course, is the demise of this hedge fund a singular event or are there committee meetings at hedge funds, pension funds and foundations going on as you read this deciding whether or not the commodity bubble has burst and whether to liquidate or substantially reduce exposure to this investment class. We have to be alert to this possibility and as I said above, we will know the answer soon enough. At the moment, as I also stated above, I have re-confirmed our Stop Loss Prices in all our oil and commodity related positions. Should those prices be breached, our first step will be to reduce positions to one half of normal. (By the way, I recognize that our decision a couple of weeks ago to take our holdings in oil stocks from 50% to 60% of normal may prove to have been wrong).
As a final aside, my gut tells me that the secular boom in commodities is not over.
An analyst looks at coal:
http://seekingalpha.com/article/93704-coal-generates-global-strength?source=front_page_long_ideas
Another at Chevron (Dividend Growth Portfolio):
The Dividend Growth Buy List
Company Close 9/2
Aflac $57.32 $55-63
Automatic Data Processing 45.16 41-47
Emerson Electric 46.76 47-54
Hormel Foods Corp 36.14 31-36
Johnson & Johnson 71.78 63-71
Manulife Financial 35.39 31-36
MDU Resources 31.96 29-33
Paychex 35.17 31-36
T Rowe Price 59.29 55-63
UGI Corp 27.54 24-28
News on Stocks in Our Portfolios
Medivation (10 Bagger) announce a deal with Pfizer to commercialize Dimebon (Alzheimer’s drug):
http://money.cnn.com/news/newsfeeds/articles/djf500/200809030754DOWJONESDJONLINE000492_FORTUNE5.htm
More Cash in Investors’ Hands
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