9/5/08

Economics

Recent Data

Second quarter nonfarm productivity rose 4.3% versus estimates of an increase of 3.9% and the final first quarter reading of +2.2%; its complement, second quarter unit labor costs, fell .5% versus expectations of a decrease of .3% and final first quarter report of a 1.3% increase. These data bode well for corporate profits; but as I have stressed numerous times, wages and incomes have to participate in the productivity increases or sooner or later there will likely be repercussions.

The August Institute for Supply Management nonmanufacturing index came in at 50.6 (anything over 50.0 signifies growth) versus a forecast of 49.0 and 49.5 recorded in July. Pictorially:

http://econompicdata.blogspot.com/2008/09/ism-services-august.html

Weekly jobless claims were up 15,000 versus expectations of a decline of 5,000.

A graphic look:

http://www.capitalspectator.com/archives/2008/09/labor_pains.html

August nonfarm payrolls were reported this morning down 84,000 versus expectation of -75,000; the unemployment rate rose to 6.1% versus estimates of 5.8%. Look at this chart plotting NFP against recession:

http://bigpicture.typepad.com/comments/2008/09/will-nfp-breach.html

Other

Is monetary policy too loose?:

http://www.american.com/archive/2008/september-09-08/is-u-s-monetary-policy-really-too-loose

A discouraging look at corporate profits:

http://bigpicture.typepad.com/comments/2008/09/soc-gen-meltdow.html

Updated chart porn on the credit default risk:

http://bespokeinvest.typepad.com/bespoke/2008/09/mortgage-rates.html

Here is the Bureau of Labor Statistics reply to the recent criticism of CPI (as put forth via our recent link to Barry Ridholtz’s comments):

http://mjperry.blogspot.com/2008/09/addressing-misconceptions-and-myth.html

Politics

Domestic

Here is a reasonably balanced analysis of McCain’s Palin choice from Charles Krauthammer:

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/04/AR2008090402845.html?sub=AR

International War Against Radical Islam

The Market

Technical

Another ugly day. Most of the decline being attributed Fed governor Janet Yellen who said that the second half of 2008 would be ‘sub par’ (is that news?) and Bill Gross of Pimco (largest fixed income manager in the US) who said he wasn’t buying anymore of the sub prime paper until the Fed makes a bigger effort to provide liquidity to that depressed market.

http://dealbreaker.com/2008/09/bill_gross_bring_out_the_bazoo.php

The DJIA (11188) sailed right through the August low (11288) (though granted it offered very weak support); that leaves the next identifiable support levels at the July 2008 intraday low (10808) and the lower boundary of the down trend off the October 2007 high (circa 10724). The S&P (1236) broke both its January/March 2008 intraday lows (1269, 1256 respectively) leaving the next support levels at its July 2008 intraday low (1198) and the lower boundary of its October to present downtrend (circa (1158).

Adding to this weak performance was the action of the volatility index which has sharply increased this week from 20 to 24 breaking out of an identifiable down trend (remember when the volatility index goes up, generally stocks go down) including a rise on Tuesday when the DJIA spiked 250 points to the upside then closed down for the day. The momentum for the VIX appears to be to the upside and typically stocks bottom when it hits the 30-36 range--so it looks like we have a way to go (i.e. stocks to the down side).

Here is some eye candy to illustrate the lousy technical picture:

http://traderfeed.blogspot.com/2008/09/buying-sentiment-stalls-out-look-at.html

http://traderfeed.blogspot.com/2008/08/money-flow-update-for-august-31st.html

http://traderfeed.blogspot.com/2008/09/few-midweek-observations.html

Here are two charts plotting the price performance of stocks during and following a bubble. It doesn’t bode well for oil:

http://bespokeinvest.typepad.com/bespoke/2008/09/theoretical-dec.html

Fundamental

The last two days whackage of the oil/commodity stocks notwithstanding, the damage yesterday was less in those sectors and more with everything else. To be sure, three of our oil/commodity holdings penetrated the pre-set Stop Loss price I detailed in yesterday’s Morning Call; but a great many more stocks outside the oil/commodity complex violated our Stops than I would have expected. Accordingly at the Market open this morning, our Portfolios will be Selling a portion of their positions in the following stocks:

In the Dividend Growth Portfolio, ConocoPhillips (COP-$76) as well as General Dynamics (GD-$85) and Linear Technology (LLTC-$30) closed below Stops that I had set in order to preserve profits. The Portfolio will reduce its position in COP to one half of a normal holding and the positions of GD and LLTC to three quarter sized holdings.

In addition, the stock price of Emerson Electric (EMR-$44) has fallen below the lower boundary of its Buy Value Range. Therefore, EMR is being Removed from the Dividend Growth Buy List. Similar to COP, GD and LLTC (taking money off the table in a profitable holding), this position will be reduced to a three quarters sized holding.

The stock price of Nokia (NOK-$22) has violated its Stop Loss Price. This morning, the Dividend Growth Portfolio will Sell one half of its NOK position and will Sell the remainder on Monday, in the absence of any price recovery.

Finally, the stock prices of Colgate Palmolive (CL-$76), Federated Investors (FII-$35) and McDonald’s (MCD-$60) have fallen below the upper boundary of their respective Buy Value Ranges. Accordingly, they are being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio already owns FII, so not further action is required. At the moment, the Portfolio will not Buy shares in MCD or CL.

In the High Yield Portfolio, defensive (Stop Loss) sales will be made this morning in Alliance Resource Ptrs (ALRP-$40) and Quaker Chemical (KWR-$30). Both holdings will be reduced to one half sized positions.

In the Aggressive Growth Portfolio, defensive sales will be made in Mastercard (MA-$216), American Vanguard (AVD-$14), FactSet Research (FDS-$59), Microsoft (MSFT-$26) and SAP (SAP-$55) lowering their size to one half of normal.

In addition, the stock price of Schlumberger (SLB-$87) has fallen below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Aggressive Growth Buy List and its holding reduced to a one half sized position.

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As an aside, you might wonder: since I believe that the July 2008 low marks the bottom of this Market cycle, why am I selling stocks this close (a mere 300 DJIA points) to that bottom? Shouldn’t I be buying? The answer lies in our Price Disciplines and in their single most important tenet--never ever take a large loss. The primary reason the Dividend Growth Portfolio has outperformed the S&P 500 basis points a year since its inception, the reason the Aggressive Growth Portfolio is up for the year is not because my Valuation Model finds good companies that are undervalued, though that certainly helps. The reason is because our Portfolios never dig themselves a hole from which they can’t escape. That means that in a Bear Market, the focus is less on finding stocks to Buy and more on preserving capital. I have said this to you dozens of times: I would rather sell a stock and have to buy it back 5% higher and look stupid, than hold on and find it down 40%, 50%, 60%.

The key in executing that strategy is to have a Sell Discipline that sets the sell (stop loss, take profits) price well in advance of having to place the order. That is what our Sell Discipline does. Using a combination of fundamental (Valuation Model) and technical factors, the prices that triggered this morning’s action were determined well before hand. That does one very important thing--it takes the emotion out of the decision making process.

So if I am correct in my call that the July low was the bottom, don’t be surprised when our Portfolios buy back some of the stocks that they are selling this morning. But in doing so, I am insuring that if my July bottom call is wrong, I will have advanced my primary goal--never ever take a large loss.

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