9/8/08

Economics

Recent Data

Other

All you want to know but were afraid to ask. Barry Ridholtz has done his usual excellent job aggregating the weekend news on the Treasury takeover of Fannie/Freddie:

http://bigpicture.typepad.com/comments/2008/09/fannie-freddi-2.html

And the key points:

http://bigpicture.typepad.com/comments/2008/09/gse-takeover-ov.html

Politics

Domestic

This article contains are interesting debate about Obama’s tax policy (must read):

http://gregmankiw.blogspot.com/2008/09/when-co-teachers-collide.html

Are Republican Presidents better for the stock market, a study:

http://www.bloggingstocks.com/2008/09/05/are-republican-presidents-better-for-the-stock-market/

A look at Obama’s national service corps idea:

http://www.ibdeditorials.com/IBDArticles.aspx?id=305420655186700

International War Against Radical Islam

The Market

Technical

Some thoughts on the technical strength of the Market, before the impact of the Treasury’s action on Fannie/Freddie:

http://traderfeed.blogspot.com/2008/09/sector-update-for-september-7th.html

And an updated assessment (a chart feast):

http://traderfeed.blogspot.com/2008/09/indicator-update-for-september-8th.html

Fundamental

You can read as much or as little as you want on the Treasury takeover of Fannie/Freddie above. My bottom line is that:

(1) subordinating the common and preferred shareholders and firing management incorporates moral hazard into this action--that is good [though some observers think that the common and preferred holders should have been wiped out], except of course for the common and preferred shareholders. To the extent that some banks own Fannie/Freddie preferreds, it will impact them,

A contrary opinion:

http://article.nationalreview.com/?q=NmRmYzY1MTY4N2MxYjMxNmM5MzhmNzZkYTBmZjQ3YjE=

(2) with the Treasury commitment in the form of a preferred rather debt, that takes the risk out of Fannie/Freddie debt [it keeps it in senior position] which is held by both domestic and foreign banks and institutions which in turn removes investor concern about the viability of these institutions. I would think that this would have a positive impact on their equity valuation [the foreign banks and institutions],

(3) removing investor concern about the financial viability of Fannie/Freddie should lower their capital [borrowing] costs which in turn will lower mortgage financing costs as well as hopefully improving the availability of mortgage credit. I would think that this would in some way help shorten the crisis in the housing market,

(4) I think that stocks rally on this news which means to me that from a technical standpoint, the July 2008 low has been successfully tested. Fundamentally, it means as I said in the week’s Closing Bell ‘it would likely mark another of those defining moments of clarity in the resolution of the financial crisis and will also lead to a turn around in investor psychology and stock prices.’

From the stand point of investment strategy, I don’t think that this means all is clear sailing for equities. Even though there is more clarity in the resolution of problems in the financial system, it still has its difficulties. In addition, we have a recession at home and the growing recognition that the economies of Europe and Japan are faltering. The question is, how much of that is already in the price of stocks? The answer as usual is that I don’t know; but what I do know is that as of today, there are now fewer unknowns. That suggests to me that there is no reason to alter our strategy of managing our cash position between 15% and 20%--drawing it down to 15% when stocks get hit and building it back up when stocks rise.

We got thrown off that strategy over the last couple of weeks when many stocks of companies in the energy, materials and technology sectors (1) broke through technically sensitive support levels and (2) fell into that no man’s zone that our Price Disciplines create between the lower boundary of a stock’s Buy Value Range and its Stop Loss Price. That action forced the sale of a portion of a number of our Portfolios’ holdings in these sectors. While our strategy of averaging out of stocks that trade in this price zone has worked well in this recent down turn, as I said in this week’s Closing Bell, those latest sales may look stupid by the end of trading today. However, for the moment until those stocks recover to a more firm technical/fundamental footing, our Portfolios will continue to treat them cautiously and act to protect our profit/avoid large losses. (Indeed, the Dividend Growth Portfolio will continue to average out of its position in Nokia (NOK-$21) at the Market open this morning. I said Friday that in absence of a price recovery, the Dividend Growth Portfolio would Sell all remaining shares Monday. However, given the likelihood of a bounce this morning, it is only selling one half of what is left [leavi

ng a one quarter position]).

Which perhaps makes my big mistake Friday not selling the stocks we sold but rather not immediately reinvesting the funds in technically stronger stocks that were trading above the lower boundary of their Buy Value Range. I am going to correct that this morning and return to trading our cash position between 15-20%. At the close Friday, our Portfolios’ cash position was between 20- 22%. I am taking it to 17-18% this morning.

Accordingly, at the Market open this morning,

(a) the Dividend Growth Portfolio will Buy new positions in McDonald’s (MCD-$60) and Aflac (AFL-$57) [both of these stocks are on the Dividend Growth Buy List, but to date no shares have been purchased] and Add to its holdings in Praxair (PX-$86. In addition, the stock price of Home Depot (HD-$29) has returned to its Buy Value Range. It is being Added to the Dividend Growth Buy List and a one half position is being bought.

(b) the High Yield Portfolio will Add to its holdings of Bank of Nova Scotia (BNS-$44), Altria (MO-$21) and Pfizer (PFE-$18). In addition, the stock price of Gannett Co (GCI-$18) has fallen below the upper boundary of its Buy Value. It is being Added to the High Yield Buy List and a one quarter position is being bought.

(c) The Aggressive Growth Portfolio will Add to its holdings of Luxottica (LUX-$25) and Rockwell Collins (COL-$52). In addition, the stock prices of Stryker (SYK-$65), Lowe’s (LOW-$26) and Walgreen (WAG-$35) has entered their respective Buy Value Ranges. A full position is being Bought in SYK and one half positions are being Bought in LOW and WAG.

News on Stocks in Our Portfolios

More Cash in Investors’ Hands