The Closing Bell

The Closing Bell

9/6/08

Statistical Summary

Current Economic Forecast

2007

Real Growth in Gross Domestic Product: 2.0- 2.5%

Inflation: 2 - 2.5 %

Growth in Corporate Profits: 6-8%

2008 (revised-again)

Real Growth in Gross Domestic Product (GDP): -1.0 - +1.05%

Inflation: 2-3%

Growth in Corporate Profits: 0-5%

Current Market Forecast

Dow Jones Industrial Average

2008

Current Trend:

Short Term Downtrend 10126-11518

Medium Term Downtrend 10695-12636

Long Term Trading Range 7100-14203

Year End Fair Value (revised): 13450-13850

2009 Year End Fair Value (revised): 13850-14250

Standard & Poor’s 500

2008

Current Trend:

Short Term Downtrend 1131-1278

Medium Term Downtrend 1161-1381

Long Term Trading Range 750-1527

Long term Up Trend 1317-1797

Year End Fair Value (revised): 1533-1577

2009 Year End Fair Value 1595-1635

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 23%

High Yield Portfolio 20%

Aggressive Growth Portfolio 23%

Economics

The economy is a neutral for Your Money. Following this week’s economic data, our view that the economy is/has been or soon will be in a mild recession remains the most likely scenario. Importantly, there was no follow on to the big-surprise-maybe-there-is-no-recession positives that characterized a couple of last week’s statistics. To be sure, we got some upbeat numbers, coming as they consistently have from the industrial sector. They included July factory orders, second quarter productivity and unit labor costs and the Institute for Supply Management’s August nonmanufacturing index. The rest of the data was basically mixed to negative; the worse coming from July residential construction and the employment numbers. Speaking of the latter, if you believe the past relationship between employment and recession remains in tact, it regrettably appears that now an economic down turn is virtually a lock.

The other part of our economic scenario centers on concern about rising inflation; but if the oil/commodity complex continues to collapse in price, the dollar strengthen, the TIPS spread narrow and the European and Japanese economies weaken, this may be less of a problem.

Here’s a chart of the TIPS spread:

http://mjperry.blogspot.com/2008/09/inflation-expectations-at-five-year-low.html

The Economic Risks:

(1) the economy is weaker than expected.

(2) Fed policy (reading the data correctly).

(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).

(4) protectionism (Free trade is a major positive for world and US economic growth.).

(5) fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.).

(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)

Politics

Both the domestic and international political environments are a negative for Your Money.

In case you missed Bill O’Reilly’s interview of Obama (Thursday night’s show only covered foreign policy), here is a summary of His key statements:

http://www.powerlineblog.com/archives2/2008/09/021425.php

The Market-Disciplined Investing

Technical

The DJIA (11220) and S&P (1242) closed Friday in two clearly defined down trends: (1) a very short term trend marked by the May 2008/August 2008 highs whose boundaries are DJIA circa 10126-11518 and the S&P circa 1131-1278 and (2) a medium term down trend extending back to October 2007 whose boundaries are DJIA circa 10695-12636 and S&P circa 1161-1381. Fortunately, there is additional support for both indices above the lower boundaries of these two down trends; it is at their July 2008 intraday lows: DJIA 10809, S&P 1198. Bottom line: I am remain hopeful that the July intraday lows will mark the bottom to this Market cycle; but that notwithstanding, no matter how you look at it, technically more downside seems likely.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (11220) finished this week about 16.9% below Fair Value (13516) while the S&P closed (1242) around 20.1% undervalued (1555).

Bottom line #1

What a difference a week makes. Last week the technical picture was clouded by divergence in performance of the major indices; and on the fundamental side, some positive economic data had investors hoping that the economy would avoid recession. At yesterday’s close, the technical picture has clarity but unfortunately the resolution suggests more price weakness. Indeed late Friday, I talked with a couple of floor traders who were pretty glum in their assessment of Market direction next week; that, of course, could be either good news (stock prices assault the July lows but bounce, thus completing a successful test) or bad news (stock prices blast through the July lows like crap through a goose). Meanwhile, the credit crisis is reasserting itself as the 500 pound gorilla in economic expectations. As you know, Thursday I got more defensive so I think that we are approaching Monday in the correct frame of mind--our primary focus, preserving capital.

Bottom line #2

I wrote both the technical bottom line and the above after the close in trading yesterday and was getting ready to take Mrs. CJS to an early movie. Fat chance. At about 4:30 (CST) the Wall Street Journal reported a rumor that the Treasury was near a plan to back stop Fannie Mae/Freddie Mac. Here are two Saturday morning articles (which gives you latest information I have before publishing this Closing Bell); notice all the ‘accordingly to unnamed sources’ referrals.

http://online.wsj.com/article/SB122064650145404781.html?mod=hpp_us_whats_news

http://www.bloomberg.com/apps/news?pid=20601087&sid=ax0ft0S9hVYk&refer=worldwide

Clearly, at the moment, we don’t know enough to make either an economic or an investment strategy judgment about the consequences of this development--it could be good news, bad news or no news. If bad or no news, then the above technical comments and bottom line #1 hold.

If it is good news, then 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. That would mean (1) fundamentally, a Treasury infusion of cash in Fannie/Freddie will likely lower mortgage rates which should in turn lead to an improvement in the housing market and (2) technically, this week’s plunge will be viewed as a test of the July lows and the rebound in prices will define that test as successful. Indeed, the rebound could be explosive--which gives me the opportunity to look stupid a lot quicker than I would have ever thought, to wit, in discussing the stock sales our Portfolios made Friday, I wrote that ‘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%.’ Well, our Portfolios may be buying those stocks back 5% higher.

All this said, the bottom line is that we don’t know enough to make an investment strategy call at this moment. Hopefully we will have clarity before the Market opens Monday. In the meantime, I will be working on both a buy and sell list this weekend so that we are ready whatever happens. Next week could be very interesting.

DJIA S&P

Current 2008 Year End Fair Value 13650 1555

Fair Value as of 9/30//08 13549 1547

Close this week 11220 1242

Over Valuation vs. 9/30 Close

5% overvalued 14226 1626

10% overvalued 14904 1701

Under Valuation vs. 9/30 Close

5% undervalued 12872 1469

10%undervalued 12194 1392

15%undervalued 11516 1315

20%undervalued 10839 1238

The Portfolios and Buy Lists are up to date.

Company Highlight:

Suncor Energy is the fifth largest crude oil producer, the tenth largest natural gas producer in Canada and is a primary means of participating in the Canadian oil sands play. The company explores, acquires, develops, produces and markets crude oil and natural gas; it transports and refines crude oil; and it markets petroleum and petrochemical products. SU has grown profits at a 25%+ rate over the past ten years, while raising its dividend at a 10% rate. Earnings growth is likely to slow somewhat in coming years though dividend increases should accelerate. The company earns a 25%+ return on equity. Driving future growth is a very aggressive expansion of capacity ($5 billion) which should double production in the next four years. Suncor is rated A by Value Line, has a 26% debt to equity ratio and its stock pays a .3% yield.

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

Make money by accessing all our Portfolios, the supporting research and Price Disciplines at www.strategic-stock-investments.com. Our work is focused on making money for our Portfolios not as some academic exercise in Internet investing. Check our performance (audited)--our Dividend Growth Portfolio has beaten the S&P 500 basis points per year for the last seven years but with a beta of only .62. (Mandatory Disclaimer: past performance is not a guarantee of future results.) We give you everything you need to duplicate our results, in particular, a strict price discipline for both Buying and Selling.

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 38 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.