10/10/08

Just a reminder that there will be no Closing Bell this week.

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Economics

Recent Data

We got good news and bad news yesterday:

Weekly jobless claims fell 20,000 versus expectations of a rise of 2,000. This is the first decline in four weeks; but it is also the first week free of any impact from Hurricane Ike. While the growth in jobs is declining, it is nowhere near recession levels.

August wholesale inventories were up .8% while wholesale sales fell 1.0%. This pushed up the inventory to sales ratio which does not bode well for future production.

Other

Great analysis from Barry Ridholtz on working our way out of this credit crisis:

http://bigpicture.typepad.com/comments/2008/10/fix-the-credit.html

Graphics on our future inflation problem:

http://bigpicture.typepad.com/comments/2008/10/adjusted-reserv.html

More chart porn on median household income:

http://mjperry.blogspot.com/2008/10/forget-everything-youve-been-told-b.html

And who pays taxes:

http://mjperry.blogspot.com/2008/10/top-1-paid-more-in-federal-income-taxes.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical/ Fundamental

Both indices (DJIA 8579; S&P 909) continue to fall toward the only easily identifiable support level (DJIA 7146; S&P 766). While that might seem a long way away, it is fewer points that they have already dropped this week. The volatility index surged again to over 60; and though volume rose, it isn’t approaching historic panic sell off levels. (Here’s a chart of the volatility index):

http://econompicdata.blogspot.com/2008/10/speechless.html

I think US officials are doing all they can to instill confidence; ditto the Brits. The rest of Europe seems to be having cognitive dissonance problems which isn’t helping. Indeed, it has put an end to the temporary thawing in the credit markets, which is the biggest most immediate fundamental global problem. (Here is a chart of the credit index):

http://econompicdata.blogspot.com/2008/10/are-equities-least-of-our-worries.html

I believe that the credit problem is being exacerbated by the relentless selling resulting from margin calls at large hedge funds, though I will have no way of substantiating it until after the fact.

At this point in the Market cycle, there is nothing reasonable that can be said about how deal with the carnage because current Market psychology is irrational. The best I can do is say that I been here before and sooner or later it will end.

With that said, I have to say that now my biggest worry is having too much cash (now at between 40% and 45%). Unless the world is coming to an end, many, many stocks have become grossly undervalued. Plus I know from talking to other professionals that there are hoards and hoards of cash sitting on the sidelines waiting for this hedge fund liquidation to end. When those responsible for the investment of that money decide to buy, I believe that there will be an explosion to the upside so violent that it will be extremely difficult to get money back to work at anywhere near the prices available right now. The point here is that I think that we are in the middle of the end. I have no idea how much more damage is going to be done; but I think that we need to be buying through it.

So I for one will start nibbling today. From this point forward, I have a multi branch decision tree and it will likely change daily:

For today, my first objective is to put 8-10% (5% of the total Portfolio) of our Portfolios’ cash to work at the open.

If we get a weak rally intraday, I may actually sell a small bit of some stocks where there doesn’t seem to have any support near term. But I will re-invest the cash generated.

If we get another flush like yesterday but with no sign of a rebound, I will spend another 5% before the close.

If we get a climactic sell off with a strong bounce (which I don’t think likely today), I want to have 50-60% (that will take total cash to 17-20%) of our Portfolios cash invested by the end of the day.

Our Portfolios I will be buying stocks whose rate of price decline has been much slower in the last couple of days than the Market in general and/or stocks that are at or near multi year support levels.

If our Portfolios take any action during the day (other than the Buy at the open), I will be in touch via a Subscriber Alert.

Subscriber Alert

At the Market open this morning, our Portfolios will spend 8-10% of their cash as follows:

Dividend Growth Portfolio: Federated Investors (FII), Northern Trust (NTRS), T Rowe Price (TROW), Paychex (PAYX), Boeing (BA—which is being Added to the Buy List), Canon (CAJ), ExxonMobil (XOM) and Linear Technologies (LLTC).

High Yield Portfolio: AJ Gallagher (AJG), Rayonier (RYN), Kinder Morgan Energy Ptrs (KMP), Alliance Resource Ptrs (ARLP), Cato Corp (CTR), Quaker Chemical (KWR) and Universal (UVV).

Aggressive Growth Portfolio: Schwab (SCHW), Lowe’s (LOW), Bucyrus Int’l (BUCY), Matthews Corp (MATW—which is being Added to the Buy List), Amphenol (APH) and Qualcomm (QCOM).

News on Stocks in Our Portfolios

Positive comments on Reynolds American (High Yield Portfolio):

http://www.thestreet.com/story/10441472/1/tobacco-stocks-not-for-the-nervous-investor.html?puc=_txtmdb

More Cash in Investors’ Hands