10/21/08

Economics

This Week’s Data

The leading economic indicators for September rose .3% versus expectations that they would be unchanged.

http://econompicdata.blogspot.com/2008/10/leading-economic-indicators-up-02-in.html

Other

Housing data from southern California shows improvement:

http://calculatedrisk.blogspot.com/2008/10/dataquick-socal-home-sales-up-50.html

A long term chart of the dollar:

http://bespokeinvest.typepad.com/bespoke/2008/10/us-dollar-a-nic.html

Politics

Domestic

Gerrymandering and lack of term limits are part of the problem:

http://online.wsj.com/article/john_fund_on_the_trail.html

In case you missed this gem--Biden on Obama:

http://hotair.com/archives/2008/10/20/biden-obamas-inexperience-will-prompt-nations-to-test-us/

International War Against Radical Islam

The Market

Technical/ Fundamental

More technical data from Traderfeed:

http://traderfeed.blogspot.com/2008/10/buying-interest-in-stocks-improved-but.html

A look at volatility:

http://www.capitalspectator.com/archives/2008/10/volatility_less.html

An update of quarterly earnings reports:

http://bespokeinvest.typepad.com/bespoke/2008/10/third-quarter-e.html

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Stock prices continued the advance yesterday. If one were to hypothesize (which I am) that stocks are for the moment in a trading range defined by DJIA 7859--9707 (admittedly, the 9707 resistance level is iffy), then yesterday’s close puts stock prices in the upper 25% of that range.

In our current strategy that means that our Portfolios should be raising cash from their current 20.5% position toward 25%. My focus is on those stocks that have had a poor relative recovery off their lows.

Subscriber Alert

At the Market open this morning, partial positions will be Sold in the following:

In the Dividend Growth Portfolio: Johnson Controls (JCI), Colgate Palmolive (CL), VF Corp (VFC).

In addition, all of the position in Hormel Foods (HRL) will be Sold. The company announced very poor earnings and its stock closed right on its Stop Loss Price. If you can’t sell Spam is this environment, I’m not sure when you can.

McCormick & Co (MKC) is being Added to the Dividend Growth Buy List; and the Dividend Growth Portfolio will purchase a one-half position in MKC.

In the High Yield Portfolio: Kimco Realty Trust (KIM).

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Now that we are breathing a bit easier, I need to address the utility of the Valuation Model under conditions of intense stress. You may have noticed that during the last leg down, the stock price of many holdings dipped below their Stop Loss Price but the positions weren’t eliminated. The reason is simple--the Valuation Model doesn’t function as it should at negative emotional extremes.

During occasions when investor psychology is ebullient, our Sell Half Discipline forces us to Sell a position’s size down to a normal 3% but not eliminate the entire holding. (In other words, there is a built in hedge to this part of our Discipline.) The reason that the position isn’t sold out is that while more often than not, the stock price may decline some after hitting new highs, more often than not it won’t fall enough to trade back into its Buy Value Range (so we can buy it back). Rather it will resume its rise. Experience has shown that selling out an entire position in a rising Market imposes an opportunity cost that doesn’t help our performance in the long run.

In the reverse situation, if we strictly followed our Stop Loss Discipline (which has no built in hedge), our Portfolios would be forced completely out of a large number of holdings and could very well end up at or near 100% cash. That may have sounded great two Fridays ago; but when a highly volatile Market turns, the difficulties of going from 100% cash to 20-30% cash without sacrificing performance is extraordinarily difficult because not only of my psychological hesitancy at points of maximum stress to buy back a stock that has been sold out versus scaled back but also because of the inherent trading ‘friction’ that occurs during periods of acute volatility. The solution that I learned through experience works the best for me is during periods of excessive price decline (i.e. bear market extremes), once a stock hits its Stop Loss, to average down to a 20-25% of normal size position fairly quickly, then ride out the remainder of the price fall. Granted in a perfect world, the ideal strategy would be to Sell when a stock hits its Stop Loss Price and Buy it back when the Market reverses itself; however, the ‘psychological hesitancy’ mentioned above is my own special problem, so I have to trade in a way that makes sense to me and makes decision making easy in periods of emotional duress.

The Dividend Growth Buy List

Company Close 10/20 Buy Value Range

Automatic Data Processing $35.38 $34-39

Boeing Co 46.71 42-48

Canon Inc 33.00 31-36

General Electric 20.14 19-22

Home Depot 20.78 18-21

Johnson & Johnson 64.44 63-71

Manulife Financial 24.78 21-25

McDonald’s 56.84 55-61

Nokia Inc 17.95 18-21

Nucor Inc 37.09 41-47

Paychex Inc 28.00 26-31

Pepisco Inc 56.76 52-60

Sysco Corp 26.01 26-30

UGI Corp 23.41 21-25

Wells Fargo 32.23 30-35

News on Stocks in Our Portfolios

Positive comments on Pfizer (High Yield Portfolio):

http://www.thestreet.com/p/_htmlrmm/rmoney/pharmaceuticals/10443268.html

More Cash in Investors’ Hands