Economics
This Week’s Data
Weekly mortgage applications rose 8.5%. Lower rates appear to be helping.
September durable goods orders increased .8% versus expectations of a 1.8% decline. Good news from a sector that has been disappointing of late; I should note that the big difference in the actual versus forecast results was a big up tick in aircraft orders--which some disparage as highly erratic.
http://econompicdata.blogspot.com/2008/10/durable-good-shipments-ytd-september.html
http://www.capitalspectator.com/archives/2008/10/a_brief_repriev.html
Third quarter gross domestic product was reported down .3% versus forecasts for a .5% decline.
http://econompicdata.blogspot.com/2008/10/gdp-down-03-world-rejoices.html
http://calculatedrisk.blogspot.com/2008/10/q3-gdp-declines-03.html
I mentioned in yesterday’s Morning Call that the FOMC would meet that afternoon. Following the meeting, the Fed lowered the Fed Funds rate another 50 basis points (from 1.5% to 1.0%); and in its highly watched statement following the meeting, it concluded that the main risk to the economy was weak growth and that inflation was no longer a problem.
The text:
I noted that such a lowering of the Fed Funds rate would have little affect because the current effective Fed lending rate was already around the 1% level. To that I would add that with respect to unfreezing the credit markets, the cost of money isn’t the issue anyway. It is getting the banks to lend the money whatever its cost. In fact the banks have more money than they know what to do with as a result of the massive injections of liquidity the Fed has already made into the financial system. To be sure all of that money has fostered progress, but, as I suggested, the issue is one of confidence and it is going to take time for sufficient confidence to return to a severely chastened banking industry.
http://mjperry.blogspot.com/2008/10/fed-cut-rates-below-1-two-weeks-ago.html
http://paul.kedrosky.com/archives/2008/10/29/bank_bailouts_a_1.html
http://econompicdata.blogspot.com/2008/10/fed-cuts-50-bps-will-it-matter.html
The more important action that the Fed announced was that it is making a $120 billion credit facility available to emerging markets (countries) central banks. That action is another step toward addressing yet another problem of illiquidity in the financial system and that is a positive. (In essence, these emerging country central banks need dollars to provide to say a hedge fund which owned the stock of a company in their country, had to liquidate that stock as a result of margin calls or redemptions and needs to convert the proceeds from the sale of that stock [remember the stock is denominated in that country’s currency] into dollars so it can meet its margin call or pay off its redeeming shareholders.)
http://calculatedrisk.blogspot.com/2008/10/more-swap-lines-from-fed.html
And still more help coming:
http://calculatedrisk.blogspot.com/2008/10/treasury-fdic-considering-plan-to.html
Other
Some humor to start your day:
http://www.brasschecktv.com/page/187.html
Politics
Domestic
More on Obama ‘redistributive’ comments:
http://www.powerlineblog.com/archives/2008/10/021903.php
More on ACORN:
http://townhall.com/columnists/AmandaCarpenter/2008/10/27/acorn_owes_millions_in_taxes
http://online.wsj.com/article/john_fund_on_the_trail.html
International War Against Radical Islam
The Market
Technical
The indices (DJIA 8990, S&P 930) remained within a DJIA 7853--9707; S&P 839--1062 trading range. Not to get too deeply immersed in the minutia of chart watching, but the DJIA traded up to the 9264 level--which it had done on three previous occasions only to trade down--and traded down; the S&P couldn’t even muster that. So yesterday’s pin action showed no follow through and indeed failed to surmount a prior trading high. In addition, sellers once again came in the last hour to drive prices down big. As you know this last hour selling has been attributed to hedge fund and mutual fund liquidations; so it doesn’t appear to be over.
http://bespokeinvest.typepad.com/bespoke/2008/10/joke-of-the-day-the-stock-market.html
On top of that the volatility index rose (negative) and volume shrank (negative). As a result, I just can’t see Tuesday as the launch of a major up move.
Fundamental
An S&P valuation matrix from Bespoke:
http://bespokeinvest.typepad.com/bespoke/2008/10/sp-500-earnings-vs-valuation-matrix.html
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So as of the close of business yesterday, I think that our strategy of selling strength is the right one (which includes selling stocks that have been underperforming as well as those that seem to be ahead of themselves).
As a result at the Market open this morning, our Portfolios are going to lighten up on a couple of stocks that seem to have gotten ahead of themselves in this rally, i.e. they are selling about 10% of the following positions: in the Dividend Growth Portfolio--ExxonMobil (XOM); in the High Yield Portfolio--Sanofi Aventis (SNY).
Company Highlight
Boeing Co. is a leading manufacturer of commercial aircraft, military aircraft as well as variety of command and control and advanced radar systems. The company has grown profits and dividends at a 9%+ annual rate over the past 10 years earning a return on equity in excess of 20%. The major news event for BA in the recent past has been a machinist strike that cost the company $100 million in revenue per day. Assuming that the recently negotiated tentative agreement holds, focus can be shifted to the company’s prospects.
At the end of June, BA had a backlog of commercial aircraft orders alone of $275 billion--almost 4 years of sales. Approximately 90% of this backlog is from foreign carriers many of which benefit from financial backing of their governments.
Boeing is rated A++ by Value Line, has a 45% debt to equity ratio (higher than I normally like) and its stock yields 3.6%.
http://finance.yahoo.com/q?s=BA
10/08
News on Stocks in Our Portfolios
Positive comments on Dow Chemical (High Yield Portfolio):
ExxonMobil (Dividend Growth Portfolio) reported third quarter earnings per share of $2.86 versus expectations of $2.38.
More Cash in Investors’ Hands
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