10/8/08

Economics

Recent Data

The International Council of Shopping Centers reported weekly sales of major retailers up .1% versus the prior week and up 1.3% on a year over year basis; Redbook Research reported month to date retail chain store sales up .8% versus the comparable period last year. These numbers don’t suggest aggressive consumer spending; but they are better than the negative figures that we have gotten the prior couple of weeks.

Other

The big news this morning is the coordinated global rate cuts to fight the financial crisis. In the US, the Fed cut Fed Funds rate 50 basis points. The Fed’s statement:

http://bigpicture.typepad.com/comments/2008/10/emergency-globa.html

More humor for a tough environment:

http://bigpicture.typepad.com/comments/2008/10/new-stock-marke.html

Eye candy on commercial and industrial loans:

http://mjperry.blogspot.com/2008/10/commercial-and-industrial-loans-set-new.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical/ Fundamental

Whew. Both Averages (DJIA 9447; S&P 996) closed below the lower boundary of their May/August downtrend as well as their 2004 lows (DJIA 9707, S&P 1062). Next identifiable support level--2002 lows (DJIA 7146, S&P 766). Despite the DJIA 500 point decline, the volatility index didn’t spike to an appreciably higher level than Monday’s close (not good); and once again, there was a dearth of volume (really not good). Current conditions are looking more and more like the final phase of a painful bear market; all that we are missing is the climactic sell off.

The biggest problem that I had with yesterday’s pin action is that a large number of our Portfolios’ stocks that had heretofore held above support/stop loss prices suffered some serious whackage. To be honest by the close Monday, I thought that most of the stocks that we own had sold off sufficiently, reached their individual lows for this cycle, might sell through their support/stop loss level in the midst of a panic sell off day but otherwise were in decent technical shape. Yes, I knew that I would be wrong about a couple of stocks; but nothing like what happened yesterday; and while our Portfolios were down only about half as much as the Averages yesterday, the dramatic technical breakdown of many of our stocks is disconcerting. So I have to ask myself:

(1) was yesterday the beginning of an end which is just going to be rougher than I expected? If this one is going to be uglier than most, then the stomach cramps are going to be excruciating.

(2) or do I simply have no clue what I am talking about? The light that I see at the end of the tunnel is an on rushing train. A severe global recession is upon us.

My conclusion: market action to the contrary, neither the anecdotal evidence (like the C&I loan chart and weekly retail sales data above. They are not robust but the consumer is not falling off a cliff) nor the actions by the government and corporations are pointing to severe global recession.

Having said that in spite of the revelation Monday of additional details of Fed/Treasury plan for bringing confidence back to the financial markets, investors just didn’t seem to care. The news yesterday was not focused on the details of the plan but on the fact that they weren’t implemented seconds after the enactment of the plan; not on the fact that the Fed was starting to lend in the commercial paper market but that it wasn’t acting as the guarantor of borrowers to traditional lenders; not on Bernanke’s statement that the Fed stood ready to inject liquidity when needed but on his reference to inflation (OK may be that was a stupid comment). The point being that no matter what actions are taken, they are not good enough for market participants or investors.

I postulated in last week’s Closing Bell that the explanation for this phenomenon was not a horrible economy causing investor dismay but rather negative investor psychology forecasting a horrible economy. I see no reason to change that point of view; there just isn’t sufficient evidence to support of doomsday scenario. On the other hand, there is plenty of evidence that some large investors (hedge funds primarily) are in full liquidation mode via margin calls and investor redemptions and that is creating an immense supply/demand imbalance that is depressing equity prices and with it general market sentiment.

Which leaves us with two questions: is there anyway of knowing when this stressful affair will be over? and what do we do in the meantime?

My bottom line is that yesterday I was wrong to start getting circumspect about our stocks holding above fundamental boundaries and technical stop loss prices. To be sure, my gut is still telling me that that stocks are somewhere near a bottom. Nevertheless, the problem is that fundamental developments are having no lasting impact on a Market that is being dominated by liquidation.

So in the absence of getting the famous final flush, I would like to take a little more off the table; but it makes no sense to do it in a disorderly market. So if we get a bounce today, our Portfolios will do a little selling. The actions if they occur will be as they always are when I get really conflicted--a compromise (a cowardly hedge), i.e. instead of reducing those holdings which experienced a technical breakdown yesterday to the size that their price action calls for, our Portfolios will sell one half that amount. The net effect will be to raise cash by about 5%. As a final repetitious note, we may buy this stocks back soon at a higher price; but that is a risk that I am willing to take.

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 by 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.

Company Highlight

Home Depot operates a chain of retail building supply/home improvement stores in the US and Canada. The company has grown profits and dividends at a 15-20% pace over the past 10 years earning 20% return on equity. HD is not expected to duplicate this record over the near term as housing remains weak and consumers remain very defensive in their spending. However,

(1) the bad news appears to be well reflected in the current stock price; and management indicates that it expects to continue to grow its dividend at an 8-9% pace while they wait for an earnings recovery [the current $.90 per share dividend is supported by $3.00 per share cash flow],

(2) the housing market will recover as will consumer spending; when that happens, this quality retailer should witness a big improvement in earnings growth.

Home Depot is rated A++ by Value Line, carries a 38% debt to equity ratio and its stock yields 3.5%+.

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

10/08

News on Stocks in Our Portfolios

Positive comments on Bucyrus Int’l (Aggressive Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=8815

More Cash in Investors’ Hands