The Closing Bell

The Closing Bell

2/2/08

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)

Real Growth in Gross Domestic Product (GDP): 2.0-2.5%

Inflation: 1.75-2%

Growth in Corporate Profits: 3-5%

Current Market Forecast

Dow Jones Industrial Average

2007

Current Trend:

Medium Term Trading Range 11600-14203

Medium Term Up Trend (?) 12516-16584

Long Term Trading Range 7100-14203

Year End Fair Value: 13250

2008 Year End Fair Value: 14050

Standard & Poor’s 500

2007

Current Trend:

Medium Term Uptrend 1269-1722

Medium Term Trading Range 1062-1527

Long Term Trading Range 750-1527

Year End Fair Value (revised): 1525

2008 Year End Fair Value (revised): 1615

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 20%

High Yield Portfolio 25%

Aggressive Growth Portfolio 28%

Economics

The economy may be a positive for Your Money. This week’s data remained mixed which, in my opinion, indicates an economy bumping its way to a slower rate of growth. The one disconcerting bit of news was a second disappointing monthly jobs report--although the monthly figures seem out of whack with the weekly numbers and the decline in nonfarm payrolls appear in conflict with a lower unemployment rate. I am sure these inconsistencies will resolve themselves soon; and until they do, I am not going to get overly pessimistic about the employment picture (this also lessens my concern http://mjperry.blogspot.com/2008/02/recession-probability-66-only-1-out-of.html). Even if we assume the worst case, one of the results of the Fed’s actions in the last two weeks will be to moderate any economic weakness.

Speaking of the Fed, it remains, in my opinion, the key to the economy navigating its way through the cyclical slowdown and the sub prime financial problems. I have already commented on Fed related events in multiple Morning Calls, so I will only repeat my conclusions: (1) lowering the Fed Funds rate was a positive, (2) barring some terribly negative event, it needs to stop worrying about rates and (3) start focusing on growing the monetary base [which turned negative again this week for the 3, 6, and 12 month periods].

Bottom line: my forecast remains unchanged: slowing economic growth, moderating inflation.

(1) the housing numbers continue abysmal: [a] December new home sales fell 4.7% versus expectations of +0.4% result--no sign here of a housing turnaround and [b] weekly mortgage applications were up 7.5%--the fourth weekly increase in a row; applications for new homes declined while re-financings continued to rise dramatically.

(2) the data on the consumer were mixed with the employment figures especially disappointing: [a] December consumer income rose .5% versus expectations of an increase of .4%, [b] December consumer spending was up .2% versus estimates of up .1%, [c] the International Council of Shopping Centers reported that weekly sales of major retailers declined 1.2% though they remain up (1.3%) on a year over year basis; Redbook Research reported month to date retail chain store sales which fell .3% versus the similar period in December and rose a paltry .7% versus the comparable time frame in 2007, [d] on the employment front, {i} weekly jobless claims jumped 69,000 versus expectations of a 14,000 rise--the larger than expected increase was due, at least in part, to the impact of the Martin Luther King holiday, {ii} while January nonfarm payrolls fell 17,000 versus expectations of a rise of 75,000, {iii} although the unemployment rate came in at 4.9% versus estimates of 5%, [e] finally, {i} the Conference Board’s January index of consumer confidence fell to 87.9 versus December’s reading of 88.6 but better than analysts’ estimate of 87.0, {ii} while the University of Michigan’s January consumer sentiment index rose to 78.4 versus forecasts of a 78.0 reading and 75.5 recorded in December,

(3) industry statistics remain largely upbeat: [a] December durable goods orders jumped 5.2% versus expectations of an increase of 2.0%, [b] December construction spending was down 1.1% versus expectations of a .5% decline, [c] the Institute for Supply Management’s January manufacturing index increased to 50.7 versus forecasts of 47.0 and 47.7 reported in December, and [d] a secondary indicator, the January Chicago purchasing manager’s index fell to 51.5 versus 56.4 recorded in December and estimates of 52.5--a bit disappointing but 51.5 still designates growth,

(4) on the macro economic front, the news wasn’t so good: [a] the initial estimate of fourth quarter real gross domestic product {GDP} came in up .6% versus expectations of an increase of 1.2%; for all of 2007, real GDP grew 2.2% and [b] the fourth quarter personal consumption expenditure index {PCE} was reported up 3.9% {at an annualized rate} while core PCE rose 2.7%. {also annualized}; in another measure of inflation, the fourth quarter employment-cost index rose .8%, in line with expectations.

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. For me it was another depressing week on the domestic front which witnessed the Dem’s Presidential candidates arguing over who could give away the most money, raise taxes the fastest and impose the most regulations, the Senate arguing over how much money could (uselessly) be thrown at the electorate and W presenting his FY 2009 budget which projected a $400 billion deficit (see The Economic Risks #5 above).

The Market

Technical

The DJIA (12743) is either in a short term trading range defined by 11622 /11900 and 14203 or in a longer term uptrend defined by the boundaries of the 1982-present trend (circa 12500-16500). At the moment, the big technical question in my mind is whether or not the DJIA has regained the necessary momentum to keep in the 1982-present up trend. Given the distance and length of time the DJIA traded below the lower boundary of this trend, I want to allow it sufficient time to trade above it before assuming it to be the operative trend. With the S&P (1325) I am watching the boundaries of up trend off the 1982 low (circa 1269-1722) and the 750-1527 2002-present trading range. The number to be watching next week is the lower boundary of the DJIA 1982-present up trend (12559 at the close Friday).

Fundamental

The DJIA (12743) finished this week about 4.7% below Fair Value (13383) while the S&P closed (1395) around 9.4% undervalued (1540).

Once again, there is not much to add to the blow by blow narrative of this week’s Morning Calls. My bottom line: I believe that the Market has likely bottomed, though the volatility will probably continue. Our investment strategy is to:

(a) use any price declines to buy positions in great quality companies whose stocks have either remained within their Valuation Range or have briefly traded below it but quickly rebounded,

(b) insure that my research on the Valuation Model especially for those stocks that have broken below or are near their Stop Loss Price is up to date and the Values generated by the Model reflects the current economic reality,

(c) build our Buy Lists, drawing largely from stocks on our Watch Lists as we review their financials and gain confidence in their Value Range [see (a) and (b) above],

(d) use positive days in the Market to Sell stocks that have traded into that ‘no man’s land’ between the lower boundary of their Buy Value Range and the Stop Loss Price but have been unable to recover into their Buy Value Range,

(e) be mindful that the Market may very well not have bottomed; so our Stop Loss Discipline and a large cash position [see Percentage Cash in Our Portfolios above] remain critical,

(e) on a longer term basis, recognize that there are both technical and fundamental factors that argue for caution and therefore to proceed carefully with our Buying, keeping a larger than normal cash position in anticipation of valuation and strategy changes that could result from a potentially new domestic economic agenda.

DJIA S&P

Current 2008 Year End Fair Value 14050 1615

Fair Value as of 2/29/08 13383 1540

Close this week 12743 1395

Over Valuation vs. 2/29 Close

5% overvalued 13981 1608

10% overvalued 14647 1685

Under Valuation vs. 2/29 Close

5% undervaluation 12650 1455

10%undervaluation 11984 1378

The Portfolios and Buy Lists are up to date.

Company Highlight:

Johnson Controls is an industrial conglomerate supplying seating, interior and door systems to the automotive industry and providing advanced battery technology and systems engineering and installed building control systems. The company has earned a 15-18% return on equity and has grown profits and dividends at a 12-15% pace over the last 10 years. This record should be extended as a result of strong global demand in the commercial building markets, growing sales as well as improving pricing power in batteries and solid revenue gains in its North American and European automotive markets. JCI has a debt/equity ratio of approximately 27% and is rated A by Value Line. Its stock yields 1.5%.

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

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.

2/1/08

Economics

A long term perspective on jobless claims:

http://bespokeinvest.typepad.com/bespoke/2008/01/initial-jobless.html

More perspective, this time on the magnitude of the sub prime problem:

http://mjperry.blogspot.com/2008/01/subprime-arms-are-only-7-of-loans.html

Finally, a look at real disposable income (how can you think that we are in a recession, when you look at a chart like this?)

http://mjperry.blogspot.com/2008/01/24th-month-of-real-disposable-income.html

Politics

Domestic

Obama on immigration (the commentary is from Mickey Kaus, a Democrat/ blogger): http://www.slate.com/id/2182933/#obamahispander

McCain on immigration (also courtesy Mr. Kaus)

http://www.slate.com/id/2182933/#mccainduck

International War Against Radical Islam

The Market

Technical

The DJIA closed last night at 12650 which put it above the 1982-present up trend line--having been below it for 10 days. A technical purist would insist that the trend line had been broken and discount any return after 10 days as meaningless. Admittedly even for me the distance (about 800 points) and time (10 days) argues that the trend has been broken. However, it was 26 year trend in which DJIA had advanced 16 fold at the point of the break which in my mind significantly diminishes the magnitude of the distance (one sixteenth) and time (one tenth of one percent). This of course could be rendered academic were the DJIA to fall again. Nevertheless, I think it important to watch as a indication as to whether the current rebound is just a rally in a bear market or the start of something more positive. The 1982-present up trend line is now at circa 12500--which curiously enough just happens to the approximate level of the August 2007 sell off intraday low.

Fundamental

The fundamental explanation for yesterday’s fourth monster intraday reversal in the last two weeks was centered on the resolution of the sub prime crisis’ financial impact on the monoline insurers. You will recall yesterday, I said:

“no better proof that the credit market not the economy is the causal factor is the Market action yesterday--despite the Fed rate move and a subsequent 176 point jump in the DJIA, when Fitch announced that it was reviewing the ratings of one of the monoline insurers [the insurers of the securitized mortgage instruments], investors clocked that Average 200 points--investors are worried about the freezing up of liquidity in the banking system,

the resolution of the financial viability of monoline insurers is likely to be the last major hurdle to overcome before investors re-gain confidence in the financial system.” (my emphasis)

Well, yesterday S&P (the rating agency, not the index) joined Fitch (see above) saying that it was reviewing the ratings of securitized mortgage instruments that the monoline insurers had insured--that helped push stock prices down big in the morning. But in a conference call later in the day MBIA (one of the monoline insurers) basically said its finances were sound enough that it could handle any losses that might come from defaults on the mortgage debt instruments it had insured (this morning’s Wall Street Journal, front page, has the complete story)--and the rally was on.

The whole point of this is the same as I made yesterday--the more clarity we receive on the resolution of the sub prime mess, the less fear in the Market and the more likely that it will stop its decline. MBIA’s statement was a clarifying event. Bears will argue that MBIA is doing what Citigroup and Merrill Lynch did at the outset of their woes--which is to lie and attempt to cover up the magnitude of the problem; and therefore, yesterday was not a clarifying event but a ‘smoke and mirror’ event. They may be correct; we will know soon enough. I am a bit less skeptical on the general thesis that MBIA saw what happened to Citigroup, et al and will do its best to avoid making the same mistake.

My bottom line is that, barring some truly unexpected revelation in the sub prime arena, I will be buying any Market declines (which by the way we will surely get) more aggressively.

However, this study does not bode well for the rest of the year (as January goes, so goes the rest of the year)

http://bespokeinvest.typepad.com/bespoke/2008/01/top-ten-worst-j.html

Subscriber Alert

In the meantime, I am also going to use the current lift in stock prices to Sell under performing stocks. Accordingly, the Dividend Growth Portfolio at the Market open this morning will Sell the remainder of its Eli Lilly (LLY-$51) and its holding of Marathon Oil (MRO-$47). Yesterday MRO announced surprisingly poor earnings and a preliminary review of its Valuation Model suggests downward revision of its Valuation Range. Since it closed near its Stop Loss Price and it was a small holding (a one third position) to begin with, this action seems reasonable.

In addition, several more stocks have recovered back into their Buy Value Range and they are being re-Added to their respective Buy Lists. They include Genuine Parts (GPC-$44) and VF Corp (VFC-$77) in the Dividend Growth Universe; Martin Midstream Partners in the High Yield Universe; and Abercrombie & Fitch (ANF-$79), Expeditors Int’l (EXPD-$47) and SAP (SAP-$47) in the Aggressive Growth Universe. EXPD is already owned by the Aggressive Growth Portfolio so no further action is needed. None of the rest will be Bought at this time.

Other stocks that are on our Buy Lists have risen above the upper boundary of their Buy Value Range are, therefore, being Removed. They include Johnson Controls (JCI-$35) on the Dividend Growth Buy List; Quaker Chemical (KWR-$20) on the High Yield Buy List; and Best Buy (BBY-$48) on the Aggressive Growth Buy List. BBY was never purchased by the Aggressive Growth Portfolio, so no further action is needed. JCI and KWR will continue to be Held by their respective Portfolios.

At the Market open this morning, the Aggressive Growth Portfolio will buy a one third position in Sun Hydraulics (SNHY-23).

Finally, Proctor & Gamble is one of the great performing stocks in the Dividend Growth Portfolio. It was purchased in 2001. In 2004 traded into its Sell Half Range and a portion of the holding was Sold. Earlier this month the stock once again traded into its Buy Value Range. When it did so, the relative size of its position was below the normal 3%. Accordingly, at the Market open this morning, additional shares of PG will be bought to bring this holding to a normal size.

News on Stocks in Our Portfolios

Proctor & Gamble (Dividend Growth Portfolio) reported its second fiscal quarter’s earnings per share at $.98 versus expectations of $.96 and $$.84 reported in its 2007 second fiscal quarter.

Peabody Coal (Aggressive Growth Portfolio) reported fourth quarter operating earnings per share $.71 versus expectations of $.79 and $.68 recorded in the comparable 2006 quarter. The primary reasons for the shortfall were weak coal prices, flooding in Australia and foreign exchange losses on a Japanese contract. The company also guided 2008 estimates lower. Operations will continue strong as demand rises in face of low worldwide inventories. However, the company expects further accounting adjustments related to a coal price settlement on a Japanese contract.

Mastercard (Aggressive Growth Portfolio) reported fourth quarter operating earnings per share of $.89 versus expectations of $.73 and $.30 recorded in the fourth quarter 2006.

ExxonMobil (Dividend Growth Portfolio) reported fourth quarter earnings per share of $2.13 versus expectations of $1.95 and $1.69 reported in the comparable 2006 quarter.

More Cash in Investors’ Hands

Microsoft is buying Yahoo for $45 billion, one half of which is in cash.

1/31/08

I have an early morning meeting, so this being sent at 7:30am; hence any news reported after that time is not going to be reflected in these comments.

1/31/08

Economics

Regarding yesterday’s sub par GDP report, the history of subsequent GDP growth following a below 1% quarterly performance:

http://bespokeinvest.typepad.com/bespoke/2008/01/l.html

One last comment on the lunacy of the tax rebate:

http://www.ft.com/cms/s/0/28b464a2-cf50-11dc-854a-0000779fd2ac.html

A look at those GDP figures released yesterday:

http://mjperry.blogspot.com/2008/01/year-toyear-real-gdp-growth-was-25.html

Yesterday the Fed lowered both the Fed Funds and the discount rate by 50 basis points--that needed to be done for all the reasons we have talked about; score that a positive. To summarize the accompanying press release: the Fed (1) is worried about growth, (2) is not worried about inflation, and (3) is prepared to lower rates again if necessary.

A couple of observations:

(1) in the last two weeks the Fed has began to demonstrate that it understands the problem,

(2) however its statement notwithstanding, the problem is not economic growth [or the lack thereof]; it has been and is the lack of liquidity in the banking system which can lead to poor economic growth. That problem was spawned by the sub prime crisis but was exacerbated by an inappropriate Fed monetary policy: [a] an inverted yield curve [the cost of money was higher than the price of money] and [b] virtually no growth in the monetary base. The former has now been addressed; but the latter [at least through the latest set of data available] has not and still needs to be. [I quiver with anticipation.]

(3) no better proof that the credit market not the economy is the causal factor is the Market action yesterday--despite the Fed rate move and a subsequent 176 point jump in the DJIA, when Fitch announced that it was reviewing the ratings of one of the monoline insurers [the insurers of the securitized mortgage instruments], investors clocked that Average 200 points--investors are worried about the freezing up of liquidity in the banking system,

(4) the resolution of the financial viability of monoline insurers is likely to be the last major hurdle to overcome before investors re-gain confidence in the financial system. Although this doesn’t sound good:

http://bigpicture.typepad.com/comments/2008/01/financial-secto.html

To be sure the pessimists point at this as not the last but rather just one in a continuing series of problems [credit card debt, auto loans being the next crisis areas] that will ultimately cripple the economy. I think that there is enough strength in the economy to make that scenario a low probability.

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

Subscriber Alert

After the close, it was reported that Eli Lilly is in talks with FDA officials concerning a settlement (fine) estimated at $1 billion for having encouraged doctors to prescribe Zyprexa, an antipsychotic drug, for uses not approved by the FDA. When I bought this stock, the primary factor driving the Valuation Model for LLY was the huge increase in Zyprexa revenues projected to climb though 2011 accompanied by an improving pipeline of new drugs. I have known that the company and the FDA have been in talks about Zyprexa’s marketing since 2004; but not much seemed to be happening, so I, in retrospect quite wrongly, assumed nothing would happen. Clearly a $1 billion penalty for Zyprexa materially alters that equation. As a result, the Dividend Growth Portfolio is Selling one half of its LLY position on the Market open this morning. It will average out of the remainder.

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

The stock prices of Alcon Labs (ACL-$139), Avon Products (AVP-$34), and Sun Hydraulics (SNHY-$23) have fallen below the upper boundary of their Buy Value Ranges. Accordingly, these stocks are being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio already owns ACL, so no further shares will be purchased. The Aggressive Growth Portfolio will not Buy shares of AVP or SNHY at this time.

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

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

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

News on Stocks in Our Portfolios

McGraw Hill (Dividend Growth Portfolio) raised its quarterly dividend per share from $.205 to $.22.

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

Altria (Dividend Growth Portfolio) reported fourth quarter earnings per share of $1.03 versus $1.40 recorded in the comparable 2006 quarter; it should be noted that the $1.40 is not adjusted for the spin off of Kraft. The company is expected to announce the spin off of Phillip Morris’s international operations soon; but no details have thus far been announced. The company did say that after the spin off in 2008, its new domestic company operations will buy back $7.5 billion in stock and its international company will buy back $13 billion in stock.

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

United Parcel Service (Dividend Growth Portfolio) reported its fourth quarter operating earnings per share of $1.13 versus $1.04 reported in 2006’s fourth quarter.

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

More Cash in Investors’ Hands

Aflac is buying back 30 million shares.

1/30/08

Economics

These are not signs of a recession:

http://mjperry.blogspot.com/2008/01/durable-goods-strength-suggests-no.html

http://mjperry.blogspot.com/2008/01/due-to-falling-unemployment-claims-in.html

Politics

Domestic

International War Against Radical Islam

On the renewal of FISA:

http://article.nationalreview.com/?q=NWQ1ZmMyZDc4OTEzNGJmMmFhMTI2YWZlNjFjNWE2MWY=

The Market

Technical

The DJIA ascending 1982-present trend line is now at the circa 12524 level with the Dow closing yesterday at 12480; so this Average is still struggling to re-establish itself in a positive trend. While the flow of news both on the economy and on the sub prime mess (Lehman Brothers, a potential big victim of the credit crisis, raised its dividend last night) has me feeling a little more comfortable that we may have seen a Market bottom, the best we can say right now is that stocks are in a trading range.

A technical look at the Market by sector:

http://bespokeinvest.typepad.com/bespoke/2008/01/bespokes-sect-1.html

Fundamental

With another positive day, I concentrated last night on the stocks that we own that “have traded into that ‘no man’s land’ between the lower boundary of their Buy Value Range and the Stop Loss Price but have been unable to recover into their Buy Value Range,” I am focused on this group because it seems to me that these are the stocks about which the Valuation Model is most likely to be wrong (i.e. all stocks got whacked, many traded outside their Valuation Range, some of those recovered to trade back into that Range, what is left is where I am probably wrong.); and if that is so, then there is more downside risk and less upside potential in each.

Accordingly, at the Market open this morning, the Dividend Growth Portfolio is Selling the remainder of its position in Paychex (PAYX-$34) and the High Yield Portfolio is Selling the remainder of its position in Verizon (VZ-$38).

Company Highlight

McGraw Hill was one of those stocks that we Bought as Market was getting pounded last August by the first round of fears over the sub prime crisis; by the time I had checked my research and adjusted its Valuation Range, the stock had through its Stop Loss and we Sold it. During the ‘flush’ last week, it traded to the low of its new Buy Value Range, and then recovered and that’s when we Bought back a partial position. We will be Adding to this holding as the Market backs and fills.

McGraw Hill Co. is a global information provider serving the financial, education and business markets via Standard & Poor’s, McGraw Hill Education, Business Week, Aviation Week and Platts. MHP earns an amazing 25-35% return on equity, with virtually no debt and has grown profits and dividends 8-14% annually over the last 10 years. The company should continue to grow as a result of:

(1) as the leading performer in the textbook publishing, MHP is benefiting from the current strong textbook adoption cycle, helped by the $1 billion Reading First initiative of No Child Left Behind,

(2) increasing demand for independent equity research which is a major positive for S&P,

(3) management’s significant efforts to streamline operations and lower costs [the company reduced its workforce by 3% in 2007],

(4) its strong cash flow which funds acquisitions, an aggressive stock buyback program and a rapidly growing dividend.

McGraw Hill has virtually no debt, is rated A+ by Value Line and its stock yields approximately 1.7%
http://finance.yahoo.com/q?s=MHP

News on Stocks in Our Portfolios

3M (Dividend Growth Portfolio) reported fourth quarter and full year operating earnings per share of $1.19 and $4.98 respectively versus $1.04 and $4.49 recorded in the comparable 2006 periods.

A positive write up on Accenture (Aggressive Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=6840

Smith Int’l (Aggressive Growth Portfolio) reported fourth quarter earnings per share of $.71 versus expectations of $.88. the short fall was due to slower development of US offshore fields and weather delays in starting new projects.

UGI (Dividend Growth Portfolio) reported its first fiscal quarter earnings pre share of $.74 versus $.58 recorded in the comparable 2007 fiscal quarter.

More Cash in Investors’ Hands

1/29/08

Economics

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.) W once again fails at the job of fiscal responsibility:

http://www.examiner.com/blogs/tapscotts_copy_desk/2008/1/28/Bush-earmark-cavein-shows-GOP-death-wish

Politics

Obama on immigration:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/28/MNH1UL57Q.DTL&type=politics

McCain on the judicial appointments:

http://campaignspot.nationalreview.com/post/?q=NmNjZDZmZGIyNmI4ZjVjMzc5OTU2NjQ4N2E3MDdhNjg=

Domestic

International War Against Radical Islam

The Market

Technical

A study on the S&P’s performance in years that start poorly:

http://bespokeinvest.typepad.com/bespoke/2008/01/worst-starts--1.html

Fundamental

Sunday 60 Minutes had a big segment on how terrible the housing market is and recounted the multiple sins of lenders/borrowers; then yesterday; the lead in this week’s edition of Newsweek is the recession. As you probably know when the main stream media starts putting the economy or Market on the front page, it usually means that it is yesterday’s story. All we need for the hat trick is for Time’s front page to bemoan the decline in stock prices. The point being that seeing the media tell the public what most of us knew six months ago is a reassuring sign that a good deal of the bad news is behind us (and as if to punctuate this point, this morning December durable goods were reported up 5.2% versus estimates of a 2% increase).

An update on the monocline insurer’s problems:

http://bigpicture.typepad.com/comments/2008/01/monoline-insura.html

Subscriber Alert

The stock prices of United Technologies (UTX-$73) and United Parcel Service (UPS-$71) have recovered to their respective Buy Value Ranges. Accordingly, they are being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio will purchase a one third position in UTX at the Market open this morning. The Dividend Growth Portfolio already owns UPS, so no further shares will be bought.

The Dividend Growth Portfolio will purchase the final one third position in T Rowe Price (TROW-$52) at the Market open this morning.

At the Market open this morning, the Aggressive Growth Portfolio will purchase additional shares in Mastercard (MA-$189) and a second one third position in Luxoticca (LUX-$26).

Company Highlight

I wanted to focus on the Defense Department’s hardware budget because Iraq War or no, there is a lot of re-constitution of materiel that needs to be done; and it won’t likely matter which political party is in control of the budgetary purse strings. (But note that General Dynamics is not currently on the Buy List.)

General Dynamics is a leading defense contractor supplying products and technology to marine systems, combat systems, information systems and aerospace (basically submarines, tanks, aircraft and command and control systems). The company has grown earnings and dividends 14% and 10% respectively over the last 10 years and has earned a consistently high 17-18% return on equity. GD should be able to continue to match that record because of:

(1) the expected increase in spending to modernize the Armed Forces,

(2) an aggressive acquisition program that has increased GD’s exposure to the growing defense information technology market and extending its reach into the intelligence sector; recently the company has acquired companies that complemented its existing command, control and communications capabilities, enhanced its expertise in rugged wireless computing, visualization and collaboration technologies, increased its ability to provide mission, operational and IT enterprise services and improved the quality of ammunition and related products. As important, most of these acquisitions were accretive to earnings.

(3) its Gulfstream division is benefiting from increased demand which not only helps revenue growth but also has stabilized the prices of used jets allowing the company to no longer lose money on trade-ins,

(4) robust cash generation is financing an aggressive stock buy back program.

GD has a debt to equity ratio of approximately 26%, is rated A++ by Value Line and its stock provides a yield of 1.3%.

Buy Value Range: $69-79 Stop Loss Price: $59 Sell Half Price: $92

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

News on Stocks in Our Portfolios

A positive write up on Abbott Labs (Dividend Growth Portfolio):

http://www.zacks.com/newsroom/commentary/index_pdf.php?id=6822

T Rowe Price (Dividend Growth Portfolio) reported fourth quarter and full year earnings per share of $.68 and $2.40 respectively versus $.53 and $1.90 recorded in the comparable 2006 periods.

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

Eli Lilly (Dividend Growth Portfolio) reported fourth quarter operating earnings per share of $.90 versus expectations of $.85 and $.82 reported in the fourth quarter of 2006.

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

Verizon (High Yield Portfolio) reported fourth quarter operating earnings per share of $.62 in line with expectations.

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

More Cash in Investors’ Hands

1/28/08

Economics

How about an optimistic economic forecast?

http://www.usnews.com/blogs/capital-commerce/2008/1/23/a-bit-of-cheer-dow-15000-by-year-end.html

OK, two positive outlooks:

http://online.wsj.com/article/SB120147855494820719.html?mod=opinion_main_commentaries

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

http://online.wsj.com/article/SB120122126173315299.html?mod=opinion_main_commentaries

Politics

Domestic

Romney on taxes:

http://article.nationalreview.com/?q=YjdmZmM2MzFiYzEzYmNjN2MxZDUwYjcxYjY5ZmUxYjA=

Huckabee and Obama on foreign policy:

http://www.jpost.com/servlet/Satellite?apage=1&cid=1200572509823&pagename=JPost%2FJPArticle%2FShowFull

McCain on immigration:

http://www.slate.com/id/2182933/#drmexicofirst

International War Against Radical Islam

The Market

Technical

Fundamental

Some interesting data on relative valuation by industry sector:

http://bespokeinvest.typepad.com/bespoke/2008/01/sector-pe-ratio.html

Also an historical look at Market performance following big intraday reversals—like last Tuesday and Wednesday:

http://bespokeinvest.typepad.com/bespoke/2008/01/recent-bespoke.html

Subscriber Alert

The stock price of Abbott Labs (ABT-$55) has fallen below the upper boundary of its Buy Value Range. Accordingly, ABT is being Added to the Dividend Growth Buy List. Since the Dividend Growth Portfolio already owns this stock, no additional shares will be purchased.

Watch Lists**

Dividend Growth Watch List: Avery Dennison, Bank of Nova Scotia, Brown Forman, Canadian Nat’l RR, Chevron, Clorox, Emerson Electric, Genuine Parts, General Electric, Illinois Tool Works, Ingersoll Rand, Johnson Controls, Johnson and Johnson, 3M, Manulife Financial, McGraw Hill, MDU Resources, Proctor and Gamble, Sysco, T Rowe Price, UPS, United Technologies, VF Corp.,

High Yield Watch List: A.J Gallagher, Alliance Resources, Buckeye Pipeline, LCA-Vision, Plains All American, Quaker Chemical, Reynolds American, Rayonier, Realty Income Trust, US Bancorp.

Aggressive Growth Buy List: Accenture, American Eagle Outfitters, American Vanguard, Amphenol, Avon Products, Best Buy, Bucyrus Int’l, CME Group, Donaldson, Eaton Vance, Expeditors Int’l, Factset Research, Fastenal, Franklin Resources, Landstar, Luxoticca, Mastercard, Nordstrom, Quest Diagnostic, Rockwell Collins, Ross Stores, SAP, Schwab, Simpson Manufacturing, Staples,; and of course I want to re-build the holdings: US Global Shares-Gold

**For the benefit of new subscribers, I started using Watch Lists during severe Market declines. These lists include stocks on our Buy Lists but also equities whose prices has fallen below both their Buy Value Range and their Stop Loss Price but whose Valuation Model (following additional homework on my part) didn’t change appreciably. Historically, the stocks in this latter group will generally trade back into their Valuation Range, sometimes quickly; and I want to be sure I catch that latter group when they do so.

News on Stocks in Our Portfolios

Donaldson (Aggressive Growth Portfolio) raised its quarterly dividend per share from $.10 to $.11.

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

Medivation (10 Bagger) is initiating Phase III trials for Dimebon:

http://www.marketwatch.com/News/Story/Story.aspx?guid={D68FD113-DCA4-4CD9-906A-742FE3AD7E35}&siteid=nbs

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

Verizon (High Yield Portfolio) reported fourth quarter operating profit of $.62 in line with expectations and unchanged from the comparable 2006 quarter.

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

More Cash in Investors’ Hands