The Closing
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): 1.0-2.0%
Inflation: 1.75-2%
Growth in Corporate Profits: 3-5%
Current Market Forecast
Dow Jones Industrial Average
2008
Current Trend:
Short Term Trading Range 11600-12511
Medium Term Trading Range 11600-14203
Long Term Trading Range 7100-14203
Year End Fair Value: 14050
2009 Year End Fair Value: 14471-14893
Standard & Poor’s 500
2008
Current Trend:
Medium Term Uptrend 1269-1722
Medium Term Trading Range 1062-1527
Long Term Trading Range 750-1527
Year End Fair Value: 1615
2009 Year End Fair Value: 1663-1711
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 21%
High Yield Portfolio 24%
Aggressive Growth Portfolio 23%
Economics
The economy may be a positive for Your Money. There is no question that the economy is slowing; the debate is by how much. I remain of the opinion that the current slowdown will not deteriorate into a recession. As long as employment, corporate profits (ex financials) and global economic growth continue to demonstrate strength, I just can’t see a decline in economic activity. However, consumer spending is being impacted more by disruptions in the financial markets than I previously thought. Accordingly, I am lowering my estimate for 2008 real economic growth from 2.0-2.5% to 1.0-2.0%. For the moment, I am sticking with my forecast for moderating inflation in 2008; however, given the economic agenda presented this week by the Democratic Presidential candidates, I leave open the possibility that a Democratic sweep in November could lead to a rising secular rate of inflation beginning in 2009.
This week’s economic news:
(1) the only housing news offered no promise of a turnaround: weekly mortgage applications [secondary indicator] experienced its first drop in four weeks, falling 2.1%,
(2) more mixed data on the consumer: [a] the International Council of Shopping Centers reported weekly sales of major retailers fell .7% but increased 1.8% on a year over year basis; Redbook Research reported month to date retail chain store sales dropped 1.2% versus the comparable period in January and inched up .6% versus the similar timeframe in 2007, [b] January retail sales, as measured by the Commerce Department, were reported up .3% versus expectations of a decline of .4%; ex autos, sales were up .3% versus estimates of .2% rise, [c] weekly jobless claims fell 9,000 versus expectations of a decline of 3,000, [d] the University of Michigan’s preliminary February consumer sentiment index came in at 69.6 {the lowest reading in 12 years} versus expectations of 76.3 and the final January reading of 78.4,
(3) measures of industrial activity showed no direction: [a] December business inventories rose .6% versus expectations of an increase of .4%; unfortunately business sales fell .5%, pushing the inventory to sales ratio up; however, as with the wholesale numbers reported last week, it appears that businesses were simply adjusting to November’s activity which saw inventories up .4% but sales up 1.4%, [b] January industrial production was reported up .1%, in line with expectations and an unchanged reading in December (http://mjperry.blogspot.com/2008/02/forget-obituaries-us-economy-is-alive.html), [c] January capacity utilization came in at 81.5 versus estimates of 81.4 and 81.4 recorded in December, [d] finally the February NY Fed manufacturing survey {secondary indicator} plunged to -11.72 {signifies a contraction} versus expectations of +5.75 and +9.03 reported in January,
(4) the macro economic statistics were both encouraging and depressing: [a] the disheartening news was that while the January US federal budget was in surplus, the deficit {fiscal} year to date is twice the level for the comparable period in FY2007; regrettably, federal spending is up 8.3% while revenues are up only 3.2% {see The Economic Risks # (5) below}, [b] on a more cheerful note, the December international trade deficit came in at $58.8 billion versus estimates of $61.8 billion--the better results despite high oil prices and a big trade deficit with China. A lower dollar {making US goods cheaper} was the primary reason. One other note, this better than expected trade report will have the effect of raising the growth rate of the fourth quarter GDP.
http://mjperry.blogspot.com/2008/02/trade-deficit-down-qiv-gdp-may-double.html
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
(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. Witness this week’s news on both fronts:
http://www.powerlineblog.com/archives2/2008/02/019794.php
http://article.nationalreview.com/?q=NWU3NmEwNzhmYjVkZDdlNzVmZDhhODVmMmViZTRlODM=
And
The Market
Technical
The DJIA (12348) is in a short term trading range defined by 11622 /11900 (the January intra day low/the January low close) and 12511 (the August 2007 intra day low). I had held out the hope that the DJIA could regain the necessary momentum to propel it back into the 1982-present up trend--but a second failure this week to do just that probably dispelled any validity of using its boundaries to judge investor sentiment. At the moment the 11622/11900 to 12511 trading range is the operative trend. With the S&P (1349) I am watching the boundaries of the up trend off the 1982 low (circa 1269-1722) and the 750-1527 2002-present trading range.
Fundamental
The DJIA (12348) finished this week about 7.7% below Fair Value (13383) while the S&P closed (1349) around 12.4% undervalued (1540).
I have added 2009 Year End Fair Values for the DJIA and S&P (see Current Market Forecast above). I put in a range for both indices because I had to began dealing with the valuation implications of this country perhaps turning to a more liberal economic agenda as espoused in the programs put forth this week by Clinton and Obama. Specifically, the lower number in each
As far as this week goes, I continued to be impressed with the Market’s price action, particularly on Thursday and Friday. By that I mean, that there was plenty of bad news on recent headline issues (the sub prime problem, recession and monoline insurers): on Thursday, in congressional testimony Bernanke suggested that the economy could likely weaken further and there were multiple news stories on the financial troubles of the monoline insurers--although we are slowly but surely getting more clarity (http://bigpicture.typepad.com/comments/2008/02/fgic-split-us-i.html); and on Friday, Citigroup halted redemptions of hedge fund that specialized in sub prime paper and the news on the NY manufacturing index and the University of Michigan consumer sentiment index (see Economics above) was disappointing. It is not that the Market didn’t decline; it just didn’t go down as much as it would have three weeks ago. My point is simply to emphasize my conclusion from last week’s Closing Bell:
“That said, ...................., that doesn’t mean that we run out and spend all of our cash reserves. While I do believe that the Market has bottomed, I also believe that the Market will test that bottom; and I believe that the prior two statements have no better than a 60/40 chance of being correct. Nevertheless that estimate is above what it was last week, so I will continue to put money to work as Market declines.”
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 reflect 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
(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
Close this week 12348 1349
Over Valuation vs. 2/29 Close
5% overvalued 13981 1608
10% overvalued 14647 1685
Under Valuation vs. 2/29 Close
5% undervalued 12650 1455
10%undervalued 11984 1378
15%undervalued 11375 1309
The Portfolios and Buy Lists are up to date.
Company Highlight:
Northern Trust is a leading provider of investment management, asset and fund administration, fiduciary and banking solutions to institutions and individuals worldwide. The company has consistently earned a 15-17% return on equity while growing profits and dividends 9-11% annually for the last 10 years. NTRS expects to continue to grow its trust and investment fees as well as assets in custody driven by its expansion into foreign markets. The company has very limited exposure to the sub prime problem in that only one of its funds has invested in these securities. NTRS is rated A by Value Line, has a debt/equity ratio of about 20% and its stock yields 1.5%.
http://finance.yahoo.com/q?s=NTRS
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.
