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 19%
High Yield Portfolio 18%
Aggressive Growth Portfolio 26%
Economics
The economy is a neutral for Your Money. Most of the economic news this week points to a recession; and to be sure, if the data remain this negative for another couple of weeks, I will likely have to lower my forecast of economic growth in 2008...again. As to the specifics: Housing showed no obvious signs of improvement, although perversely, declining housing starts and building permits do portend lower home inventories--a prerequisite for an upturn in this market. The consumer sector provided mixed signals with retail sales being the only bright spot amongst all of this week’s economic data. Business activity figures were all bad; the only redeeming feature being since this is the first week those numbers have been really poor, it could be an aberration. Likewise, we got nothing positive from the macro economic statistics.
That said, the really significant developments this week all revolved around the government’s efforts to provide liquidity to the credit markets. I covered those in our Morning Calls so I won’t be repetitive here. However, I have to mention that we got more news on Thursday: the Fed reported that (1) it had expanded the list of assets [hint: that means lower quality securities] it would accept as collateral against the $200 billion swap with its US Treasuries and (2) banks had already borrowed $28 billion from the discount window. Bottom line is that giant steps were made this week in ‘clarifying the resolution of the credit crisis’ and hence further lessening the risk that financial market illiquidity will negatively impact economic activity.
(1) housing stats were not great but could have been worse: [a] February housing starts declined .6% versus expectations of a decrease of .7%; January starts were revised up, [b] however, February building permits {an indication of future starts} fell 7.8% versus estimates of being down 3.9%, [c] weekly mortgage applications were off 2.8%,
(2) consumer data were mixed with retail sales up but unemployment also up: [a] the International Council of Shopping Centers reported weekly sales of major retailers up .4% and up 1.6% on a year over year basis; Redbook Research reported month to date retail chain store sales increased 1.6% versus the comparable period in February and 1.1% over the similar time frame in 2007, [b] weekly jobless claims jumped 22,000 versus expectations of an increase of 7,000,
(3) all the measures of industrial activity were negative: [a] February industrial production was down .5% versus expectations of a .1% decrease, [b] February capacity utilization came in at 80.9 versus estimates of 81.3, and two secondary indicators were both down: [c] the March NY Fed manufacturing index fell to -22.2 versus forecasts of -7.4, and [d] the March Philadelphia Fed business activity index came in a -17.4 versus estimates of -19.5 and February’s reading of -24.0,
(4) the macro economic numbers were also disappointing: [a] the February index of leading indicators fell by .3% {the fifth month in a row} versus forecasts of a rise of .2% and [b] the February producer price index {PPI} rose .3% in line with expectations; the core PPI jumped .5% versus forecasts of a .2% rise.
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.
The Market
Technical
The DJIA (12361) is in a short term trading range defined by 11622 /11900 (the January intra day low/the January low close) and 12460 (the current level of the December 2007 intra day high to present down trend). With the S&P (1329) I am watching the boundaries of the up trend off the 1982 low (circa 1285-1738), the 750-1527 2002-present trading range and the short term trading range comparable to the DJIA range (1269-1349).
Fundamental
The DJIA (12361) finished this week about 8% below Fair Value (13449) while the S&P closed (1329) around 14% undervalued (1548).
Subscriber Alert
As a result of Thursday’s strength in equity prices, on the Market open Monday morning, the High Yield Portfolio will Sell additional shares of Plains All American (PPA-$44) and Martin Midstream Ptrs (MMLP-$31) and the Aggressive Growth Portfolio will Sell its remaining shares in Luxottica (LUX-$23). (Reminder: these are all stocks that have fallen below the lower boundary of their
At present the core of our investment strategy is to Sell stocks [those whose price has declined below the lower boundary of their Buy Value Range and can’t recover] as they rally and Buy them [those stocks whose prices have recovered above the lower boundary of their Buy Value Range or never dropped below it in the first place] in a decline, with the objective of raising our cash position to 20% during the rallies and lowering it to 15% when stock prices fall. This strategy will remain in effect until stock prices prove that they can trade higher; and I don’t think that will happen for a while. Despite the progress that has been made in addressing the credit crisis, there remains, in my opinion, sufficient uncertainty that the Averages will continue to oscillate between their January 2008 (support) lows and the November 2007 (resistance) lows (though as I have pointed they also need to overcome the resistance offered by the December 2007-present downtrend which is currently below those November lows).
However, as my confidence grows that the January 2008 low was indeed the bottom of this Market cycle, I want to increase our Portfolios overall commitment to equities, So in the next decrease in stock prices my objective for our cash balance will fall to 12 ½% from 15% and on any subsequent rally, it will drop to 17 ½% from 20%.
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 (but keeping a minimum cash position of 12 ½ %),
(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 [i] 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 and [ii] sell below at four of the five price markers defining the August 2007 to present decline,
(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 3/31//08 13449 1548
Close this week 12361 1329
Over Valuation vs. 3/31 Close
5% overvalued 14121 1625
10% overvalued 14794 1703
Under Valuation vs. 3/31 Close
5% undervalued 12777 1471
10%undervalued 12104 1393
15%undervalued 11431 1316
The Portfolios and Buy Lists are up to date.
Company Highlight:
Franklin Resources is a financial services holding company which provides investment management, trust and stock transfer services, distributes hundreds of mutual funds worldwide and sells insurance products, tax shelter investments and closed end funds. The company has grown its dividend and profits at a 12-15% pace over the last 10 years while earning a 15%+ return on equity. BEN should continue this record as its assets under management grows as the result of the introduction of new mutual funds, because investors are likely to be attracted by the above average performance of a number of its mutual funds and BEN’s aggressive marketing program.
http://finance.yahoo.com/q?s=BEN
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.
