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 11600-12722
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 17%
High Yield Portfolio 19%
Aggressive Growth Portfolio 23%
Economics
The economy is a neutral for Your Money. This week’s data supports my forecast of an economy (1) that is weak but will skirt a recession, but (2) with inflation growing as a problem. The housing numbers remained lousy on an absolute basis but showed signs of a decline in the rate of decline in housing activity suggesting a bottom could be occurring; of course, more information is needed before assuming that to be the case. Figures on the consumer were on balance positive with the sentiment indicators providing the only sour note. The sole measure of the industrial sector was not good. Marco economic data were generally in line with expectations--with the report of final fourth quarter gross domestic product (GDP), we now know that 2007 GDP grew (2.2%) about as I expected (see Current Economic Forecast above), inflation rose (2.5%--which was at the high end of my forecast), though corporate profit growth was disappointing (2.6%).
http://www.realclearpolitics.com/articles/2008/03/hold_the_hysteria.html
Once again the most significant news of the week did not come from the economic data but rather the Fed. In this case, on Thursday, the Fed held its first auction in which it allowed investment banks to swap a wide range of risky collateral for US Treasuries--which ended up being remarkably unremarkable (if that’s a word); that is, investment banks submitted far fewer securities for swap than had been anticipated. My take on this is that it strongly suggests that the investment banks aren’t nearly as concerned about the quality of their assets as the rest of the Market has been--which, in my opinion, speaks volumes about the embedded risk (or lack thereof) in the financial system. I hasten to add that this doesn’t mean that there still aren’t problems out there, that another Bear Stearns isn’t lurking in the weeds; but it likely means that any difficulties will be specific to a firm and not endemic to the entire financial system. More clarity on the resolution of the credit crisis.
(1) housing stats were somewhat mixed--but ‘mixed’ is a major improvement from their recent very poor performance: [a] February existing home sales {remember existing home sales are roughly 9x greater than new home sales} rose 2.8% versus estimates of a decline of .8%; the inventory of existing homes for sale fell, [b] February new home sales declined 1.8% versus expectations of a drop of 2.2%, [c] weekly mortgage applications {secondary indicator} soared 48.1% spurred by a 62% increase in refinancing resulting from lower interest rates,
(2) consumer related data also contained both good and bad news: [a] February personal income was reported up .5% versus expectations of an increase of .3%, [b] February personal spending was reported up .1% versus estimates of a .1% decline, [c] the International Council of Shopping Centers reported weekly sales of major retailers fell .4% but rose 1.0% on a year over year basis; on the other hand, Redbook Research reported month to date retail chain store sales were up 1.8% versus the comparable period in February and up 1.2% versus the similar timeframe in 2007, [d] weekly jobless claims fell 9,000 versus forecasts of a decline of 3,000, plus we got both sentiment indicators: [e] the Conference Board reported its March index of consumer confidence plunged to 64.5 versus estimates of 73.0 and 75.0 recorded in February; this is the lowest reading in 34 years while [f] the University of Michigan reported its revised March consumer sentiment index at 69.5, in line with expectations and versus February’s final reading of 70.8,
(3) only one piece of data on business activity and it was disappointing: February durable goods orders were off 1.7% versus forecasts of a rise of .8%,
(4) macro economic indicators were neutral: [a] the final report on fourth quarter gross domestic product {GDP} came in up .6%, in line with expectations; for 2007, real GDP grew 2.2%, [b] the fourth quarter core {ex food and energy} personal consumption expenditure index {PCE--the Fed’s favorite inflation indicator} rose at an annual rate of 2.5% versus estimates of up 2.7%; however, the February core PCE was reported at up.1%, in line with expectations and the year over year core PCE as of the end of February was up 2%, finally [c] fourth quarter corporate profits fell 3.3% and for the full year were up 2.6%.
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 utter disregard by our elected representatives for fiscal discipline:
http://www.humanevents.com/article.php?id=25650
Another review of the fiscal devastation that is Social Security:
http://www.humanevents.com/article.php?id=25698
A not so positive view of events taking place in southern
http://www.slate.com/id/2187564/
The Market
Technical
The DJIA (12216) is in a short term trading range defined by 11622 /11900 (the January intra day low/the January low close) and 12369 (the December 2007 to present downtrend). With the S&P (1315) I am watching the boundaries of the up trend off the 1982 low (circa 1290-1743), the 750-1527 2002-present trading range and the short term trading range comparable to the DJIA range (1269-1336).
Fundamental
The DJIA (12216) finished this week about 9% below Fair Value (13449) while the S&P closed (1315) around 15% undervalued (1548).
The short version of our investment strategy is to Buy stocks during Market declines, pulling cash reserves down to 12 ½%; and Sell those stocks that can’t regain their Buy Value Range and are selling below at least three of the technical markers that I have been monitoring, rebuilding cash reserves to 17 ½%.
The long version of 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 least three of the five technical price markers defining the July/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 12216 1315
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:
Blackrock Inc. provides investment management services (fixed income, equity and cash management) to institutional clients and individual investors worldwide as well as a family of open-end and closed-end mutual funds and offers risk management, investment system outsourcing and financial advisory services. The company has grown its earnings per share between 15-20% over the last five years and raised its dividend per share from $.40 in 2003 to $1.68 in 2007. In addition, BLK has consistently earned a 20%+ return on equity. Growth should continue as the company introduces new financial services and expands globally. Blackrock is rated A+ by Value Line, has only 2% debt and its stock currently yields 1.4%.
http://finance.yahoo.com/q?s=BLK
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.
