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-again)
Real Growth in Gross Domestic Product (GDP): .5-1.5%
Inflation: 1.75-2%
Growth in Corporate Profits: 0-5%
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 1293-1722
Medium Term Trading Range 1293-1406
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 18%
Aggressive Growth Portfolio 16%
Economics
The economy is a neutral for Your Money. The data this week portray an economy teetering on the brink of recession, but not quite there, amidst a growing inflation problem. As you know two weeks ago, I adjusted my forecast to reflect this weakening growth, rising inflation scenario. However, as I have said repeatedly, there remains sufficient uncertainty about the direction of the economy that my conviction level on this forecast is quite low. My big worries are (1) the employment, which was mildly negative this week, again. The lower this data series goes, the more serious my concern about a [deepening] recession and (2) inflation. I raised this issue several weeks ago; and if nothing changes, I fear it will soon become the economy’s numero uno problem.
At first blush it may seem somewhat contradictory to be worried about both, but: (1) while each appears to be approaching threatening levels, the economic data is still confusing enough that I am simply not sure whether either will materialize into a genuine problem and (2) the Phillips Curve notwithstanding, the real dilemma is that they both could happen at the same time, i.e. if monetary policy stays constant, while the production of goods decline and layoffs take place, then there will be fewer goods for the same amount of money to buy--and that is the definition of inflation [more money chasing fewer goods].
As to this week’s particulars: housing continued to beat us over the head with a hammer; the March retail sales were a pleasant surprise; industrial activity showed further signs of recovery; and while the March inflation numbers were discouraging, the leading economic indicators were another reason for cautious optimism.
(1) still no end to the agony in the housing market: [a] March housing starts fell 11.9% versus expectations of a 6.1% decline, [b] March building permits dropped 5.8% versus estimates of a decrease of 1.2%, [c] weekly mortgage applications {secondary indicator} jumped 16.4%,
(2) indications of consumer health were mildly positive: [a] March retail sales, as reported by the Commerce Department, rose .2% versus expectations of a decline of .1%; however, most of the gain came from higher gasoline prices; ex those, sales were flat--still modestly better than estimates, [b] ex autos, March retail sales were up .1%, in line with expectations, [c] the International Council of Shopping Centers reported weekly sales of major retailers up .9% and up 1.8% on a year over year basis; Redbook Research reported month to date retail chain store sales fell 1.2% versus the comparable period in March but up 2.0% versus the similar time frame in 2007, [d] weekly jobless claims rose 17,000 versus expectations of an increase of 18,000,
(3) data on industrial activity followed the pattern of a weak February and a stronger March: [a] February business inventories were up .6%, in line with expectations; however, February business sales dropped 1.1% driving the business inventory to sales ratio up versus the January number but still below the February 2007 reading, [b] March industrial production rose .3% versus forecasts of a .1% decline and a fall of .5% in February, [c] March capacity utilization came in at 80.5 versus an anticipated reading of 80.4; and two secondary {conflicting} indicators: [d] the New York Fed’s April manufacturing survey was reported as + .63 {anything positive connotes growth} versus forecasts of -17.5 and -22.2 recorded in March and [e] the Philadelphia Fed April business activity index came in a -24.9 versus expectations of -15.0,
(4) the macro economic numbers were mixed: [a] the March producer price index {PPI} came in up 1.1% versus estimates of a .5% rise while core PPI was reported as increasing .2%, in line with forecasts, [b] the March consumer price index {CPI} was up .3%, in line with expectations, while core CPI rose .2% also in line with estimates, [c] March leading economic indicators rose .1% versus an anticipated fall of .1% and a drop of .3% in February.
Once again the most relevant data to us as investors this week came not from the government statistics but rather from corporate America in the form of better than expected earnings reports (as of the Friday close, 25% of the S&P companies have reported first quarter profits; ex financials, their earnings were up 5%). To be sure there were disappointments, GE and Pfizer for example--both of which our Portfolios own. But in general, there were more significant upside than downside surprises; and that was the primary force behind this week’s stellar Market performance (more on this below).
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.
http://article.nationalreview.com/?q=OWQwNmVhZGI1MjFhNTIxOTFiYzNlOTRhYTMyN2RhN2Q=
http://www.washingtonpost.com/wp-dyn/content/article/2008/04/17/AR2008041703165.html?sub=AR
The Market-Disciplined Investing
Technical
On Friday the DJIA (12849) broke out of the late 2007-present trading range (circa 11600-12722). If the break above the 12722 level holds, the next visible resistance level is circa 12966 which is the current level of the October 2007 to present down trend line. As you know, I tend to allow some time and space following the penetration of support/resistance level before declaring it a fait accompli, so I am going to watch for another day or so before making the assumption that the prior trading range is no longer the operative trend. However, if it proves to be the case, my focus on the DJIA would shift to a now discernable short term uptrend off its March 2008 lows defined by the boundaries of 12351-13132.
On the other hand, the S&P (1390) has not traded above the upper boundary of its late 2007-present trading range (1406). That said it never violated its 1982 to present up trend (now circa 1298-1841); so it could be argued that the late 2007-present trading range never held that much significance in the first place. The comparable (to the DJIA mentioned above) March 2008 low to present uptrend has boundaries of circa 1335-1427.
Another opinion:
http://bespokeinvest.typepad.com/bespoke/2008/04/key-index-techn.html
Fundamental-A Dividend Growth Investment Strategy
The DJIA (12849) finished this week slightly less than 5% below Fair Value (13517) while the S&P closed (1390) around 11% undervalued (1555).
If subsequent Market action confirms that stocks have indeed resumed an uptrend, I will move the cash position for our Portfolios to a 10-15% range from the present 12 ½ -17 ½% range. However, in line with my longer term concerns about the possible changes in direction of
So the short version of our investment strategy will move to Buying stocks during Market declines, pulling cash reserves down to 10%; and on any up move in equity prices, Sell those stocks that can’t regain their Buy Value Range and/or haven’t established an clearly defined up trend off their March lows, rebuilding cash reserves to 15%.
For the moment, though I am sticking with the 12 ½-17 ½% range for our cash positions.
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
Close this week 12849 1390
Over Valuation vs. 4/30 Close
5% overvalued 14192 1632
10% overvalued 14868 1710
Under Valuation vs. 4/30 Close
5% undervalued 12841 1477
10%undervalued 12165 1399
15%undervalued 11489 1321
The Portfolios and Buy Lists are up to date.
Company Highlight:
Abercrombie & Fitch retails youthful, fashion oriented causal apparel for men, women and children through 900+ stores in the US and Canada. The company has grown its profits at a 20%+ pace over the last 10 years and its dividend at a 10% rate over the last five years while earning a 30%+ return on equity. ANF should be able to maintain its above average growth rate due to (1) an expansion of its store base in the
http://finance.yahoo.com/q?s=ANF
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.
