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 Up Trend 12448-13250
Possible 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:
Short Term Up Trend 1350-1442
Medium Term Uptrend 1293-1722
Possible 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 16%
High Yield Portfolio 20%
Aggressive Growth Portfolio 14%
Economics
The economy is a neutral for Your Money. There were few economic statistics reported this week and those that were generally supported my forecast of a weak economy, probably slipping into a shallow recession. There was no price data (save the continuing fall in housing prices); but, as you know, the second part of my forecast suggests inflation is a mounting problem. The specifics of this week’s data are: housing remains in a slump; the consumer sales numbers were mildly disappointing but the employment report was a big plus; March durable goods orders were a neutral.
(1) the housing market continues to get boot stomped: [a] March existing home sales fell 2%, in line with expectations; inventories continue to build and the median home price to decline, [b] March new home sales plunged 8.6% versus forecasts of a 2.5% decrease; as with existing homes, inventories rose, [c] weekly mortgage applications {secondary indicator} dropped again by 14.2%,
(2) consumer related data were downbeat except for the jobs report which was extremely positive: [a] the International Council of Shopping Centers reported weekly sales of major retailers declined .7% but rose 1.4% on a year over year basis; Redbook Research reported month to date retail chain store sales dropped 1.3% versus the comparable period in March and increased 1.9% versus the similar time frame in 2007, [b] weekly jobless claims fell 33,000 versus expectations of a 3,000 increase, [c] the University of Michigan preliminary April index of consumer sentiment came in at 62.6 versus estimates of 63.0 and the 69.5 March reading,
http://bespokeinvest.typepad.com/bespoke/2008/04/historical-mich.html
(3) the only measure of industrial activity was March durable goods orders which appeared bad but combined with the sizeable February upward revision, the report was basically neutral: March durable goods orders were down .3% versus estimates of a rise of .6%; however, February orders were revised from down 1.7% to down .9%; ex transportation, March orders were up 1.5%.
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://www.realclearmarkets.com/articles/2008/04/analysis_of_john_mccains_econo.html
http://article.nationalreview.com/?q=ZDZmYjdkMjRkNjRmZTU4NWVmODM5MTdiYmMxN2E0MjM=
The Market-Disciplined Investing
Technical
I pointed out in yesterday’s Morning Call that the DJIA (12891) had stayed above the November 2007 low (the former resistance turned support level) this week including attempts to trade below it for three days in a row. As a result, I think dominant technical pattern is now the March 2008 to date uptrend (current boundaries circa 12448-13250). In addition, I am watching the next visible resistance level (circa 12966) which is the current level of the October 2007 to present down trend line.
The S&P (1397) has not traded above the upper boundary of its late 2007-present trading range (1406); but as I observed in last week’s Closing Bell, the S&P never violated its 1982 to present up trend (now circa 1298-1841); and since its March 2008 low to present (circa 1350-1442) up trend is as well defined as the aforementioned DJIA up trend, the late 2007-present trading range is becoming less significant. The October 2007 to present down trend line is now circa 1414.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (12891) finished this week slightly less than 5% below Fair Value (13517) while the S&P closed (1390) around 10% undervalued (1555).
In Friday’s Morning Call, I suggested a notable shift in investor sentiment could be taking place. Until around
In the meantime, I am moving the guideline for the cash position for our Portfolios to a 10-15% range from the present 12 ½ -17 ½% range. 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%.
The long version of our investment strategy is to:
(a) use any price declines to buy positions in great quality companies whose stocks are trading within their
(b) 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
(e) be mindful that there remains an outside chance that the Market may not have bottomed; so our Stop Loss Discipline remains critical,
(d) 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 12891 1397
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
SEI Investments offers comprehensive software products and computer processing services to trusts and investment programs and administrative and distribution services to mutual funds and other pooled funds. SEI has grown its profits and dividends at a 15-20% pace over the past 10 years earning over a 40% return on equity with virtually no debt. Despite the recent turmoil in the securities markets, the company should continue its above average growth as a result of the implementation of its new Global Wealth Platform as well as the trend towards outsourcing in the investment industry. SEI’s stock is rated A by Value Line and yields .5%.
http://finance.yahoo.com/q?s=SEIC
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.
