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 12710-13538
Medium Term Trading Range 11600-14203
Long Term Trading Range 7100-14203
Year End Fair Value (revised): 13650-14050
2009 Year End Fair Value (revised): 14050-14893
Standard & Poor’s 500
2008
Current Trend:
Short Term Uptrend 1386-1482
Medium Term Trading Range 1306-1841
Long Term Trading Range 750-1527
Year End Fair Value (revised): 1570-1615
2009 Year End Fair Value (revised): 1615-1711
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 14%
High Yield Portfolio 20%
Aggressive Growth Portfolio 12%
Economics
The economy is a neutral for Your Money. If one looked at this week’s economic data in isolation, he/she would scarcely believe all the wailing about recession. Of course, (1) they can’t be looked at in isolation and (b) this wasn’t a big week for statistics. So I am not contemplating a change in my forecast: an economy which has slowed dramatically, could easily be sliding toward negative growth and, to add insult to injury, is in beginning to experience serious upward pricing pressures. That said, I am not one to look a gift horse in the mouth; so today I take comfort in good employment, productivity, service and wholesale sales numbers. The particulars:
(1) again, the only housing statistics was weekly mortgage applications {secondary indicator} which rose 12%,
(2) the consumer related statistics were generally positive with employment remaining a bright spot: (1) the International Council of Shopping Centers reported weekly sales of major retailers fell .2%, though it rose 2.3% on a year over year basis; Redbook Research reported month to date retail chain store sales declined 1.6% over the comparable period in March while it increased 1.6% versus the similar time frame in 2007, (2) April retail sales as measured by Retail Metrics came in at a better than expected +3.3%; however, an Easter holiday related adjustment rendered this number not quite as positive as it appears on the surface, (3) weekly jobless claims fell 18,000 versus forecasts that they would remain unchanged,
(3) the two reported measures of industry activity were both upbeat: (1) the Institute for Supply Management released its April non manufacturing index {measures about 70% of the economy) at 52.0 {anything over 50 connotes growth} versus expectations of 49.8 and a March reading of 49.6, (2) March wholesale inventories declined .1% versus estimates of a .6% rise; March wholesale sales increased 1.6%, resulting in a decline in the wholesale inventory to sales ratio,
(4) the macro economic data were also positive: (1) first quarter productivity increased 2.2% versus forecasts of +1.5% and the fourth quarter report of up 1.9%, (2) on the other hand, first quarter unit labor costs were up 2.2% versus expectations of a rise of 2.8% and +2.6% recorded in the fourth quarter, (3) the March trade deficit was reported at $58.2 billion versus estimates of $61.9 billion--this despite record oil prices {imports}.
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.american.com/archive/2008/may-05-08/the-fast-track-trade-war
http://pajamasmedia.com/blog/whats-behind-the-iraq-iran-weapons-imbroglio/
The Market-Disciplined Investing
Technical
Until it’s proven otherwise, I think that dominant technical pattern for the DJIA (12745) is the March 2008 to date uptrend (current boundaries circa 12745-13552). For the S&P (1388), the dominant trend (s) is (are) the (1) the 1982 to present up trend (circa 1306-1841) and (2) the March 2008 low to present up trend (circa 1389-1484).
That said, it could be proven otherwise Monday since both indices closed right on the March 2008 to present up trend line (DJIA 12745; S&P 1389). Given those closing prices, stocks are clearly at a technical inflection point and will either (1) Hold the March to present up trend which will leave it as the dominant current trend or (2) they won’t which will re-introduce the August 2007 to April 2008 trading range as the major technical focus.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (12745) finished this week about 6% below Fair Value (13583) while the S&P closed (1388) around 11% undervalued (1562).
Notwithstanding the uncertain technical position stocks found themselves on Friday’s close, the evidence just keeps accumulating that (1) we have seen the worst of the credit crisis and (2) while a recession may still occur statistically, it is not apt to be the disaster forecast by many. Which to me means that (1) stock prices should be working their way upwards toward Fair Value and (2) even if they move lower, I can’t see them challenging the worse levels reached in January. So bottom line: I see no need to alter our current investment strategy.
That said, it is still fair to consider where I might be wrong:
(1) certainly, we could have a worsening in the credit crisis and/or a severe decline in economic growth. If that is the case, news events will tell us soon enough and I will have to adjust our investment strategy.
(2) investors may be entering the traditional seasonal summer apathy--‘the sell in May and go away’ syndrome. If this is the case, our current investment strategy should hold us in good stead.
(3) with Democratic presidential race having gained some clarity on Tuesday, investors may be starting to adjust equity valuations to reflect a change in the economic agenda of the country if the Democrats prevail in November. As you know, I have been raising this as an issue for some time; so clearly I have had to think about such a results impact on our Valuation Model. And I have, but I have held off going on record quantifying the effect of an altered economic agenda because the election was still outside the traditional discounting time frame of most investors; plus it has taken time to get any specifics to the Democratic presidential candidates’ broader policy statements.
Well the elections are closer and the policy statements have some detail; so I tested our forecasts by changing some of the economic assumptions of our Valuation Model to reflect the impact of an assumed Democratic sweep of Congress and the White House in November. Were that to occur, the 2008 Year End Fair Values would be DJIA 13650/S&P 1570 and the 2009 Year End Fair Values would be DJIA 14050/S&P 1615. I reflected these new projections by increasing the Year End Fair Value spreads in the above Current Market Forecast section.
Four important things to note: (1) I am not saying these are my new forecast; at the moment, they simply quantify a possible outcome whose probability seems to be increasing, (2) they are subject to changes in the Democrats’ rhetoric once a presidential candidate has been selected and they no longer need to pander to the more liberal elements of their constituency, (3) even if they became the most likely result, stocks are still collectively undervalued. So again, at the moment, there is no need to alter our present investment strategy and (4) a change in the economic agenda will impact various industries differently. I will begin adjusting the
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 have traded into that ‘no man’s land’ between the lower boundary of their
(e) be mindful that [i] there remains an outside chance that the Market may not have bottomed and [ii] that notwithstanding, a number of our Holdings have traded into their Sell Half Range, so our Sell Disciplines remains critical,
(d) on a longer term basis, recognize that there are 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 12745 1388
Over Valuation vs.5/31 Close
5% overvalued 14262 1640
10% overvalued 14941 1718
Under Valuation vs. 5/31 Close
5% undervalued 12903 1483
10%undervalued 12224 1409
15%undervalued 11545 1327
The Portfolios and Buy Lists are up to date.
Company Highlight:
State Street Corp provides institutional investors with custody services, daily pricing of mutual funds, investment management, investment research and trading. The company has grown profits and dividends 10-15% over the last 10 years while earning a 13-15% return on equity. STT should be able to continue its above average performance because its asset servicing and asset management operations continue to take market share, its foreign exchange business benefits from higher volumes and increased volatility, improving net interest margins and acquisitions. State Street is rated A by Value Line, has a debt to equity ratio of approximately 19% and its stock yields 1.3%.
http://finance.yahoo.com/q?s=STT
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.
