The Closing
We have an out of town wedding of a niece this weekend; we leave very early Saturday morning. So The Closing Bell is early this weekend.
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 12263 (12511)-13133
Medium Term Trading Range 11635-14190
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 1323 (1372)-1439
Medium Term Trading Range 750-1527
Long Term Up Trend 1307-1754
Year End Fair Value (revised): 1570-1615
2009 Year End Fair Value (revised): 1615-1711
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 15%
High Yield Portfolio 20%
Aggressive Growth Portfolio 15%
Economics
The economy is a neutral for Your Money, though of late the data have by and large been up beat; and I am encouraged. For the moment, I am not changing my forecast of (1) a dramatically slowing economy teetering on the edge of recession, (2) with inflation growing as a risk. However, given that over the last couple of weeks the reported data points have been coming in above Street expectations and real long term interest rates are rising (suggesting improved future economic activity), the probability of an out right recession seems to be fading. In addition, if the recent down moves in oil and gold prices and the move up in the dollar continue, that bodes well for diminishing price pressure. Bottom line: several more weeks of such reports and I will likely take the possibility of recession out of the forecast. That said, I am not for a second suggesting that we still aren’t in for a bumpy economic ride over the rest of the year.
(1) housing statistics were somewhat mixed though April new home sales outweigh the weekly mortgage applications: [a] April new home sales rose 3.3% versus expectations of a 1.3% increase, and [b] weekly mortgage applications {secondary indicator} fell 4.6%,
(2) consumer data was neutral to positive: [a] weekly jobless claims rose 4,000 versus forecasts of up 8,000, [b] plus two sentiment indicators: the Conference Board’s May index of consumer confidence dropped to 57.2 versus forecasts of 60.0 and 62.3 recorded in April and the University of Michigan’s final May index of consumer sentiment came in at 59.9 versus estimates of 59.0 and 62.6 recorded in the final April reading, [c] finally, the International Council of Shopping Centers reported weekly sales of major retailers were unchanged and up 1.5% on a year over year basis; Redbook Research reported month to date retail chain store sales jumped 1.9% versus the comparable period in April and increased 1.8% versus the similar time frame in 2007,
(3) both measures of industrial activity were better than anticipated: [a] April durable goods orders declined .5% versus estimates of a decrease of 1.5%, [b] and a secondary indicator--the Chicago purchasing managers May index came in at 49.1 versus forecasts of 48.0 and April’s report of 48.3,
(4) the macro economic data was generally upbeat: [a] first quarter gross domestic product increased .9% in line with expectations and up from the initial estimate of up .6%, [b[ the first quarter core personal consumption expenditure index rose 2.1% on an annualized basis versus expectations of a 2.6% increase and the initial report of +2.2%, [c] April personal income was reported up .2%, in line with expectations, [d] April personal spending was reported up .2%, also in line with estimates.
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.
Some good news; but note the reference to
http://www.washingtonpost.com/wp-dyn/content/article/2008/05/29/AR2008052904116.html?nav=rss_world
The Market-Disciplined Investing
Technical
In Tuesday’s Morning Call, I pointed out that the March 2008 to present up trend for both the DJIA and the S&P had been broken. The rest of the week they struggled to establish a new short term technical trend. At the moment, the DJIA (12638) appears to have found a discernable top to a trading range at circa 13133; the bottom is not so clear--I am speculating, it will ultimately be either the August 2007 low (circa 12511) or the April 2008 low (circa 12263). Longer term the DJIA is in a trading range defined by circa 14190 (October 2007 high) and circa 11635 (January 2008 low).
A short term trend for the S&P (1400) is somewhat less clear because there is neither an apparent top nor bottom to a trading range; although right now it looks like there is resistance at circa 1439 and support at either circa 1372 (the August 2007 low) or circa 1323 (the January 2008 low). Longer term, the S&P remains in its 1982 to present up trend (circa 1307-1754).
Fundamental-A Dividend Growth Investment Strategy
The DJIA (12638) finished this week about 6% below Fair Value (13500) while the S&P closed (1400) around 9.8% undervalued (1553).
As I suggested above in the Economics section, the recent economic data seems to be turning a bit more positive. Next week’s statistics include some critical housing and employment figures which, if up beat, could potentially reinforce a more favorable view of the economy, raise my (and other investors’) confidence about buying stocks on price weakness, would likely provide at least some of the needed impetus to drive stock prices toward their Fair Value and push me to be more aggressive in getting our cash balances to work.
I recognize that this judgment is somewhat at odds with the conclusion I draw above on the Market’s technical outlook; and I have no way of reconciling the two. But the Market will. If the economic fundamentals improve, the technical outlook will likely follow suit; if those fundamentals are a disappointment, then the economic outlook fades to a darker shade of pale and my focus will be on figuring out where the technical bottom is.
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 12638 1400
Over Valuation vs.5/31 Close
5% overvalued 14175 1630
10% overvalued 14850 1708
Under Valuation vs. 5/31 Close
5% undervalued 12825 1475
10%undervalued 12150 1398
15%undervalued 11475 1320
The Portfolios and Buy Lists are up to date.
Company Highlight:
Luxottica is an Italian company which markets prescription eyewear and sunglasses under the Ray-ban, Chanel, Bulgari, Polo Ralph Lauren, Tiffany and Oakley brands through 5,500 company owned, franchised and leased locations under the LensCrafters, Sunglass Hut, Pearle Vision and Sears Optical banners. The company has grown dividends and profits at a 15-20% pace over the past 10 years earning a 17-18% return on equity. While 2008 will likely be a rough retail environment, LUX should continue to make gains as a result of the cost savings from the integration of Oakley and the company’s continued expansion into emerging markets. LUX is rated B+ by Value Line, carries about 39% debt to equity ratio and its stock yields 2%.
http://finance.yahoo.com/q?s=LUX
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.
