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 10663(?)-13133
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 Trading Range 1269-1439
Long Term Trading Range 750-1527
Long term Up Trend 1317-1797
Year End Fair Value (revised): 1570-1615
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 19%
High Yield Portfolio 19%
Aggressive Growth Portfolio 17%
Economics
The economy is a neutral for Your Money. This week’s economic data reversed the depressing results from last week suggesting that those statistics were the exception rather than the rule. As to the particulars, the housing numbers couldn’t be described as upbeat but existing home sales were a hopeful sign; measures of consumer health were modestly positive as were the macroeconomic data and the single data point on industrial activity. As a bonus, the Fed in its statement Wednesday supported our forecast: an economy growing by fits and starts but not rolling over into a recession with inflation a rising menace.
(1) housing figures remain dismal though somewhat better than expectations: [a] May new home sales declined 2.7% versus estimates of a 4.0% decrease, [b] May existing home sales {approximately 90% of all home sales} rose 2% versus April’s report, in line with forecasts; and existing home inventories fell 1.4%, [c] weekly mortgage applications {secondary indicator} dropped another 9.3%, reaching its lowest level in 6 ½ years,
(2) data on the consumer were generally positive except for the sentiment indicators: [a] May personal income jumped 1.9% versus expectations of a .4% rise--at least part of this encouraging result was the rebate checks, [b] May personal spending was up .8% versus estimates of +.7%, [c] the International Council of Shopping Centers reported weekly sales of major retailers down .6% versus the prior week but up 2.2% on a year over year basis; Redbook Research reported month to date retail chain store sales down .7% versus the comparable period in May but up 2.4% versus the similar time frame in 2007, [d] weekly jobless claims were unchanged versus forecasts of an increase of 1,000, and [e] two secondary indicators: the Conference Board’s June index of consumer confidence plunged to 50.4 versus expectations of 56.0 and the May reading of 57.2 and the University of Michigan’s June final consumer sentiment index came in at 56.4 versus an anticipated reading of 56.5 and 59.8 recorded in May,
(3) there was only a single data point measuring industrial activity: May durable goods orders were unchanged from April versus forecasts of a .5% decline,
(4) the two macroeconomic statistics released this week were mildly up beat: [a] first quarter final gross domestic product grew 1%, in line with expectations and up from the initial estimate of up .6%, [b] the first quarter personal consumption expenditure index {PCE} rose a 3.6% annual rate versus the initial forecast of 3.5% while the core PCE increased at a 2.3% annual rate versus initial expectations of +2.6% and +2.4% recorded in fourth quarter 2007,
(5) the Fed: I dealt with the Fed, its decision not to raise rates and the consequences in Thursday and Friday’s Morning Call. There is little to add save someone else’s perspective:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/27/cnbarclays127.xml
Three (brief) economic forecasts for the rest of 2008:
http://www.american.com/archive/2008/june-06-08/america2019s-economic-outlook-a-symposium
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.
With regards to Your Money, regrettably this is the least worse candidate for President. And you wonder why I sound pessimistic sometimes:
http://www.realclearpolitics.com/articles/2008/06/bless_the_speculator.html
The Market-Disciplined Investing
Technical
The DJIA (11346) is either in a trading range (we hope) circa 10663-13133 or in a downtrend off its October 2007 high with boundaries circa 10986-12933--don’t be misled by the current level of this lower boundary being higher than the boundary of the aforementioned trading range because it is declining rapidly each day.
The S&P (1278) remains in a trading range bounded by its January 2008 low and May 2008 high (1269-1439).
All that said, clearly the mood on the Street is dark and the current momentum is to the downside. Consequently, I think that we need to accept the likelihood of either some sort selling climax or a long painful bottoming process.
This gloomy statement may raise the question, why not just sell everything and wait to get back in? The answer is (1) this is just my best guess and I could be wrong and (2) even if I am correct, given the volatility of recent selling climaxes, the DJIA could be down 500 points by noon on Monday and close up 200 points on the day. I would rather ride through that kind of scenario rather than incur the friction costs associated with trading in a highly emotional Market, even assuming I could trade with perfect knowledge which of course I can’t. So the best I can do is keep adjusting the hedge (cash) in our bets.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (11346) finished this week about 16.2% below Fair Value (13550) while the S&P closed (1278) around 17.7% undervalued (1553).
I am not sure there is much to add to the comments already made in this week’s Morning Calls. I will repeat my biggest concern which I have mentioned several times in the last month: when I lowered the discount rate in our Valuation Model anticipating a more inflationary environment resulting from a changing political agenda, was it enough? Or said another way, based on what is likely to occur in the next 12 months is the DJIA really 16.2% undervalued? Or have I under estimated the difficulties that corporate America is going to face and is the DJIA only 5% undervalued; or could it be overvalued?
Well, I don’t have an answer to that; and I am probably not going to be able to make a reasonable judgment on it until the atmosphere becomes decidedly less emotional. My best thought at this moment is the one I made in Thursday’s Morning Call; and at the risk of being terribly repetitious, I print again:
‘I may be wrong but I think that this lack of clarity (in Fed policy viz a viz inflation) will serve to keep investor uncertainty at an elevated level and therefore keep stocks range bound at best. Indeed, I think that the only thing that changes Market psychology is a break in oil prices and that probably is not going to happen until (1) the dollar strengthens [which is not going to happen until monetary policy tightens], (2) the demand for oil [and other commodities] rolls over [which is probably not going to happen if the Fed is correct about the economy] or (3) the supply of oil [and other commodities] improves [if that happens it won’t be because of any help from our elected representatives].’
Our investment strategy is:
(a) defense, defense, defense. Focus our Sell Discipline on [i] those stocks trading between the lower boundary of their
(b) await for signs of a bottom to resume buying positions in great quality companies whose stocks are trading within their
(c) 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 13850 1593
Fair Value as of
Close this week 11346 1278
Over Valuation vs.6/30 Close
5% overvalued 14228 1636
10% overvalued 14905 1714
Under Valuation vs. 6/30 Close
5% undervalued 12872 1480
10%undervalued 12195 1402
15%undervalued 11518 1324
20%undervalued 10840 1246
The Portfolios and Buy Lists are up to date.
Company Highlight:
Colgate Palmolive is a global producer and marketer of detergents (FAB), toiletries Colgate toothpaste, Mennen, Colgate shave cream), and other household products (
http://finance.yahoo.com/q?s=CL
Steve Cook received his education in investments from Harvard, where he earned an MBA,
