The Closing
This weekend CJS wife and I leave for
P.S. We have additional work to do on the Market open Monday. I will send a Subscriber Alert before departing for
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 25%
High Yield Portfolio 27%
Aggressive Growth Portfolio 28%
Economics
The economy is a neutral for Your Money. For the second time in three weeks, the economic data were disappointing. I am saying that not because we received a lot of negative statistics; on balance, I would say that they were mixed. But the employment numbers and the Institute for Supply Management’s non manufacturing index [which measures a much larger portion of the economy than the manufacturing index] were the most important of reported data points; and they were both negative. If this were simply a week of discouraging data in the midst of a stream of positive statistics, I wouldn’t be concerned. But I said that two weeks ago; and now we have data with a recessionary bias in two out of the last three reporting periods. I don’t think that this is sufficient to alter my forecast of an economy struggling but not declining; but it certainly makes that projection less certain.
There was one very positive piece of news which came after the Market closed on Thursday--and that was the Fed reported that the value of the securities that it took in from Bear Stearns during its crisis at $28.9 billion. That is only $1.1 billion below their value at the time of the transaction. In addition, the Fed said that it had made no new loans to security dealers in its latest reporting period. Think about this for a second in the context of the ‘crisis in the banking system’.
The Fed is saying that (1) there has been only a minor mark down in the securities in took from Bear Stearns since it took them--suggesting a stabilization in the value of those securities. Now that doesn’t mean that we won’t get further write downs from other firms but it does suggest that those write downs will come from a previous decline in value not from a continuing decline in value; that is a significant point in judging the risk remaining in the financial system, (2) the securities dealers balance sheets have stabilized to the point and sufficient liquidity has returned to the system that the dealers did not need Fed resources to carry on business as usual--again this suggests that considerably less risk exists in the financial system. It doesn’t mean that no risk exists or that one or more firms may still have big write offs ahead of them; but it does suggest that those occurrences would not pose a significant risk to the overall system.
(1) the only housing stat this week was weekly mortgage applications [secondary indicator] which rose 3.6% [although they remain 22.8% below their level in same week in 2007],
(2) the consumer data were focused on employment and they weren’t pretty: [a] June nonfarm payrolls fell 62,000 versus expectations a drop of 58,000, [b] leaving the unemployment rate at the end of June unchanged at 5.5%, [c] weekly jobless claims jumped 20,000 versus estimates of a 1,000 increase, [d] the International Council of Shopping Centers reported weekly sales of major retailers up .1% over the prior week and up 2.2% on a year over year basis; {I could not find the weekly Redbook Research report},
(3) measures of industry activity were mixed with a slightly positive bias: [a] May construction spending fell .4% versus estimates of a .5% decline, [b] May factory orders were up .6%, in line with forecasts, [c] the Institute for Supply Management reported its June manufacturing index at 50.2 {anything over 50.0 signifies growth} versus forecasts of 48.3 and May’s reading of 49.6, [d] and its June nonmanufacturing index came in at 48.2 versus expectations of 51.5 and 51.7 recorded in May, [e] finally, the Chicago purchasing managers’ index {secondary indicator} released its June reading of 49.6 {any number under 50.0 connotes contraction} versus estimates of 48.0 and May’s index of 49.1.
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.
An update on
http://www.longwarjournal.org/archives/2008/07/analysis.php
The Market-Disciplined Investing
Technical
The DJIA (11288) is either in a trading range (we hope) circa 10663-13133 or in a downtrend off its October 2007 high with boundaries that I am a little unsure of--the problem is that this index has been falling so fast that it keeps pushing through a succession of ever lower, lower boundaries, which in and of itself is not particularly encouraging.
The S&P (1262) may be in a trading range. It moved through its January 2008 low (1269) Wednesday but managed to stay above its slightly lower March 2008 low (1256). It remained in this 1256-1269 range on Thursday. Clearly, it won’t likely stay there much longer; and its direction when it trades out of this range may tell something about the future course of stock prices.
The bottom line, technically speaking, is that stocks appear to have sustained downside momentum. The only near term hope is that somehow the S&P 1256-1269 level can hold and become the base for a ‘U’ shaped recovery. But don’t hold your breathe.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (11288) finished this week about 17% below Fair Value (13600) while the S&P closed (1262) around 19.4% undervalued (1565).
I have discussed our strategy ad nauseum in this week’s Morning Calls, so any repetition would only make it hurt worse. Bottom line: until we get either (1) some change in Fed policy/government change in energy policy and/or (2) a visible sign that a bottom is being made, we will continue to protect principal by Selling those stocks that trade below their Buy Value Range in any meaningful way or those in which we have substantial profits but their prices have deteriorated technically.
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 7/31//08 13600 1565
Close this week 11288 1262
Over Valuation vs.7/31 Close
5% overvalued 14280 1643
10% overvalued 14960 1722
Under Valuation vs. 7/31 Close
5% undervalued 12920 1487
10%undervalued 12240 1409
15%undervalued 11560 1330
20%undervalued 10800 1252
The Portfolios and Buy Lists are up to date.
Company Highlight:
Hormel Foods is an international manufacturer and marketer of consumer branded meat and food products which are sold fresh, frozen, cured, smoked, cooked and canned (Hormel, Always Tender, Cure 81, SPAM, Dinty Moore, Jennie-O, Mary Kitchen, Little Sizzlers, Chi-Chi’s and Kid’s Kitchen). HRL has grown profits and dividends at a 9-11% annual rate for the past 10 years earning a 16% return on equity. Despite rising feed and energy costs, the company should continue to grow as a result of (1) pricing gains, (2) manufacturing efficiencies, (3) its efforts to produce more value added products, such as Compleats microwave trays, (4) expansion into overseas markets, and (5) acquisitions. Hormel is rated A by Value Line, has a 15% debt to equity ratio and its stock yields approximately 2%.
http://finance.yahoo.com/q?s=HRL
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.
