CJS wife and I leave for the beach this weekend and will be gone till the middle of the following week. I apologize for the proximity of this vacation to our recent baby sitting stint; but the timing of the latter was out of our control. The good news is that we have been to this resort before; they have all the communications amenities I need to stay in constant contact with the Markets and subscribers; hence, as much as we would all like the coming days to witness calm in the securities markets, assuming the ugliness that we are currently in continues, you will likely hear from me daily--much as you did when I was in San Francisco. Nevertheless, there will be no Morning Calls or Closing Bells for the next two weeks.
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 Down Trend 10809-11525
Medium Term Down Trend 10918-14198
Year End Fair Value (revised): 13650-14050
2009 Year End Fair Value (revised): 14050-14893
Standard & Poor’s 500
2008
Current Trend:
Short Term Down Trend 1206-1296
Medium Term Down Trend 1186-1404
Long Term Trading Range 750-1527
Year End Fair Value (revised): 1570-1615
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 26%
High Yield Portfolio 36%
Aggressive Growth Portfolio 26%
Economics
The economy is a neutral for Your Money. This week’s data did nothing to alter the view that the economy is weak though not in recession and inflation is the more significant problem. Housing for the first time in weeks was mixed instead of disastrous. I am not suggesting a bottom as much as a temporary sense of relief. The consumer continues to spend though sluggishly at best; business activity remains the bright spot; and the macroeconomic statistics trumpeted rising inflation. That notwithstanding, perhaps the most important economic news this week was the fall in oil prices--which have clear impact on inflation. Should oil continue to decline in price, it would not only make the Fed’s job a lot easier but would likely influence consumer (investor) psychology which right now is bad, bad, bad. So far it seems to be having only a marginal impact on behavior; but if it continues to get worse, it will probably start to impact economic activity.
(1) the housing numbers were positive but distorted by a change in New York City building codes; with that adjustment, results were mixed: [a] June building permits were reported up 11.5% but amended for the aforementioned change were up only.7%; still better than estimates of a 1% decline, [b] the June housing starts headline reading was up 9.1%; ex the above modification, they were down 4% versus expectations of a 1.2% decline, [c] weekly mortgage applications {secondary indicator} rose 1.7%, the third weekly increase in a row,
(2) consumer data were also mixed though they portray weakness in this sector: [a] June retail sales as measured by the Commerce Department rose .1% considerably below the +.6% forecast; much of this shortfall was a result of poor auto sales {caused by high oil prices} as reflected in the retail sales ex autos number which was up .8% versus expectations of up .9%, [b] the International Council of Shopping Centers reported weekly sales of major retailers up .2% and up 2.2% on a year over year basis; Redbook Research reported month to date retail chain store sales up 1.2% versus the comparable period in June and up 2.7% versus the similar time frame in 2007, [c] weekly jobless claims climbed 18,000, less than forecasts of a 34,000 increase,
(3) measures of industry activity were up beat: [a] May business inventories increased .3% versus estimates of a rise of .6%; business sales grew .8%, once again pushing the inventory to sales ratio down, [b] June industrial production was up .5% versus expectations of up .1%, [c] resulting in capacity utilization at the end of June at 79.9 versus forecasts of 79.4 and May’s reading of 79.4, and [d] two secondary indicators: the July New York Fed’s manufacturing survey was reported at -4.92 versus expectations of -8.0 and -8.7 recorded in June and the Philadelphia Fed’s current business activity index came in at -16.3 versus estimates of -15.1 and the June reading of -17.1,
(4) the macroeconomic numbers centered on inflation and they didn’t make great reading: [a] the June producer price index {PPI} soared by 1.8% {that makes the last 12 month increase 9.2%}; while the core PPI came in at +.2% versus estimates of +.3%, [b] the June consumer price index {CPI} jumped 1.1% versus expectations of up .7%; core CPI rose .2% in line with expectations.
The Economic Risks:
(1) the economy is weaker than expected.
(2) Fed policy (reading the data correctly).
http://article.nationalreview.com/?q=NDgxYTM3MWUzMDc0OWUxZjE2ZWQyZjEyNmMzMzNjNTg=
(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.)
http://article.nationalreview.com/?q=ODZmNzYxZWVjODU1MGU0ZmI0ZDI2NWUzMzJkMzZkM2E=
Politics
Both the domestic and international political environments are a negative for Your Money.
Victor Hanson looks at
http://article.nationalreview.com/?q=ZjE2MjFmNGYzMTk2MGUxYWYzYjE0NTk5YjNmNDg2N2Y=&w=MA==
Ignominy in
http://www.realclearpolitics.com/articles/2008/07/a_child_killers_homecoming.html
The Democrats’ agenda:
http://article.nationalreview.com/?q=MjNlMWI2MmU5YzgxM2ZmMGViNmFlNzRlMjAyOTBmMzk=
W’s flip flop on
http://www.weeklystandard.com/Content/Public/Articles/000/000/015/337buwmb.asp
The Market-Disciplined Investing
Technical
The DJIA (11496) is trading within two downtrends: (1) a shorter term one off its May 2008 high: boundaries circa 10809-11525 and (2) a longer term one off its October 2007 high: boundaries circa 10918-14198. This Wednesday’s intraday low was circa 10797 and there is a major support level at circa 10663--not that far below Wednesday’s intraday low.
The similar levels for the S&P (1260) are (1) the decline off the May high: boundaries circa 1206-1296; the downtrend off the October high: boundaries circa 1186-1404; Wednesday’s intraday low: circa 1198; and the next major support level: circa 1166.
If one only focused on those downtrends, then the only conclusion is that stocks have further downside. However, there were a sufficient number of other technical indicators concurrent with the early Wednesday intraday low to suggest an important bottom has been made (a spike in the volatility index, huge volume, massive short covering, overwhelming bearish sentiment). Was it? I am not that smart; so as always, our strategy is to hedge our bets when uncertainty is high. In this case, it means putting about 20% of our cash reserves to work but keeping our finger on the trigger (to sell) should the Averages be unable to breach the upper boundary of their May 2008 to present downtrend.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (11496) finished this week about 15% below Fair Value (13600) while the S&P closed (1260) around 19.5% undervalued (1565).
The fundamental factors that have prompted recent gloomy investor sentiment are almost too discouraging to list: problems in our financial system, high energy prices, rising inflation and a political (from both parties) and bureaucratic class that demonstrates a depressing disregard of the most elementary economic concepts in an attempt to promote a political/social agenda that will surely impair corporate America’s ability to earn a competitive return on capital. Is this all in the price of stocks? Is supply/demand for energy starting work its magic? Will the Fed wise up? Is all the rhetoric from our politicians’ election year pandering?
I don’t know. But as you know, I have adjusted our Valuation Model to reflect at least some of these problems and by that measure, stocks are still significantly undervalued. Bottom line: at the moment, given what our Valuation Model suggests is general undervaluation of equities, I am focused on technical factors to guide our short term investment strategy.
Our investment strategy is:
(a) defense, defense, defense. Focus our Sell Discipline on [i] those stocks trading between the lower boundary of their
(b) watch Market technicals for signs of whether or not a bottom has been made; and if so, 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 11496 1260
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 10880 1252
The Portfolios and Buy Lists are up to date.
Subscriber Alert
This section will basically serve as my Monday communication. All actions discussed below will be implemented Monday morning at the Market open.
The stock prices of Northern Trust (NTRS-$78) and Walmart (WMT-$58) have traded into their
The stock price of Paychex (PAYX-$33) has traded into its
While the decline in the price of oil has prompted us to Sell a portion of our Portfolios holdings in the integrated oil companies to protect our profits, there are other segments of the energy complex that either benefit from that price decline (like refiners) or have suffered disproportionately (like natural gas). Therefore, the Dividend Growth Portfolio will purchase a one quarter position in Marathon Oil (MRO-$43) and the Aggressive Growth Portfolio will purchase one quarter positions in Frontier Oil (FTO-$18) and XTO Energy (XTO-$56)
Company Highlight:
Eaton Corp is a global manufacturer of highly engineered products, including hydraulic and fluid connectors, electric power distribution and control equipment, truck drive train and engine components, for the industrial, vehicle, construction, commercial and aerospace markets. The company has grown profits 9-11% annually for the past 10 years, earning a 20%+ return on equity. ETN should be able to maintain this pace as a result of (1) strong growth in the electrical, hydraulic and aerospace markets, (2) acquisitions, (3) continued penetration of international markets. Eaton is rated A+ by Value Line, carries higher than I would like debt to equity ratio of 33% and its stock provides a 2%+ yield.
http://finance.yahoo.com/q?s=ETN
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.
