8/8/08

Economics

A not very optimistic assessment of the current state of the US economy:

http://www.ft.com/cms/s/0/794801a8-63e8-11dd-844f-0000779fd18c,dwp_uuid=13e90304-4dc0-11dd-820e-000077b07658.html

The rally in the dollar continues:

http://mjperry.blogspot.com/2008/08/king-dollar-rally-continues.html

The initial jobless claims reported yesterday did not make great reading; and as you know, the employment numbers have been worrisome for me. But take a look at this analysis (absolute must read). Maybe the jobless claims data need to be revised.

http://mjperry.blogspot.com/2008/08/adjusted-for-growth-in-labor-force.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Another volatile day, yesterday; once again in a single day’s action, the Averages (DJIA 11431; S&P 1266) have moved from testing a resistance level (the January 2008 intraday lows) on the upside to approaching support levels (the July 2008 to present up trend: DJIA circa 11344, S&P circa 1258) on the downside). That leaves us watching, waiting and thankful for our 20% cash position.

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The percentage of stocks trading above their 50 day moving average:

http://bespokeinvest.typepad.com/bespoke/2008/08/percentage-of-s.html

Fundamental

Having commented yesterday’s Morning Call about how well the financial stocks performed generally on Wednesday in the face of the Freddie Mac news, they reacted terribly to the American International Group and Citicorp news (respectively, horrible earnings and a settlement with regulators to provide liquidity to retail customers for illiquid securities). That certainly squashes for the moment the notion that the financial stocks may have most of the bad news reflected in their prices.

Subscriber Alert

The stock price of Manulife Financial (MFC-$35) has fallen below the upper boundary of its Buy Value Range. Accordingly, MFC is being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio already owns this stock so no further action will be taken.

http://finance.yahoo.com/q?s=MFC

The stock prices of Fastenal (FAST-$49) and SAP (SAP-$58) have traded above the upper boundary of their Buy Value Range. Therefore, they are being Removed from the Aggressive Growth Buy List. The Aggressive Growth Portfolio will continue to Hold these stocks.

http://finance.yahoo.com/q?s=FAST

http://finance.yahoo.com/q?s=SAP

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

8/7/08

Economics

a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.) More taxes = less oil:

http://www.ibdeditorial.com/IBDArticles.aspx?id=302829283496153

A study on the impact that taxes, limited government and flexible labor laws have on economic growth:

http://www.american.com/archive/2008/july-07-08/the-path-to-prosperity

More data on unemployment:

http://www.thestreet.com/p/_htmlrmd/rmoney/marketcommentary/10432146.html

The impact of commodity prices on the daily cost of living:

http://bespokeinvest.typepad.com/bespoke/2008/08/the-cost-of-hig.html

Taxes paid by industry:

http://bespokeinvest.typepad.com/bespoke/2008/08/sector-cash-tax.html

Politics

Domestic

International War Against Radical Islam

Another opinion from the NYTimes on a withdrawal schedule from Iraq:

http://www.powerlineblog.com/archives2/2008/08/021174.php

The Market

Technical/ Fundamental

More on stock performance following a DJIA 300+ day:

http://bigpicture.typepad.com/comments/2008/08/300-point-dow-g.html

And a rebuttal:

http://bespokeinvest.typepad.com/bespoke/2008/08/dow-jones-300-p.html

A chart of the volatility index:

http://bespokeinvest.typepad.com/bespoke/2008/08/vix-back-below.html

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Yesterday’s Market action was interesting.

(1) Freddie Mac reported horrendous earnings that were below expectations; and while most financial stocks were down on the day, they weren’t crushed as they have been in prior instances when a highly visible troubled firm announced bad news.

Tentative conclusion: the more frequently the financial stocks DON’T react to more negative news, the more likely that all the negative news has been discounted.

(2) oil traded down, but most of the oil stocks were up big,

Tentative conclusion: over the past year, oil stock prices never advanced as fast or as far as the price of oil; so it seems reasonable to assume that in this decline, oil stock prices will either bottom well in advance of oil prices or if they bottom simultaneously, oil stock prices will not decline as fast or as far as the price of oil. Yesterday could be a signal that oil stock prices have bottomed irrespective of oil prices. ‘Signal’ is the operative word; but if the next couple of trading days reinforce this conclusion, our Portfolios will likely re-start re-building its positions in oil and related stocks.

(3) the DJIA [11656] traded above the January 2008 intraday low resistance level [circa 11636]. This puts both indices above the upper boundary of their May to present downtrend [resistance] line and their January 2008 intraday low [resistance] level. That is clearly a positive, but--

Tentative conclusion: even though the DJIA traded above the January 2008 intraday low, it wasn’t by much; so from my point of view, we need either time or distance to confirm this breakout. If we get it, then we will shift to a strategy of managing our Portfolio’s cash position between 15-20%; if not, we will hold on to our 20% cash position and hope that the July 2008 low holds as the bottom to this cycle.

I deliberately included ‘tentative’ in all the above conclusions because each of the three developments are interrelated to and could be in potential conflict with the other two. So each ‘tentative conclusion’ assumes ‘all other things being equal’, which we all know that they never are. My purpose is to point out the cross currents in the Market and how they might lead to an alteration of our investment strategy. However, as of this moment there is no change in our strategy.

Subscriber Alert

The stock price of Nike (NKE-$62) has risen above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio will continue to Hold NKE.

http://finance.yahoo.com/q?s=NKE

The stock price of WalMart (WMT-$61) has once again traded into its Sell Half Price Range. Therefore, at the Market open this morning, the Dividend Growth Portfolio will again reduce the size of this holding to 3% of the Portfolio.

http://finance.yahoo.com/q?s=WMT

The stock price of Avon Products (AVP-$44) has risen above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Aggressive Growth Buy List. The Aggressive Growth Portfolio will continue to Hold AVP.

http://finance.yahoo.com/q?s=AVP

At the Market open this morning, the Aggressive Growth Portfolio will Sell another one quarter of its position in US Global Shares-Gold (USERX) and the proceeds will be re-invested in a one quarter position in Schlumberger (SLB-$97).

http://finance.yahoo.com/q?s=USERX

http://finance.yahoo.com/q?s=SLB

The High Yield Buy List

Company Close 8/6 Buy Value Range

AJ Gallagher $25.69 $23-27

American Tel & Tel 30.87 28-32

Dow Chemical 38.90 32-37

Pfizer 19.43 19-22

Plains All American 45.11 45-52

RPM Int’l 20.27 19-22

US Bancorp 31.82 30-35

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

8/6/08

Economics

Yesterday was Fed day; and the Fed left the Fed Funds rate unchanged. The statement accompanied it and investor reaction fit well with the current schizophrenic market; that is, the language in the statement was more hawkish, i.e. it suggested that the Fed’s perceived level of concern about inflation is rising and, therefore, there would be an increased likelihood of tighter monetary policy, but investors reacted as though it were more dovish, i.e. they assumed that Fed is more concerned about the continuing credit crisis and, therefore, is more likely to maintain an accommodative monetary policy. Why the seeming contradictory reaction? Oil and commodity prices continued to get whacked which was interpreted as a decline in inflationary pressures (which indeed it is) which in turn led to investors assuming that the Fed was bluffing. Bottom line: Fed policy is likely to remain easy for the foreseeable future.

A parsing of the Fed’s statement:

http://paul.kedrosky.com/archives/2008/08/05/first_lets_ban.html

http://www.bloggingstocks.com/2008/08/05/fomc-decision-doves-10-hawks-1/

Market performance following Fed days:

http://bespokeinvest.typepad.com/bespoke/2008/08/recent-fed-days.html

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A graphic on the Baltic Dry Index (not good):

http://bespokeinvest.typepad.com/bespoke/2008/08/baltic-dry-inde.html

More on the logic of a windfall profits tax on oil:

http://mjperry.blogspot.com/2008/08/oil-industry-ranks-60-by-profit-margin.html

Politics

Domestic

Obama’s presumptiveness:

http://hughhewitt.townhall.com/blog/g/848b9d7f-c718-46df-9030-449da99862dc

Obama on drilling in Alaska:

http://www.powerlineblog.com/archives2/2008/08/021165.php

International War Against Radical Islam

The Market

Technical

An ordinary guy could get a severe case schizophrenia is this Market. Yesterday, after three rough days in the marketplace of America, we were speculating about whether the indices would be able to hold a very short term up trend and give some added hope that stocks are making a bottom--or not and offer the possibility that a rough ride isn’t likely over. Twenty four hours and a rebound that more than recouped that aforementioned three day decline later, the question is, will those same indices overwhelm a sufficient number of resistance levels that the probability of bottom being made rises significantly?

Not only did the S&P [1284] (1) hold the July 2008 to present short term uptrend, (2) it blew through the January intraday low resistance level [1256] and the upper boundary of its May 2008 to present downtrend [1264]. The next resistance level is the former lower boundary of its 1982 to present uptrend [circa 1339]. The DJIA [11615] bounced off the May 2008 short term uptrend as well as remaining above the May 2008 to present downtrend; it is now a hair’s breadth below its January 2008 intraday low resistance level. The bottom line here is that we are now in the opposite position as we were yesterday; that is, yesterday morning we were watching and worried about stocks going lower and whether we might need to protect our profits in the energy/oil/commodity holdings; today, we watch with an eye to whether stocks have indeed established a bottom and we need to adjust our cash strategy.

Barry Ridholtz thoughts on the current rally:

http://bigpicture.typepad.com/comments/2008/08/looking-at-tues.html

Cramer’s thoughts on what is going on in the oil/commodity stocks:

http://www.thestreet.com/p/_htmlrmd/rmoney/jimcramerblog/10431998.html

Stock performance after a big up day:

http://bespokeinvest.typepad.com/bespoke/2008/08/an-equal-opport.html

Fundamental

Company Highlight

Altria is the holding company for Phillip Morris USA, John Middleton (machine made cigars), Phillip Morris Capital Corporation and owns a 28.6% interest in SABMiller (Miller brewing). As a result of the recent spin offs of Kraft Foods and Phillip Morris International, breaking out past return on equity numbers as well as dividend and earnings growth rates directly attributable to this entity is beyond our pay grade; plus we have yet to find any other analyst that has undertaken the task.

Looking forward, the primary attraction that MO holds for us is its dividend yield (5.6%) as well as its very high cash flow per share which should allow the company to increase its dividend annually as well as engage in a share buy back program.

That said, the company should be able to grow its earnings in the future as a result of:

(1) continued increase in US market share,

(2) product line extensions, such as a move into smokeless tobacco,

(3) an efficient distribution network,

(4) a strong sales force,

The most significant negative is the company’s legal liability; however, the recent trend in court rulings have been favorable to the tobacco industry. As a result this risk appears to be reflected in MO’s current price.

MO is rated B+ by Value Line.

http://finance.yahoo.com/q?s=MO

News on Stocks in Our Portfolios

Proctor and Gamble (Dividend Growth Portfolio) reported its fourth fiscal quarter operating earnings per share of $.80 versus expectations $.78 and $.67 reported in the comparable 2007 quarter. Some analysis:

http://www.thestreet.com/p/_htmlrmm/rmoney/retail/10431939.html

http://seekingalpha.com/article/89414-proctor-gamble-tops-wall-street-in-management-feat

http://finance.yahoo.com/q?s=PG

Here is a positive write up on Bucyrus Int’l (Aggressive Growth Portfolio). However, the stock is now caught up in the selling Cramer discusses above. At the moment it is sitting right on a major support level. If that gives way, the Aggressive Growth Portfolio will likely act to protect profits.

http://biz.yahoo.com/ts/080805/10431959.html?.v=1

More Cash in Investors’ Hands

8/5/08

Economics

The underlying strength of the US economy is a major reason why we haven’t seen a significant recession; but the recovery will be slow and painful. Here’s why:

http://www.american.com/archive/2008/july-07-08/messages-from-merrill2019s-misfortunes

Politics

Domestic

Obama on economics:

http://www.ibdeditorials.com/IBDArticles.aspx?id=302484020165482

International War Against Radical Islam

The Market

Technical/ Fundamental

Market performance following Fed days:

http://bespokeinvest.typepad.com/bespoke/2008/08/recent-fed-days.html

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From a technical point of view the DJIA (11284) remains above the descending upper boundary of the May 2008 to present downtrend (11238) and also above a very short term uptrend off the July 2008 low (11200)--that’s some good news, the last couple of trading days notwithstanding; the S&P (1249) closed below the descending upper boundary of the May 2008 to present downtrend but still slightly above the very short term uptrend off the July 2008 low (1247)--so that’s OK news.

The internal pin action of the Market had the financial stocks mixed, the recession proof stocks (food, beverages, household products, health care) up nicely while the oil and commodity stocks were beaten like a rented mule. The good news is that our Portfolios had (1) sold a portion of many of the oil/commodity holdings and (2) recently been buying a number of names in the recession proof economic sectors; the bad news is that in the last week, they also started re-building positions in the oil/energy/commodity stocks.

Perhaps coincidentally yesterday many of the oil/energy/commodity stocks traded down to easily identifiable support levels (just as the Averages traded near the lower boundary [support level] of the short term July 2008 to present uptrend). So the next couple of day’s Market action could be instructive as to the future stock price movement.

http://bespokeinvest.typepad.com/bespoke/2008/08/oil-headlines.html

If the July 2008 to present up trends of the indices hold as well as the individual support levels for the oil/energy/commodity stocks, it could be another signal that the Market is in a bottoming phase. On the other hand, if the oil/energy/commodity stocks break their support levels and plunge as the financial stocks have done previously, we may be in for more rocky times.

Subscriber Alert

In the meantime, as always our Price Disciplines ultimately control our actions. As a result at the Market open this morning, in order to protect our profits in ExxonMobil (XOM-$77; Dividend Growth Portfolio) and Smith Int’l (SII-$70; Aggressive Growth Portfolio), their positions will be reduced to one half sized holdings; and because the stock price of XTO Energy (XTO-$44; Aggressive Growth Portfolio) has fallen to near its Stop Loss Price, that position will be cut in half, leaving a one quarter sized holding.

In addition, the stock price of Canon (CAJ-$44) has fallen below its Stop Loss Price. Accordingly, the Dividend Growth Portfolio will Sell its (one quarter) position. The proceeds will be re-invested in the shares of Linear Technology (LLTC-$31).

The Dividend Growth Buy List

Company Close 8/4 Buy Value Range

Aflac $54.58 $49-56

Automatic Data Processing 43.43 41-47

CR Bard 92.84 81-94

Emerson Electric 47.83 47-54

Illinois Tool Works 46.73 45.52

Kimberly Clark 50.94 54-62

Linear Technology 31.11 29-33

Hormel Foods Corp 36.57 31-36

Johnson & Johnson 68.98 60-69

MDU Resources 31.45 29-33

Marathon Oil 45.21 44-51

Nike 59.78 55-63

Paychex 32.66 31-36

T Rowe Price 59.51 55-63

UGI Corp 26.36 24-28

News on Stocks in Our Portfolios

More Cash in Investors’ Hands