The Closing Bell

The Closing Bell

9/6/08

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): -1.0 - +1.05%

Inflation: 2-3%

Growth in Corporate Profits: 0-5%

Current Market Forecast

Dow Jones Industrial Average

2008

Current Trend:

Short Term Downtrend 10126-11518

Medium Term Downtrend 10695-12636

Long Term Trading Range 7100-14203

Year End Fair Value (revised): 13450-13850

2009 Year End Fair Value (revised): 13850-14250

Standard & Poor’s 500

2008

Current Trend:

Short Term Downtrend 1131-1278

Medium Term Downtrend 1161-1381

Long Term Trading Range 750-1527

Long term Up Trend 1317-1797

Year End Fair Value (revised): 1533-1577

2009 Year End Fair Value 1595-1635

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 23%

High Yield Portfolio 20%

Aggressive Growth Portfolio 23%

Economics

The economy is a neutral for Your Money. Following this week’s economic data, our view that the economy is/has been or soon will be in a mild recession remains the most likely scenario. Importantly, there was no follow on to the big-surprise-maybe-there-is-no-recession positives that characterized a couple of last week’s statistics. To be sure, we got some upbeat numbers, coming as they consistently have from the industrial sector. They included July factory orders, second quarter productivity and unit labor costs and the Institute for Supply Management’s August nonmanufacturing index. The rest of the data was basically mixed to negative; the worse coming from July residential construction and the employment numbers. Speaking of the latter, if you believe the past relationship between employment and recession remains in tact, it regrettably appears that now an economic down turn is virtually a lock.

The other part of our economic scenario centers on concern about rising inflation; but if the oil/commodity complex continues to collapse in price, the dollar strengthen, the TIPS spread narrow and the European and Japanese economies weaken, this may be less of a problem.

Here’s a chart of the TIPS spread:

http://mjperry.blogspot.com/2008/09/inflation-expectations-at-five-year-low.html

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 US economic growth.).

(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.

In case you missed Bill O’Reilly’s interview of Obama (Thursday night’s show only covered foreign policy), here is a summary of His key statements:

http://www.powerlineblog.com/archives2/2008/09/021425.php

The Market-Disciplined Investing

Technical

The DJIA (11220) and S&P (1242) closed Friday in two clearly defined down trends: (1) a very short term trend marked by the May 2008/August 2008 highs whose boundaries are DJIA circa 10126-11518 and the S&P circa 1131-1278 and (2) a medium term down trend extending back to October 2007 whose boundaries are DJIA circa 10695-12636 and S&P circa 1161-1381. Fortunately, there is additional support for both indices above the lower boundaries of these two down trends; it is at their July 2008 intraday lows: DJIA 10809, S&P 1198. Bottom line: I am remain hopeful that the July intraday lows will mark the bottom to this Market cycle; but that notwithstanding, no matter how you look at it, technically more downside seems likely.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (11220) finished this week about 16.9% below Fair Value (13516) while the S&P closed (1242) around 20.1% undervalued (1555).

Bottom line #1

What a difference a week makes. Last week the technical picture was clouded by divergence in performance of the major indices; and on the fundamental side, some positive economic data had investors hoping that the economy would avoid recession. At yesterday’s close, the technical picture has clarity but unfortunately the resolution suggests more price weakness. Indeed late Friday, I talked with a couple of floor traders who were pretty glum in their assessment of Market direction next week; that, of course, could be either good news (stock prices assault the July lows but bounce, thus completing a successful test) or bad news (stock prices blast through the July lows like crap through a goose). Meanwhile, the credit crisis is reasserting itself as the 500 pound gorilla in economic expectations. As you know, Thursday I got more defensive so I think that we are approaching Monday in the correct frame of mind--our primary focus, preserving capital.

Bottom line #2

I wrote both the technical bottom line and the above after the close in trading yesterday and was getting ready to take Mrs. CJS to an early movie. Fat chance. At about 4:30 (CST) the Wall Street Journal reported a rumor that the Treasury was near a plan to back stop Fannie Mae/Freddie Mac. Here are two Saturday morning articles (which gives you latest information I have before publishing this Closing Bell); notice all the ‘accordingly to unnamed sources’ referrals.

http://online.wsj.com/article/SB122064650145404781.html?mod=hpp_us_whats_news

http://www.bloomberg.com/apps/news?pid=20601087&sid=ax0ft0S9hVYk&refer=worldwide

Clearly, at the moment, we don’t know enough to make either an economic or an investment strategy judgment about the consequences of this development--it could be good news, bad news or no news. If bad or no news, then the above technical comments and bottom line #1 hold.

If it is good news, then it would likely mark another of those defining moments of clarity in the resolution of the financial crisis and will also lead to a turn around in investor psychology and stock prices. That would mean (1) fundamentally, a Treasury infusion of cash in Fannie/Freddie will likely lower mortgage rates which should in turn lead to an improvement in the housing market and (2) technically, this week’s plunge will be viewed as a test of the July lows and the rebound in prices will define that test as successful. Indeed, the rebound could be explosive--which gives me the opportunity to look stupid a lot quicker than I would have ever thought, to wit, in discussing the stock sales our Portfolios made Friday, I wrote that ‘I would rather sell a stock and have to buy it back 5% higher and look stupid, than hold on and find it down 40%, 50%, 60%.’ Well, our Portfolios may be buying those stocks back 5% higher.

All this said, the bottom line is that we don’t know enough to make an investment strategy call at this moment. Hopefully we will have clarity before the Market opens Monday. In the meantime, I will be working on both a buy and sell list this weekend so that we are ready whatever happens. Next week could be very interesting.

DJIA S&P

Current 2008 Year End Fair Value 13650 1555

Fair Value as of 9/30//08 13549 1547

Close this week 11220 1242

Over Valuation vs. 9/30 Close

5% overvalued 14226 1626

10% overvalued 14904 1701

Under Valuation vs. 9/30 Close

5% undervalued 12872 1469

10%undervalued 12194 1392

15%undervalued 11516 1315

20%undervalued 10839 1238

The Portfolios and Buy Lists are up to date.

Company Highlight:

Suncor Energy is the fifth largest crude oil producer, the tenth largest natural gas producer in Canada and is a primary means of participating in the Canadian oil sands play. The company explores, acquires, develops, produces and markets crude oil and natural gas; it transports and refines crude oil; and it markets petroleum and petrochemical products. SU has grown profits at a 25%+ rate over the past ten years, while raising its dividend at a 10% rate. Earnings growth is likely to slow somewhat in coming years though dividend increases should accelerate. The company earns a 25%+ return on equity. Driving future growth is a very aggressive expansion of capacity ($5 billion) which should double production in the next four years. Suncor is rated A by Value Line, has a 26% debt to equity ratio and its stock pays a .3% yield.

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

Make money by accessing all our Portfolios, the supporting research and Price Disciplines at www.strategic-stock-investments.com. Our work is focused on making money for our Portfolios not as some academic exercise in Internet investing. Check our performance (audited)--our Dividend Growth Portfolio has beaten the S&P 500 basis points per year for the last seven years but with a beta of only .62. (Mandatory Disclaimer: past performance is not a guarantee of future results.) We give you everything you need to duplicate our results, in particular, a strict price discipline for both Buying and Selling.

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.

9/5/08

Economics

Recent Data

Second quarter nonfarm productivity rose 4.3% versus estimates of an increase of 3.9% and the final first quarter reading of +2.2%; its complement, second quarter unit labor costs, fell .5% versus expectations of a decrease of .3% and final first quarter report of a 1.3% increase. These data bode well for corporate profits; but as I have stressed numerous times, wages and incomes have to participate in the productivity increases or sooner or later there will likely be repercussions.

The August Institute for Supply Management nonmanufacturing index came in at 50.6 (anything over 50.0 signifies growth) versus a forecast of 49.0 and 49.5 recorded in July. Pictorially:

http://econompicdata.blogspot.com/2008/09/ism-services-august.html

Weekly jobless claims were up 15,000 versus expectations of a decline of 5,000.

A graphic look:

http://www.capitalspectator.com/archives/2008/09/labor_pains.html

August nonfarm payrolls were reported this morning down 84,000 versus expectation of -75,000; the unemployment rate rose to 6.1% versus estimates of 5.8%. Look at this chart plotting NFP against recession:

http://bigpicture.typepad.com/comments/2008/09/will-nfp-breach.html

Other

Is monetary policy too loose?:

http://www.american.com/archive/2008/september-09-08/is-u-s-monetary-policy-really-too-loose

A discouraging look at corporate profits:

http://bigpicture.typepad.com/comments/2008/09/soc-gen-meltdow.html

Updated chart porn on the credit default risk:

http://bespokeinvest.typepad.com/bespoke/2008/09/mortgage-rates.html

Here is the Bureau of Labor Statistics reply to the recent criticism of CPI (as put forth via our recent link to Barry Ridholtz’s comments):

http://mjperry.blogspot.com/2008/09/addressing-misconceptions-and-myth.html

Politics

Domestic

Here is a reasonably balanced analysis of McCain’s Palin choice from Charles Krauthammer:

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/04/AR2008090402845.html?sub=AR

International War Against Radical Islam

The Market

Technical

Another ugly day. Most of the decline being attributed Fed governor Janet Yellen who said that the second half of 2008 would be ‘sub par’ (is that news?) and Bill Gross of Pimco (largest fixed income manager in the US) who said he wasn’t buying anymore of the sub prime paper until the Fed makes a bigger effort to provide liquidity to that depressed market.

http://dealbreaker.com/2008/09/bill_gross_bring_out_the_bazoo.php

The DJIA (11188) sailed right through the August low (11288) (though granted it offered very weak support); that leaves the next identifiable support levels at the July 2008 intraday low (10808) and the lower boundary of the down trend off the October 2007 high (circa 10724). The S&P (1236) broke both its January/March 2008 intraday lows (1269, 1256 respectively) leaving the next support levels at its July 2008 intraday low (1198) and the lower boundary of its October to present downtrend (circa (1158).

Adding to this weak performance was the action of the volatility index which has sharply increased this week from 20 to 24 breaking out of an identifiable down trend (remember when the volatility index goes up, generally stocks go down) including a rise on Tuesday when the DJIA spiked 250 points to the upside then closed down for the day. The momentum for the VIX appears to be to the upside and typically stocks bottom when it hits the 30-36 range--so it looks like we have a way to go (i.e. stocks to the down side).

Here is some eye candy to illustrate the lousy technical picture:

http://traderfeed.blogspot.com/2008/09/buying-sentiment-stalls-out-look-at.html

http://traderfeed.blogspot.com/2008/08/money-flow-update-for-august-31st.html

http://traderfeed.blogspot.com/2008/09/few-midweek-observations.html

Here are two charts plotting the price performance of stocks during and following a bubble. It doesn’t bode well for oil:

http://bespokeinvest.typepad.com/bespoke/2008/09/theoretical-dec.html

Fundamental

The last two days whackage of the oil/commodity stocks notwithstanding, the damage yesterday was less in those sectors and more with everything else. To be sure, three of our oil/commodity holdings penetrated the pre-set Stop Loss price I detailed in yesterday’s Morning Call; but a great many more stocks outside the oil/commodity complex violated our Stops than I would have expected. Accordingly at the Market open this morning, our Portfolios will be Selling a portion of their positions in the following stocks:

In the Dividend Growth Portfolio, ConocoPhillips (COP-$76) as well as General Dynamics (GD-$85) and Linear Technology (LLTC-$30) closed below Stops that I had set in order to preserve profits. The Portfolio will reduce its position in COP to one half of a normal holding and the positions of GD and LLTC to three quarter sized holdings.

In addition, the stock price of Emerson Electric (EMR-$44) has fallen below the lower boundary of its Buy Value Range. Therefore, EMR is being Removed from the Dividend Growth Buy List. Similar to COP, GD and LLTC (taking money off the table in a profitable holding), this position will be reduced to a three quarters sized holding.

The stock price of Nokia (NOK-$22) has violated its Stop Loss Price. This morning, the Dividend Growth Portfolio will Sell one half of its NOK position and will Sell the remainder on Monday, in the absence of any price recovery.

Finally, the stock prices of Colgate Palmolive (CL-$76), Federated Investors (FII-$35) and McDonald’s (MCD-$60) have fallen below the upper boundary of their respective Buy Value Ranges. Accordingly, they are being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio already owns FII, so not further action is required. At the moment, the Portfolio will not Buy shares in MCD or CL.

In the High Yield Portfolio, defensive (Stop Loss) sales will be made this morning in Alliance Resource Ptrs (ALRP-$40) and Quaker Chemical (KWR-$30). Both holdings will be reduced to one half sized positions.

In the Aggressive Growth Portfolio, defensive sales will be made in Mastercard (MA-$216), American Vanguard (AVD-$14), FactSet Research (FDS-$59), Microsoft (MSFT-$26) and SAP (SAP-$55) lowering their size to one half of normal.

In addition, the stock price of Schlumberger (SLB-$87) has fallen below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Aggressive Growth Buy List and its holding reduced to a one half sized position.

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As an aside, you might wonder: since I believe that the July 2008 low marks the bottom of this Market cycle, why am I selling stocks this close (a mere 300 DJIA points) to that bottom? Shouldn’t I be buying? The answer lies in our Price Disciplines and in their single most important tenet--never ever take a large loss. The primary reason the Dividend Growth Portfolio has outperformed the S&P 500 basis points a year since its inception, the reason the Aggressive Growth Portfolio is up for the year is not because my Valuation Model finds good companies that are undervalued, though that certainly helps. The reason is because our Portfolios never dig themselves a hole from which they can’t escape. That means that in a Bear Market, the focus is less on finding stocks to Buy and more on preserving capital. I have said this to you dozens of times: I would rather sell a stock and have to buy it back 5% higher and look stupid, than hold on and find it down 40%, 50%, 60%.

The key in executing that strategy is to have a Sell Discipline that sets the sell (stop loss, take profits) price well in advance of having to place the order. That is what our Sell Discipline does. Using a combination of fundamental (Valuation Model) and technical factors, the prices that triggered this morning’s action were determined well before hand. That does one very important thing--it takes the emotion out of the decision making process.

So if I am correct in my call that the July low was the bottom, don’t be surprised when our Portfolios buy back some of the stocks that they are selling this morning. But in doing so, I am insuring that if my July bottom call is wrong, I will have advanced my primary goal--never ever take a large loss.

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

9/4/08

Economics

Recent Data

July factory orders jumped 1.3% versus expectations of a .5% increase; in addition, June orders were revised upward from +1.7% to +2.3%. Following on the mildly disappointing construction spending and ISM manufacturing numbers, this is a welcome return to an upbeat performance from the industrial sector.

The International Council of Shopping Centers reported weekly sales of major retailers rose .1% from the prior week and 2.2% from the comparable period in 2007; Redbook Research reported month to date retail chain stores sales increased 2.3% on a year over year basis.

Auto (and light trucks) sales were down 15.5% versus expectations of a rise of 4%. Ugh.

http://bigpicture.typepad.com/comments/2008/09/auto-sales-crat.html

And some chart porn to go with it:

http://econompicdata.blogspot.com/2008/09/asia-based-autos-up-to-almost-50-of-us.html

The Fed released its latest beige book report (a once every six weeks anecdotal look at the economy). Its conclusions: business conditions are slowing nationwide, credit conditions are tightening, consumer spending is slowing, housing is lousy, manufacturing is weak and inflationary pressures are rising. There is not much new here; the only question I have is regarding industrial activity; to date the weekly data have not been bearing out the beige book conclusion.

Other

Analysis from Robert Samuelson on the latest economic scorecard (must read):

http://www.realclearmarkets.com/articles/2008/09/the_real_economic_scorecard.html

Barry Ridholtz’s last shot at last week’s GDP number (this is also a must read(:

http://bigpicture.typepad.com/comments/2008/09/taking-a-closer.html

Some thoughts from Roger Altman (former Treasury official) on the regulation of the financial markets:

http://bigpicture.typepad.com/comments/2008/09/can-the-fed-sav.html

Chart on the dollar:

http://bespokeinvest.typepad.com/bespoke/2008/09/dollar-golden-c.html

Chart on hourly wages plus fringe benefits:

http://mjperry.blogspot.com/2008/09/counting-fringe-benefits-average-worker.html

And median income per household member:

http://mjperry.blogspot.com/2008/09/five-problems-with-census-poverty.html

A windfall profits tax on corn?:

http://mjperry.blogspot.com/2008/09/windfall-profits-tax-on-corn-soybeans.html

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.). Farm values, crop prices and the farm bill:

http://mjperry.blogspot.com/2008/09/chart-above-for-farm-values-in-midwest.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

From the standpoint of the Averages, not much changed yesterday. Both remain in the May/August 2008 downtrend. Watch the S&P (1274) January/March intraday lows (1267/1256) as a signal for further downside.

Fundamental

A graphic of the S&P versus the ten year Treasury:

http://econompicdata.blogspot.com/2008/09/things-that-make-you-go-hmmmm.html

***************************************

On the other hand, my decision yesterday on delaying selling BP and Peabody Energy was wrong. BP rallied a little while BTU got smoked There was a modest rally in some oil/commodity stocks; but I think that investors decided that there were more problems coming in commodity fund land, so the selling basically continued. Accordingly we will plunge ahead with the strategy I outlined yesterday: selling sufficient shares to bring oil/commodity holdings down to a one half sized position under two circumstances (1) stocks that have fallen into the price zone between the lower boundary of their Buy Value Range and their Stop Loss Price or (2) stocks in which we have profits whose prices have broken a support level.

Listed below are the oil/commodity stocks held in each of our Portfolios. The column titled ‘First Stop’ is one of the two prices described above. The second column is the current long term Stop Loss on those stocks. Those prices marked in red are those where immediate action is needed. Therefore, at the Market open this morning, the indicated Portfolio will Sell sufficient shares of the Stocks indicated (MRO, BP, BUCY, BTU, SII) to lower the size of those holdings to 50% of normal. I marked Reliance Steel in blue to indicate that this holding was already at 50% of a normal size. You can also see that there are a number of stocks’ prices that are very close to the ‘First Stop’ price, so there may well be more transactions to follow.

Price 9/3 First Stop Final Stop Loss

Dividend Growth Portfolio

ConocoPhillips $79.09 $78.75 $56.84

Chevron 84.18 80.94 78.52

ExxonMobil 78.02 77.53 71.40

Marathon Oil 44.11 44.63 41.90

High Yield

BP 54.44 57.09 49.83

PennVirginia Resource Ptrs 23.56 22.45 20.40

Alliance Resource Ptrs 42.15 41.82 27.10

Aggressive Growth Portfolio

American Vanguard 14.84 14.72 10.94

Bucyrus Int’l 53.80 58.15 37.08

Peabody Energy 53.35 59.60 37.93

Reliance Steel 53.48 57.62 52.59

Frontier Oil 19.01 17.08 15.19

Schlumberger 88.69 88.67 78.73

Smith Int’l 64.99 66.34 42.50

Suncor Energy 50.57 46.51 38.99

XTO Energy 47.26 45.07 46.54

Company Highlight

C.R. Bard is a medical device manufacturer with products in three markets: vascular (angioplasty catheters and stents), urology (catheters, urine collection systems and incontinence aids) and oncology (gastroenterological, bladder, prostate, hernia, orthopedic and laparoscopic products). The company produces a 20%+ return on equity; has a very sound balance sheet with only 7% debt to equity ratio; and has grown earnings at approximately 15% for the past 10 years. Dividend growth has been slower but should pick up in the next 2 to 3 years. In addition, management has indicated that it intends to shrink its share base by 1% annually.

As you can tell by its product mix, Bard is well situated to benefit from an aging population and should be able to maintain above average profit and dividend growth because:

(1) a top notch R&D effort producing exciting new high margin products,

(2) strategic acquisitions to complement and enhance its current product line,

(3) an expanding marketing effort,

(4) an aggressive cost control effort.

BCR’s stock has been a stellar performer in our Portfolio having traded well past our Sell Half Price and is a great example of why we only sell half of a well performing position as long as the company continues to meet all our financial hurdles. While the current yield on the stock is only .7%, it yields 5% (nearly 50 basis points over the long Treasury bond yield) on our cost--again another great example of why we want to own the stocks of companies who consistently raise their dividend. The company is rated A by Value Line

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

9/08

News on Stocks in Our Portfolios

A positive comment on General Dynamics (Dividend Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=8471

Staples (Aggressive Growth Portfolio) reported second quarter earnings per share of $.21 in line with expectations bur down 15% from the comparable 2007 quarter.

More Cash in Investors’ Hands

9/3/08

Economics

Recent Data

July construction spending was down .6% versus expectations of a.5% decline and -.4% recorded in June. Residential construction continued to have a major negative impact on this number; it was down 2.3% for the period.

The August Institute for Supply Management’s manufacturing index came in at 49.9 versus expectations of 49.5 and a 50.0 reading in July.

Bottom line: no surprises which is probably somewhat disappointing to the Bulls after the positive we got last week in durable goods and GDP.

Other

An interesting look at income disparity as determined by which party controls the White House (this may cause cognitive dissonance):

http://econompicdata.blogspot.com/2008/09/income-growth-equality-by-presidential.html

Chart porn on the TIPS spread (good news for those worried about inflation):

http://bespokeinvest.typepad.com/bespoke/2008/09/inflation-fears.html

A look at how the US economy is doing versus the rest of the world:

http://mjperry.blogspot.com/2008/09/economic-facts-us-economy-doing-quite.html

Politics

Domestic

Palin on energy:

http://article.nationalreview.com/?q=NzYyMmU0ODE1ZjFlMjZkODcwNTdiOTgzYjI4ODdlYWI=

McCain’s tax plan:

http://online.wsj.com/article/SB122031215585888783.html?mod=opinion_main_commentaries

International War Against Radical Islam

Rumors on Iran:

http://article.nationalreview.com/?q=ZGUxMzhhYjgxOGIyYzA1MGM2ODJhZWYzZjQ4Nzk2NWI=

The Market

Technical

This volatility is something isn’t it? Yesterday both indices (1) despite a huge move up in the morning, failed to top their August highs, (2) then reversed direction and closed below the upper boundary of the May/August down trend (recall that Friday the DJIA have failed to hold above that down trend line, while the S&P closed above it).

I think that this puts the August highs of both indices as identifiable resistance levels (DJIA 11866, S&P 1311). The support levels remain unclear. For the DJIA, there are two: the July intraday low (10809) and the lower boundary of the October 2007 to present down trend (circa 10686). For the S&P, there are numerous support levels: the January 2008 intraday low (1267), the March 2008 intraday low (1256), the July 2008 intraday low (1198) and the lower boundary of its October 2007 to present down trend (1161).

The very short term key to Market direction is, in my opinion, whether the S&P can hold its January/March lows. If so, the downside in stock prices may be limited. If not, at least a test of the July 2008 lows seems likely.

Two other points:

(1) I have mentioned this before, but remember September is statistically the worst month for stock performance by a significant margin.

(2) the volatility index soared yesterday, breaking out of an easily identifiable month long decline. That is not good news; when the VIX starts climbing, stocks usually start declining.

Fundamental

One of the most distinguishing features of yesterday’s pin action was the very serious whackage among the commodity stocks. Given that when I started my after-the-close review of all of our holdings, I made two assumptions:

(1) that the prices of a number of our oil/commodity stock holdings probably violated either the lower boundary of their Buy Value Range and/or a significant technical level that I had marked as a Stop Loss to protect the profits in these positions. Surprisingly, only two stocks met either criteria: BP Ltd in the High Yield Portfolio and Peabody Energy in the Aggressive Growth Portfolio,

(2) that as a first step, I would Sell sufficient shares of the stocks defined in (1) above to reduce their positions to one half of their normal size.

By the time I finished my review, a $3 billion commodity hedge fund (Ospraie) announced that it was closing its doors and would return investors’ money. Question: do you think that [a] they liquidated those assets before making the announcement or [b] will wait till later? (Hint: the answer is [a]) My guess is that much of the terrible price performance yesterday can be attributed to this fund’s sales--and to be sure, others on the Street knew that this was going on and contributed to the deluge by selling and/or shorting stocks/commodities in their funds as the process unfolded.

The point here is that because yesterday’s terrible pin action in the commodity stocks was probably heavily influenced by the liquidation of the aforementioned hedge fund, I am going to violate a normally firm rule and NOT sell BP and Peabody on the thought that there will be a sharp snap back in these stocks today. Clearly, this could be a risky move; but I think it’s worth it. We will know soon enough how smart it is; and if I am wrong, I’ll take my lumps and correct it tomorrow.

That takes care of today; but the larger issue is, of course, is the demise of this hedge fund a singular event or are there committee meetings at hedge funds, pension funds and foundations going on as you read this deciding whether or not the commodity bubble has burst and whether to liquidate or substantially reduce exposure to this investment class. We have to be alert to this possibility and as I said above, we will know the answer soon enough. At the moment, as I also stated above, I have re-confirmed our Stop Loss Prices in all our oil and commodity related positions. Should those prices be breached, our first step will be to reduce positions to one half of normal. (By the way, I recognize that our decision a couple of weeks ago to take our holdings in oil stocks from 50% to 60% of normal may prove to have been wrong).

As a final aside, my gut tells me that the secular boom in commodities is not over. Brazil, Russia, China and India still have a long way to go in their industrialization process and huge chunks of Africa, the Middle East and southern Eurasia haven’t even started. That said, I never let my opinion get in the way of making money (preserving principal).

An analyst looks at coal:

http://seekingalpha.com/article/93704-coal-generates-global-strength?source=front_page_long_ideas

Another at Chevron (Dividend Growth Portfolio):

http://seekingalpha.com/article/93675-chevron-s-share-price-looks-most-compelling?source=front_page_long_ideas

The Dividend Growth Buy List

Company Close 9/2 Buy Value Range

Aflac $57.32 $55-63

Automatic Data Processing 45.16 41-47

Emerson Electric 46.76 47-54

Illinois Tool Works 49.48 45.52

Hormel Foods Corp 36.14 31-36

Johnson & Johnson 71.78 63-71

Manulife Financial 35.39 31-36

MDU Resources 31.96 29-33

Marathon Oil 43.01 44-51

Paychex 35.17 31-36

T Rowe Price 59.29 55-63

UGI Corp 27.54 24-28

News on Stocks in Our Portfolios

Medivation (10 Bagger) announce a deal with Pfizer to commercialize Dimebon (Alzheimer’s drug):

http://money.cnn.com/news/newsfeeds/articles/djf500/200809030754DOWJONESDJONLINE000492_FORTUNE5.htm

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