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): -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 10090-11477
Medium Term Downtrend 10658-12605
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 1122-1273
Medium Term Downtrend 1155-1374
Long Term Trading Range 750-1527
Long term Up Trend 1317-1797
Year End Fair Value (revised): 1533-1577
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 22%
High Yield Portfolio 23%
Aggressive Growth Portfolio 24%
Economics
The economy is a neutral for Your Money. The economy continues to struggle. The data on the consumer this week was generally soft (decline in consumer credit, poor weekly and August retail sales, a smaller than expected decline in weekly jobless claims) though the University of Michigan’s preliminary September index of consumer sentiment surprised analysts on the upside (73.1 versus estimates of 64.0). There was no help from the industrial sector with both wholesale and business inventories up more than expected largely as a result of lousy wholesale and business sales. The big (pleasant) surprise came in the form of the August producer price index which declined .9% versus forecasts of .3% increase. In sum, there was nothing to ease concerns about a potential recession but there is growing evidence that the threat of inflation is lessening. Bottom line: the economy may or may not be in a recession; but if it is, I don’t expect any slowdown to be dramatic. My concern about inflation is subsiding.
Here’s the glass half full argument:
http://www.poorandstupid.com/2008_09_07_chronArchive.asp#2985918066237617746
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.
I haven’t commented on the political environment in some time; and this isn’t a long one. But it is amazing how a competitive political environment can drive rhetoric to the center. Note, Obama’s statement (1) on
The Market-Disciplined Investing
Technical
The DJIA (11421) and S&P (1251) 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 10090-11477 and the S&P circa 1122-1273 and (2) a medium term down trend extending back to October 2007 whose boundaries are DJIA circa 10658-12605 and S&P circa 1155-1374. Fortunately, there are a couple of additional support levels for both indices above the lower boundaries of these two down trends; it is at their early July 2008 intraday lows: DJIA 10809, S&P 1198 and their late July intraday lows: DJIA 11132, S&P 1209. Bottom line: I 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 the risk remains high of additional downside at least for the Averages.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (11421) finished this week about 15.7% below Fair Value (13549) while the S&P closed (1251) around 19.1% undervalued (1547).
Last weekend, I thought that depending on the components of the Treasury’s plan for salvaging Fannie/Freddie, we would get a clearer picture of Market direction this week. Nope. Granted that the Treasury back stopping of Fannie/Freddie provides additional clarity in the resolution of the financial crisis; but it didn’t do much galvanize investor sentiment.
I opined in Friday’s Morning Call that there were signs that we are in some sort of rolling Market bottom--the early July low marking the bottom in the financial and consumer discretionary stocks and this week the oil/commodity stocks attempting to make a low. Some would argue with that of course. Especially today with investors focused on Lehman Bros, AIG, Washington Mutual and Merrill Lynch and what might happen if Lehman can’t meet its commitments. And to be sure, there are some stocks within the financial group (namely those mentioned above) that are getting hammered as this is written. However, when I review the pin action of the preponderance of bank, insurance, broker and money management stocks in our Universes, there was, in my opinion, a clear bottom in July among a big segment of the financial stocks.
Here’s a chart of the S&P financial sector to support this point:
http://bespokeinvest.typepad.com/bespoke/2008/09/sp-500-financia.html
So what to do if my hypothesis of a rolling bottom is correct? Well, the first step would be to bulk up our Portfolios’ commitments in financial and consumer stocks. That is largely done, although there is a little work to do in the Aggressive Growth Portfolio (we got stopped out of Mastercard last week, so those funds need to be reinvested; plus its holdings in Lowe’s and Walgreen are only partial positions and need to be added to).
The big issue right now is have the oil/commodity stocks hit bottom and should our Portfolios begin re-building their allocations to the oil/commodity/industrial sector. So far we haven’t (presently most of our holdings in these sectors are one quarter to one half of normal size) though we have attempted to grow positions in beneficiaries of lower oil prices (transportation, oil refiners); and a major reason that we haven’t is that I think that right now the fate of oil stock prices are in the hands of institutional investors (who have been massively liquidating their oil/commodity stock holdings) rather than a function of the fundamentals of their respective markets (remember I still believe that global industrialization is alive and well). As a result, the only way I know to deal with these stocks is technically.
To quote Thursday’s Morning Call: ‘...the answer is to look at a stock’s chart and measure the current price against (1) the upper boundary of the stock’s identifiable downtrend [in other words, did yesterday’s price increase move the stock out of an established downtrend?] and (2) whether or not the stock was able to regain the price level of the Stop Loss [that I had originally set at an identifiable support level] which pushed our Portfolios to Sell these holdings in the first place [in other words, following Tuesday’s decline, did Wednesday’s recovery push the stock price above the Stop Loss {support level} which in my judgment would suggest that a bottom has been made].
As of the close Friday, while none of stocks of our holdings have broken out of their short term downtrend several of the stocks in which our Portfolios have a position re-gained the price level of the prior Stop Loss (item #2 above). This may be a signal that the bottom may have been or is being made. However, until we have a more universal recovery, our Portfolios are on the side line.
Whether or not we are in a ‘rolling’ bottom scenario, the schizophrenic behavior among various sectors’ stock price performance is making our current investment strategy of managing our cash position between 15% and 20% difficult, e.g. when the Market was getting clocked last week and our strategy called for committing cash, there were stocks that had moved up into their Sell Half (take profits) Ranges forcing our Portfolios to Sell. I am not abandoning this strategy, just pointing out that implementing it in this Market is a lot tougher than advocating it.
On a slightly longer term basis, our investment strategy remains:
(a) defense is still important--protect profits and avoid losses,
(b) watch Market technicals for confirmation that a bottom has [is being] been made,
(c) on a longer term basis, recognize that there remain 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 13650 1555
Fair Value as of 9/30//08 13549 1547
Close this week 11421 1251
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:
Stryker Corp develops, manufactures and markets orthopedic implants for the hip, knee, spinal and craniomaxilofacial needs as well as power instruments, endoscopic systems and other operating room devices. The company has grown profits and dividends at a 20%+ annual rate for the past 10 years earning a 17-19% return on equity. SYK should maintain this record as a result of:
(1) strong demographic trends, i.e. the a rapidly growing older segment of the population,
(2) an extensive and well diversified product line,
(3) an active acquisition program.
SYK is rated A by Value Line, has no debt, is in the midst of a $750 million share buy back program and its stock yields .7%.
http://finance.yahoo.com/q?s=SYK
9/08
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.
