10/16/08

Economics

This Week’s Data

Yesterday’s economic releases made for pretty grim reading:

August business inventories rose .3% in line with estimates; unfortunately, business sales once again declined, in August by 1.8%.

The September producer price index (PPI) fell .4% versus forecasts of a .3% drop; core PPI rose .4% versus expectations of a .2% increase.

Weekly mortgage applications (secondary indicator) were down very slightly (-.03%); however, mortgage rates have risen in the last couple of days and that doesn’t bode well for housing.

The October New York Fed’s manufacturing survey (secondary indicator) came in at -24.6 versus estimates of -10.0 and September’s reading of -7.4.

The Fed released its once every six week anecdotal look at the economy, the Beige Book; and it was generally gloomy, saying that the economy was weak across all geographic and industry sectors.

Weekly jobless claims fell 16,000 versus expectations of a 13,000 decline.

http://calculatedrisk.blogspot.com/2008/10/weekly-unemployment-claims.html

A closer look at yesterday’s September retail sales number:

http://www.capitalspectator.com/archives/2008/10/the_big_fade_on.html

Other

There is more than one positive (falling gasoline prices) to lower oil prices:

http://faustasblog.com/?p=6924

Eye candy on inflation--no problem here, for the time being:

http://econompicdata.blogspot.com/2008/10/impllied-inflation-below-1-over-next.html

A long term chart plotting bank failures:

http://mjperry.blogspot.com/2008/10/biggest-economic-nonsense-since-great.html

Politics

Domestic

More on ACORN:

http://www.commentarymagazine.com/blogs/index.php/rubin/37452

Obama’s tax plan:

http://powerlineblog.com/archives/2008/10/021767.php

International War Against Radical Islam

The Market

Technical

Up dates on charts of Market indicators:

http://traderfeed.blogspot.com/2008/10/midweek-look-at-stock-market-indicators.html

A long term chart of the DJIA:

http://econompicdata.blogspot.com/2008/10/dow-jones-long-term-perspective.html

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As I said in yesterday afternoon’s Subscriber Alert, it looks like we are already facing a test of last Friday’s lows (DJIA 7853, S&P 839)--something that I clearly wasn’t expecting judging by yesterday’s Morning Call. I also said that I thought that the massive forced liquidation of stocks resulting from hedge fund margin calls was largely over. As sickening as yesterday’s pin action was, that still may be the case. Checking around with traders after the Market close, I am told that the selling yesterday came as much from mutual funds that are suffering record share redemptions as it did from hedge funds--which to be sure is as much a forced sale as a margin call. Another positive sign that hedge fund liquidation may be nearing an end is that it is now a lead story on CNBC. So, if hedge fund liquidation is largely behind us, then while the supply/demand problem that we have had over the last couple of weeks hasn’t improved as much as I thought yesterday, it still appears that the ranks of sellers are shrinking.

On the fundamental side, I believe that the crescendo of fear over the collapse of the financial system was made last Friday. In my opinion, too many steps have been taken by too many entities for the ‘collapse’ scenario to occur. Nevertheless, that doesn’t necessarily assure an immediate rise in investor confidence that financial institutions have returned to sound footing; and, indeed, a look at the history of past credit crises suggests this process takes three to six months. (As an aside, I will say that there are some initial, very tentative signs of improved confidence, the most important of which is a decline in LIBOR rates.) So while it would help immensely for investor confidence to rebound immediately, that seems unlikely. On the other hand, I see no reason for it to act as a driving force for further equity price declines.

http://www.bloggingstocks.com/2008/10/15/private-equity-s-bigwigs-zero-in-on-deals/

That leaves us with fear of a severe recession as the primary driving force of yesterday’s decline. Lending some support to this notion was the relative performance of various sectors in yesterday’s Market. Not that there was a lot of comfort to be had from anything we own; but the financials we own while off big, still didn’t approach the price levels of last Friday. Materials and industrials, on the other hand, closed near and in many cases below their prices of last Friday.

So what have we got:: forced liquidation of stocks not over but still evidence that the end may be close, tentative signs of a return of confidence in the credit markets with investor attention starting to shift to the shape of the economy post credit crisis but with no clue what that shape is and stock prices down 35-40% from a year ago. Given this, I am still willing to bet that the low was last Friday; and our Portfolios reflected that taking cash from 25% to 22% yesterday afternoon. Following that the Market traded down another DJIA 300 points and is a mere 700 points above last Friday’s intraday low.

This morning our Portfolios are going to take cash from 22% to 20.5%. I should note that while this is a small dollar bet, it is probably the riskiest bet I have made since 2002. Clearly that risk is that last Friday’s low is not the bottom and that we still face THE FLUSH. Invest your own account accordingly.

Subscriber Alert

This morning, our Portfolios will Add to the following holdings:

Dividend Growth Portfolio: Wells Fargo (WFC), 3M (MMM), Coca Cola (KO), WalMart (WMT), Manulife Financial (MFC).

High Yield Portfolio: Bank of Nova Scotia (BNS), Reynolds American (RAI), Oneok Ptrs (OKS), WP Carey (WPC).

Aggressive Growth Portfolio: American Vanguard (AVD), Balchem (BCPC), Avon Products (AVP), Staples (SPLS), Walgreen (WAG)

Fundamental

Company Highlight

Qualcomm Inc develops and markets cutting edge integrated circuits used primarily in wireless applications. QCOM has grown profits at a 20%+ annual rate over the last 10 years; and has raised its dividend per share from an initial $.09 in 2003 to $.64 in 2008. It has done this while earning a 20% return on equity. The company future appears equally promising as a result of:

(1) it recently settled litigation with Nokia in which it will receive a substantial up front payment as well as ongoing royalties for NOK’s use of its patents in its mobile devices and infrastructure equipment,

(2) the strong worldwide demand for high end mobile devices which utilize QCOM’s technology,

(3) the expansion of the number of features and uses being developed by carriers (mobile computing, mobile video, mobile banking), all of which require QCOM’s technology.

The company is rated A by Value Line, has no debt but a huge cash position which can be used for R&D to pursue new strategic initiatives and its stock yields 1.6%.

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

10/08

News on Stocks in Our Portfolios

Wells Fargo (Dividend Growth Portfolio) reported third quarter earnings per share of $.49 versus expectations of $.41 and $.64 reported in its 2007 third quarter.

Abbott Labs (Dividend Growth Portfolio) reported third quarter operating earnings per share of $.79 versus estimates of $.77 and $.46 recorded in the comparable 2007 quarter.

More Cash in Investors’ Hands

10/15/08

Economics

Recent Data

The International Council of Shopping Centers reported sales of major retailers up .7% versus the prior week and up 1.0% on a year over year basis; Redbook Research reported month to date retail chain store sales up .5% versus the comparable period in 2007.

In addition, September retail sales were weak:

http://calculatedrisk.blogspot.com/2008/10/retail-sales-decline-sharply-in.html

Other

Bernanke, in his own words:

http://online.wsj.com/article/SB122394360912831019.html

Chart porn on the magnitude of expanded Fed credit facilities:

http://bigpicture.typepad.com/comments/2008/10/total-fomc-lend.html

Thoughts on the economic outlook and what that means for investment strategy:

http://www.capitalspectator.com/archives/2008/10/mr_market_econo.html

Comments by San Francisco Fed President Janet Yellen on the economy:

http://calculatedrisk.blogspot.com/2008/10/feds-yellen-us-economy-appears-to-be-in.html

How about some good news—commercial loans continue to rise:

http://mjperry.blogspot.com/2008/10/total-commercial-bank-loans-reach-new.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical/ Fundamental

A great read on making mistakes (as an investor):

http://traderfeed.blogspot.com/2008/10/thoughts-about-breaking-trading-slumps.html

A not very optimistic look at dividends:

http://econompicdata.blogspot.com/2008/10/evaluating-shares-as-dividend.html

More chart porn on credit spreads:

http://econompicdata.blogspot.com/2008/10/all-is-still-not-well-in-credit-land.html

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Yesterday the Averages (DJIA 9310, S&P 998) made an assault on their respective 2004 support levels (DJIA 9707, S&P 1062--which now act as resistance) and backed off. Despite the fact that the DJIA was down 300 points at one point, it ended the day off modestly, I am taking that as a sign that the worst of this selling is over and further that last Friday’s intra day stock price lows will prove to have been the bottom (DJIA 7853, S&P 839). However, that doesn’t mean that there weren’t some negative aspects to yesterday’s trading. For one, the volatility index just isn’t backing off which suggests more days of triple digit price swings and lower prices. In addition, volume was again anemic meaning that buyers are being very cautious. Finally, in what was basically only a mildly negative day on the surface, a number of stocks got pummeled which suggests that not all of the forced selling is complete.

Whether yesterday’s pin action was simply a momentary digestive process after a big quick up move or reflective that the above mentioned 2004 price levels are as high a valuation as investors collectively are currently willing to pay, we will know soon. (If the latter, clearly our Portfolios shouldn’t have spent the 3% cash it did yesterday.) Either way, what we want now is for stocks to more clearly define (what I am hypothesizing is) a new trading range. Within this new range, our Portfolios will build cash to 25% when stocks advance and spend cash down to 15% when their prices decline. Right now for the first time in a week or so, our Portfolios do nothing. (I recognize that if stocks were to advance from here and are sold, our cash position will rise above 25%. I can live with that problem till we have a better feel for how this Market is going to trade.)

Subscriber Alert

The stock prices of Becton Dickinson (BDX-$74) and Sigma Aldrich (SIAL-$46) have risen above the upper boundary of their respective Buy Value Ranges. Accordingly, they are being Removed form the Aggressive Growth Buy List. The Aggressive Growth Portfolio will continue to Hold these stocks.

Aggressive Growth Buy List

Company Close 10/14 Buy Value Range

Balchem Corp $24.62 $23-26

Harley Davidson 28.73 29-33

Mastercard 174.07 162-186

Peabody Energy 30.55 32-39

Qualcomm 40.32 35-41

Reliance Steel 26.81 28-32

Styrker 59.91 56-64

TJX Corp 27.12 25-29

News on Stocks in Our Portfolios

A neutral write up on Johnson & Johnson (Dividend Growth Portfolio):

http://www.thestreet.com/p/_htmlrmm/rmoney/pharmaceuticals/10442312.html

Positive comments on Coca Cola (Dividend Growth Portfolio):

http://www.thestreet.com/p/_htmlrmm/rmoney/retail/10442287.html

And KO reported third quarter earnings per share at $.81 versus expectations of $.77 and $.71 reported in the comparable 2007 quarter.

More Cash in Investors’ Hands

10/14/2008

I apologize for this; but I have a reunion to attend this coming weekend. We are leaving Friday after the Market close. So there will be no Closing Bell again this weekend.

Economics

Recent Data

Politics

Domestic

More on ACORN voter fraud:

http://jammiewearingfool.blogspot.com/2008/10/voter-fraud-you-can-believe-in-every.html

International War Against Radical Islam

On the removing of North Korea from the list of state sponsors of terrorism:

http://article.nationalreview.com/?q=NGY3ODI1M2YyZjA2Yjk3NDdkM2VmMGRkZTNkNzEzYTc=

The Market

Technical

Ten charts from Barry Ridholtz:

http://www.thestreet.com/p/_htmlrmm/rmoney/investing/10442102.html

How this bear compares to those past:

http://bigpicture.typepad.com/comments/2008/10/how-this-bear-m.html

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The pin action yesterday (DJIA 9387, S&P 1003) was something else; the bonus being that for the first time in seven trading days, stock prices were up. I said last week that I believed that after a bottom had been made, we would see an explosion to the upside; and that is what we got. It is a little bothersome that the volatility index closed at 55 and that volume was paltry. On the other hand, banks may have been on a holiday but margin clerks weren’t; and the fact that there was no real selling pressure all day suggests to me that the worst of the force liquidation may be over.

All in all, I think that the indices made their bottom in this cycle (circa DJIA 7853 and S&P 839) Friday intraday. Of course I said that back in July and I was clearly wrong.

Fundamental

In my opinion, that doesn’t mean that it is now all roses and wine. While the collective and cumulative action by central bank authorities may have stemmed a collapse in the financial system (this morning the Treasury and Fed are going to announce a plan that is complementary to that of the Europeans in which among other things $250 billion of the $700 billion authorized by Congress will be invested in the equity of US banks, the FDIC will guarantee unlimited deposit insurance on business accounts and the government will guarantee interbank debt). (here’s a look at recent credit spreads, though this morning following the Treasury/Fed announcement, they are narrowing)

http://bespokeinvest.typepad.com/bespoke/2008/10/high-yield-sp-2.html

Investors may be relieved but our problems are not over. Soon if not immediately they begin assessing the extent to which the disruptions in the financial markets will impact economic growth; and beyond that there remains the issues of an enormous bulge that has occurred in the money supply which has to be reckoned with to avoid future inflation and the potential impact on future economic growth of a pro-tax, pro-spending, pro-regulation, anti-trade regime.

Bottom line: our strategy is going from defense, defense, defense back to managing our cash position within a trading range. The problem of course is that while we may know the bottom of the trading range (assuming that I am correct), we don’t know the top. Stock prices probably have more to go on the upside. The question in my mind is, will they get back to the level at which they traded before the capitulation started (DJIA 10890, S&P 1198). I, of course, don’t have a clue.

So what to do? First of all, the good news is that our Portfolios have gone from roughly a 43% cash position to a 28% cash position as of the Market close yesterday. Further, I know that until we have a clearer view of the extent of the impending economic malaise, I want a minimum of 15% cash. Finally, since I also believe that last Friday’s intraday lows will mark the bottom, I don’t think that our Portfolios’ cash position needs to be over 25%. (I note that as the economic outlook gains clarity, this 15-25% spread will go lower and the magnitude of the spread will narrow).

So our strategy for today is to take our Portfolios’ cash position down from 28% to 25%. At that point, I am ready to let our bet ride till stocks find a top to what I am theorizing will be a trading range.

Subscriber Alert

Here is what our Portfolios are buying today:

Dividend Growth Portfolio: Canon )CAJ), Wells Fargo (WFC), Nokia (NOK), Automatic Data Processing

(ADP), ConocoPhillips (COP), United Technologies (UTX).

High Yield Portfolio: Cato Corp (CTR), Quaker Chemical (KWR), Bank of Nova Scotia (BNS), RPM Int’l (RPM), Reynolds American (RAI), Plains All American Pipeline (PAA), Zenith Insurance (ZNT--another new name that will be Added to the Buy List).

Aggressive Growth Portfolio: Matthews Corp (MATW), Qualcomm (QCOM), Franklin Resources (BEN), SAP (SAP), Peabody Energy (BTU), Avon Products (AVP), Staples (SPLS), SEI Investments (SEIC), Reliance Steel (RS).

Company Highlight

Becton Dickinson produces a wide range of medical devices as well as products for the collection and transport of diagnostic specimens, instruments for analysis and testing for infectious diseases and research and clinical tools for the study of cells. The company has grown profits and dividends at a 13-15% annual pace over the last 10 years earning a 20%+ rate of return on equity. The company should sustain its growth via:

(1) growth of safety needle-free products. BDX is a world leader in this market which is growing at a 12% annual rate globally,

(2) the equally attractive rate of growth of the remainder of its well diversified product line [diabetes care, surgical equipment, ophthalmic systems, diagnostic systems and immunocytometric systems],

(3) a disciplined acquisition program to supplement organic growth. Recent purchases include two add ons to its diagnostics business: fast, easy and accurate tests and Pap smear and cancer diagnostics.

BDX is rated A+ by Value Line, has a debt to equity ratio of about 16% and its stock yields 1.3%.

10/08

News on Stocks in Our Portfolios

Johnson and Johnson (Dividend Growth Portfolio) reported third quarter earnings per share of $1.17 versus expectations of $1.11 and $.88 recorded in the comparable period in 2007.

More Cash in Investors’ Hands

10/13/08

Economics

Recent Data

Other

A prescription for what ails us:

http://bigpicture.typepad.com/comments/2008/10/how-to-repair-t.html

Politics

Domestic

More on ACORN:

http://online.wsj.com/article/john_fund_on_the_trail.html

Dodd and Countrywide:

http://online.wsj.com/article/SB122360116724221681.html

McGovern and the Employee Free Choice Act:

http://article.nationalreview.com/?q=YjZhN2M4NTY4ZGQ3YmQxYWQyZDQ0OWE2M2U3NjAxYWU=

McCain and Fannie Mae:

http://www.powerlineblog.com/archives2/2008/10/021750.php

International War Against Radical Islam

An update on Iraq:

http://pajamasmedia.com/blog/in-todays-iraq-the-times-are-constantly-changing/

The Market

Technical/ Fundamental

A note of caution:

http://traderfeed.blogspot.com/2008/10/indicator-update-for-october-13th.html

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

Friday was an unusual day. It opened up down 600 DJIA points then rallied big, faded, rallied, then faded at the end. I thought after the first hour that we had seen the capitulation. Certainly, the volatility index (spiked over 70) and the volume (heavy) would argue that we have. But instead of being off to the races after that morning flush, the sellers kept coming back--hence the down close marked by the continued relentless selling of the groups that heretofore have performed the best in this bear market (consumer staples and healthcare).

I said Friday morning that we are in the middle of the end and by the close Friday, we were that much closer to the end. I continue to believe that the key to the end is the completion of the forced liquidation of the hedge funds. While Friday’s action suggests that it is not over, the magnitude of the selling may be tapering off. That is very positive. The question is, are we at the point where a sufficient number of buyers step in and simply overwhelm the remaining sellers?

We will know soon enough. In the meantime, the fundamentals of credit market continue to improve as governments world wide appear to be doing their best to bolster confidence among credit market participants.

http://calculatedrisk.blogspot.com/2008/10/fed-federal-reserve-and-other-central.html

Our Portfolios ended Friday with a cash position between 35-40%.

Here is the strategy for today.

It looks like a strong open, so our Portfolios will sell a small bit of some stocks where there doesn’t seem to have any support near term. But the cash generated will be reinvested immediately.

Next I want to put 20-25% (10% of the total Portfolio) of our Portfolios’ cash to work (that will get cash down to 25-30%). Our Portfolios will buy a part of that at the open, then average in during the day.

If we get another big flush, I will spend another 20% cash (5% of the Portfolio) before the close (that will take cash to 20-25%). If I decide to do that I will alert you.

Our Portfolios I will be buying stocks whose rate of price decline has been much slower in the last couple of days than the Market in general and/or stocks that are at or near multi year support levels.

Subscriber Alert

Here are the names our Portfolios will be Buying:

Dividend Growth Portfolio: Federated Investors (FII), T Rowe Price (TROW), Boeing (BA), Canon (CAJ), Wells Fargo (WFC), Aflac (AFL), Home Depot9HD), Johnson Controls (JCI), Praxair (PX (PX), General Electric (GE), 3M (MMM), MDU Resources (MDU), Nucor (NUE), Abbott Labs (ABT), VF Corp (VFC).

High Yield Portfolio: Rayonier (RYN), Quaker Chemicals (KWR), Realty Income Trust (O), Pacer Int’l (PACR), Sanofi Aventis (NY-new name being Added to Buy List), Alliance Resources (ARLP), Cato Corp (CTR), Worthington Ind (WOR).

Aggressive Growth Portfolio: Bucyrus Int’l (BUCY), Matthews Corp (MATW), Amphenol (APH), Qualcomm (QCOM), Blackrock (BLK), Franklin Resources (BEN), Sigma Aldrich (SIAL), American Vanguard (AVD), Balchem (BCPC), Accenture (ACN), Ecolabs (ECL), Factset Research (FDS), SAP (SAP), Smith Int’l (SII), Donaldson (DCI), SEI Investments (SEIC), XTO Energy (XTO), Walgreen (WAG), Sun Hydraulics (SNHY, Microsoft (MSFT), CH Robinson (CHRW), Mastercard (MA), Becton Dickinson (BDX).

News on Stocks in Our Portfolios

More Cash in Investors’ Hands