9/27/07

Economics

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.). This is a little long but it is an excellent analysis of the new health care bill.

http://www.nationalcenter.org/NPA560.html

And this on earmarks in the water resources bill:

http://article.nationalreview.com/?q=NDkxYTIyNjg1ZmUxNWYwNzgzOTc1MWUyMTNmNDg1MGM=

a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.) No better example can be found of the economic ignorance of our elected leaders than this proposal to eliminate the interest rate tax deduction on homes at a time when the housing market is floundering:

http://www.washingtonpost.com/wp-dyn/content/article/2007/09/26/AR2007092602127_pf.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

Watching the financial news talking heads, it seems as though the Street is equally divided between those thinking that the US economy is headed for a recession and those that think that inflation is re-igniting. One company that should do well in either scenario is Johnson & Johnson (Dividend Growth Buy List).

Johnson & Johnson is a major manufacturer and marketer of health care products. Its major divisions are: Consumer (baby care, non-prescription drugs, sanitary protection and skin care), Medical Devices (wound closures, minimally invasive surgical instruments, diagnostics, orthopedics and contact lenses) and Pharmaceuticals (contraceptives, psychiatric, anti-infective and dermatological). This company has maintained an amazing 28-30% return on equity with almost no debt for the past 15 years. In addition, JNJ has grown its earnings and dividend at a 14-15% annual rate. We believe that its strong, well diversified product line will continue to grow rapidly, supplemented by acquisitions.

EPS: 2006 $3.76, 2007 $4.10, 2008 $4.45; DVD: $1.62 YLD 2.7%

Buy Range $60-69, Stop Loss $53, Sell Half $95

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

News on Stocks in Our Portfolios

The SEC is investigating the credit rating agencies (McGraw Hill--Dividend Growth Portfolio) role in the sub prime mess:

http://www.marketwatch.com/News/Story/Story.aspx?guid={7387D333-4133-416D-AE18-42430DA60830}&siteid=nbs

Yesterday Goldman Sachs (GS) lowered its rating on Merrill Lynch (Dividend Growth Portfolio) based on a potential earnings write off related to the sub prime problem. GS also lowered its price objective for MER ($70) from $108 to $94 (our Sell Half Range is $93-99). More than a month ago I noted that we needed to be cautious of the financials until we had a better handle on the overall sub prime problem, in general, and its impact on each company, in particular. Since then the magnitude of the problem has been coming into focus as financial firms (MER among them) have acknowledged the extent of their exposure, their stocks have reflected this news and the Fed has committed to attempt to relieve any non sub prime liquidity difficulties--and that was the basis for the Dividend Growth Portfolio’s purchase of MER.

My bottom line is that GS’s report doesn’t seem to provide any new insight. In fact as this is being written, it is being reported that Warren Buffet is negotiating to buy a stake in Bear Stearns which appears to suggest that at least some of the smart money thinks most of the bad news in the financials is being discounted.

That said, GS may know more than is in their report; and the purchase of MER could have been too early. Indeed, we have stated repeatedly that our Buy Price Discipline, which is designed to select stocks that are at historical low absolute and relative valuations, almost by definition, will be too early and wrong on occasion since the only time stocks sell at low valuations is when either the Market or the individual company is having problems.

At the moment, MER remains in its Buy Range despite yesterday’s decline and I think that the GS downgrade is a case of shutting the barn door after the horse is out. But I have to emphasize that I could be wrong. If it is so, I remind you that our Stop Loss Discipline is in place and it is there to protect our portfolios’ asset value during the inevitable tough times.

One final observation, if the rumor concerning Warren Buffett’s interest in Bear Stearns is correct, it could mark the bottom for financials which could in turn mean that the performance gap we spoke of yesterday between the industrial/material stocks and the financial stocks gets closed not by a fall in the industrial/material stocks but a rise in the financials--so much for the most likely historical resolution proposed by my favorite technicians that I quoted yesterday (the industrial/materials stocks drop). I highlighted the ‘coulds’ in the above statement because nothing has happened yet, so this is still speculation about how this bifurcated Market corrects itself; though clearly a price increase in the financial stocks would be a more optimal solution than a fall in the industrial/materials stocks.

Barry Ridholtz is skeptical:

http://bigpicture.typepad.com/comments/2007/09/buffett-to-buy-.html

Rocky Mountain Chocolate Factory (Aggressive Growth Portfolio) reported its second fiscal quarter earnings per share of $.21 versus $.16 in the comparable 2006 quarter.

EPS: 2006 $.75, 2007 $.95, 2008 $1.10; DVD: $.34 YLD 2.4%

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

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