12/20/07

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.) A review of the omnibus budget bill passed Tuesday night:

http://www.heritage.org/Research/Budget/wm1751.cfm

Politics

Domestic

International War Against Radical Islam

If you like history, take a look at the Democratic Party’s 1864 platform:

http://www.powerlineblog.com/archives2/2007/12/019319.php

Another history lesson on the role of oil in warfare and what the US should do about it right now:

http://article.nationalreview.com/?q=NGRiZTliODFmMDZjMzUyNGU5NWNmMjYxOWI3NjM2ZTE=

The Market

Technical

DJIA levels I am watching: 13096--any close below that would suggest a downside bias; while a move above 13314 could get stocks moving up again.

Fundamental

More good news yesterday in the form of greater clarity to the sub prime problem (Morgan Stanley wrote off about $10 billion in bad [read sub prime] loans) or its resolution (the Fed’s first ‘auction’ which I talked [not too favorably] about last week and which was successful and the Chinese $5 billion capital injection into Morgan Stanley) Investors didn’t seem to care; but I do. These are small steps but when aggregated with all the other small steps announced of late, they are forming into a bigger picture that is providing perspective on the magnitude of the sub prime problem and how it will be overcome.

That said, I am in no way suggesting that the above mentioned ‘auction’ process which the Fed set up to deal with illiquidity in the short term credit markets is any less inadequate than I originally opined. Indeed, perhaps investors are of the same thought; and their seeming lack of enthusiasm for yesterday’s events simply reflect the conclusion that the Fed needs to address the inverted yield curve and stagnant growth in the monetary base because they are a more important than these ‘auctions’ in solving the sub prime problem.

Subscriber Alert

The stock price of Canon (CAJ-$48) has fallen below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth Buy List. The stock price remains well above its Stop Loss. The Dividend Growth will continue to Hold CAJ.

The stock price of LCA-Vision (LCAV-$18) has risen above the upper boundary of its Buy Value Range. Therefore, LCAV is being Removed from the High Yield Buy List. The High Yield Portfolio will continue to Hold this security.

The High Yield Buy List

Company Close 12/19 Buy Value Range

US Bancorp $31.59 $29-34

Kinder Morgan Ptrs 52.43 51-58

Buckeye Pipeline 49.50 47-52

Alliance Resources Ptrs 35.10 33-38

Realty Income Trust 27.49 26-30

AJ Gallagher 25.29 23-26

Company Highlight

Another great total return stock in our High Yield Portfolio is Buckeye Partners (BPL)

Buckeye Partners is a master limited partnership engaged in common carriage transportation of refined petroleum products including gasoline, jet fuel and distillates. The partnership has achieved an attractive return on equity (15-20%) and has consistently grown earnings, cash flow and dividends in 5-7% range over the last 10 years. This should accelerate over the next five years because:

(1) BPL’s high quality, strategically located assets produce a very safe and stable cash flow which keeps its cost of capital down making its acquisition costs low,

(2) it will pursue an aggressive acquisition strategy as the energy space continues to consolidate and restructure--the company made $850 million in equity investments and asset acquisitions in the two years ending 12/06 and this year they included a number of small acquisitions plus Lodi Gas Storage,

(3) management also expects to pursue organic growth opportunities which included $62 million in expansion and cost reduction projects in 2006 and various ethanol-blending and butane blending projects at company owned pipeline stations and terminals and a pipeline/terminal complex at the Memphis International Airport in 2007.

The company recently experienced a leadership change with new management having strong industry experience and an incentive to spur growth. With a dividend yield of 6.5%+ and a more aggressive growth strategy (the dividend has been raised in each of the last 14 quarters), the total return from BPL is attractive.

Buy Value Range: $45-52 Stop Loss: $41 Sell Half Range: $81-89

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

News on Stocks in Our Portfolios

Accenture (ACN-$35) reported its first fiscal quarter earnings per share of $.60 versus $.46 recorded in the comparable 2007 fiscal quarter.

VF Corp (VFC-$74) confirmed its original guidance of 2007 earnings per share and the stock bolted $5 to the upside (don’t ask me why). I clearly took the head fake on this stock (remember the Dividend Growth Portfolio just Sold one half of its position); although it does illustrate the upside to partial sales. Unless yesterday’s move is itself a head fake, I may re-establish a full position at some point. To be clear though, I am not doing it now.

More Cash in Investors’ Hands