1/11/08

Economics

protectionism (Free trade is a major positive for world and US economic growth.)

http://www.ibdeditorials.com/IBDArticles.aspx?id=284688553661334

Politics

Domestic

Giuliani on taxes:

http://www.clubforgrowth.org/2008/01/rudys_bold_tax_cut_plan.php

McCain on energy:

http://article.nationalreview.com/?q=ZjA0NDgzNjBlYTQ3YWZlZDFlYWZiOTFhNTRlZTM5YzU=

International War Against Radical Islam

The Market

Technical

Yesterday stocks traded above a short term resistance level (DJIA-12800; S&P 1419); if the Averages can stay above the aforementioned levels for a day or two, that should provide some short term psychological lift; and if that happens then the next price points to watch are DJIA 13578 to the upside and the August intra day low (12709) on the downside. Comparable support and resistance prices for the S&P are 1498 and 1406.

Fundamental

We have received some decent news this week providing added visibility on the resolution of the liquidity problems and the financial distress caused by the collapse in the sub prime market. Two events yesterday bear comment (I will cover them all in this week’s Closing Bell):

(1) in a speech Fed Chairman Bernanke sounded very sympathetic to the economy’s current difficulties saying that the Fed is prepared to make ‘substantive’ cuts in rates if necessary. Several points:

(a) it’s a start; but {i} we don’t know what he means by 'substantive’, {ii} the bond market was pricing a 50 basis point drop in the Fed Funds rate at the January Fed meeting at the same time stocks were getting clocked earlier this month; so unless ‘substantive’ is more than 50 basis points, it is meaningless, {iii} a 50 basis point drop in the Fed Funds still leaves short term rates too high relative to long term rates which does nothing to encourage bank lending [they can’t make a profit by paying up to borrow short in order to lend long at an uneconomic rate], {iv} in other words, Mr. Bernanke now needs to walk the walk.

(b) the inverted yield curve, in my opinion, is the lesser of the predicaments attributable to the Fed. The major problem is that the monetary base has shrunk in the last 12 months; the economy can’t grow if it can’t get the funds that it needs to do so. A 50 basis point reduction in the Fed Funds rate in an environment where the money supply is contracting will do absolutely nothing to remedy a weak economy.

(2) it was rumored yesterday and announced this morning that Bank of America was buying Countrywide Financial. Certainly, this is a plus for liquidity in the mortgage market. But how desperate is B of A’s situation that they double down on an investment that they have already been nailed to the wall on? [Remember they invested in a Countrywide preferred stock at a level 300% higher than current prices]. How smart is that?

http://bigpicture.typepad.com/comments/2008/01/boa-in-talks-to.html

My cynicism aside, both these announcements are still positives; certainly investor’s initial reaction would suggest so. But in Market terms, are they significant enough fundamentally to change investor sentiment and (1) slow the rate of stock price decline, (2) halt the decline completely or (3) warrant a rebound in stock prices. I have no idea of the answer but I thought perhaps a clue could found by looking at those stocks I discussed in yesterday’s Morning Call--stocks that had fallen into, then out of their Buy Value Ranges and hit their Stop Loss Prices yet no matter how hard I reworked their companies’ financials, I couldn’t get a markedly different Valuation Range. In other words, stocks that in my analysis were unreasonable undervalued.

So I checked yesterday’s closing price of all those stocks that our Portfolios had Sold over the last month but whose Valuation Model hadn’t changed on the thesis that I would be eager to Buy them back if their stock price bounced back into their original Buy Value Range. Well, only three (out of 20+ that we have either Sold all or a part of) stocks had done so: American International Group, Automatic Data Processing and Realty Income Trust. Certainly not in my mind an indication that the decline in stock prices is over. Bottom line: even assuming (which I am not) that the last two days marked a Market bottom, the prices of stocks that I want to own are clearly not getting away on the upside which affords a bit more time to evaluate the significance of recent events. Caution remains a key.

Subscriber Alert

The stock price of Linear Technology (LLTC-$28) has declined below the lower boundary of its Buy Value Range. Accordingly, LLTC is being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio will continue to Hold this stock.

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

The stock prices of Telefonos de Mexico (TMX-$36) and Luxoticca (LUX-$27) have fallen below the upper boundary of their respective Buy Value Ranges. Therefore, these tow stocks are being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio will not Buy these stocks at this time.

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

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

Today is the deadline for Selling the January Citigroup, Merrill Lynch and Wells Fargo calls Bought in the Aggressive Growth Portfolio. Unfortunately, the MER calls are the only ones with sufficient value to warrant a closing transaction. So barring some phenomenal bit of luck today, at the Market close, the Aggressive Growth Portfolio will Sell its January Merrill Lynch January 55 calls.

News on Stocks in Our Portfolios

The dividend on US Global Shares-Gold (Aggressive Growth Portfolio) was $1.63 income and $.80 capital gains.

More Cash in Investors’ Hands