1/23/08

Economics

More thoughts on tax rebates:

http://www.townhall.com/columnists/RobertBluey/2008/01/20/government_handouts_won%e2%80%99t_help_economy?page=full&comments=true

Politics

Domestic

McCain on taxes:

http://hughhewitt.townhall.com/blog/g/175c5aa6-a8ac-486e-9739-dadddfe90a2b

International War Against Radical Islam

Problems with the Law of the Sea Treaty:

http://article.nationalreview.com/?q=MjY3MTk1OGEwYjIwMzBiY2U1NmIwZWI4MmZmODE4Yzg=

The Market

Technical

After a huge down open, the DJIA closed at 11971 above the 11900 support level; similarly, the S&P closed at 1310 versus the current support at 1261. DJIA 11900 and S&P 1261 remain the levels to watch.

Fundamental

The good news is:

(1) the volatility indices spiked at the Market open yesterday to a level that is commensurate with a Market bottom,

(2) by and large investors did not sell the rally that occurred later in the day--which they have been doing with every rally since mid December,

(3) as noted above, despite a Market open around DJIA 11600, at least for a day the DJIA held the 11900 support level,

(4) the Fed dropped the Fed Funds rate 75 basis points; and I am reminded of the axiom that ‘you can’t fight the Fed’,

(5) once again, the financial and retail stocks, i.e. those groups that have been sold the most aggressively in this decline, were up even at the worst moments of the day. I mention this in the context of my remarks last week--that stocks don’t all bottom at the same time and that it is a ‘hopeful’ sign of a bottom when those industry sectors that led stock prices down begin acting better while the rest of Market continues to decline.

The bad news is:

(1) while the Market bounced powerfully off its lows, it still closed down for the day; plus I was disappointed that volume wasn’t higher,

(2) furthermore both the DJIA and S&P remain below the August/November lows and the DJIA below the lower boundary of its 1982-present up trend [12319]. The S&P is still above its 1982-present up trend line. The 1982-present trend line, in particular, is a major support level; and typically when these are broken, prices tend to fall much more than 7% [12319 to yesterday’s DJIA low] afterwards.

As an aside, long time subscribers know that I am not a technical Kool Aid drinker and I find many technical measures way too esoteric; but there is a logic and simplicity to support/resistance levels and trend lines that makes Market judgments easier for me. So I am not saying that a lower Market is inevitable, just that history is tough to ignore.

More clarity would be provided if either the DJIA quickly rebounded above the 1982-present trend line [12319] or the S&P fell below its trend line [1258].

(3) despite the up tick in the financial and retail stocks, few of them rose sufficiently to suggest that their prices had broken their downward momentum,

(4) a 75 basis point cut in the Fed Funds rate was a great start; but we still need two, possibly three, other events to take place to be sure the sub prime crisis has passed: [a] the Fed needs to grow the monetary base, [b] the European central banks need to lower their rates, [c] the monoline insurers {MBIA, Ambac} are in danger of bankruptcy; if that were to occur all those investment banks that bought insurance against the sub prime products are in more trouble. This may require intervention from the federal government.

http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html

(5) Apple reported last night, missed guidance and the stock was off significantly after hours; that could portend another poor Market this morning [and a 8:02 am that appears to be the case].

Bottom line, yesterday may have been the first meaningful attempt at a Market bottom--‘may have been’ being the operative words. However, even if it was, there is likely to be some additional testing of the lows. Nevertheless, I don’t think that it makes any sense to ignore the beginning of a possible change in investor sentiment. This coupled with our large cash reserves persuades me to tweak our investment strategy.

First, I am going to stop fudging our Stop Loss Discipline. To be clear, when a stock hits its Stop Loss Price, our Portfolios will Sell it. However, since mid December I have been occasionally Selling stocks before they hit their Stop Loss price. I am going to at least temporarily refrain from that.

Second, I want to begin to nibble at financial/retail stocks that either never fell below the lower boundary of their Buy Value Range or did so very briefly and bounced back.

Subscriber Alert

The stock price of MDU Resources (MDU-$25) has fallen below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth Buy List. The Dividend Growth Portfolio never purchased MDU, so no further action will be taken.

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

The stock prices of T. Rowe Price (TROW-$49) and VF Corp (VFC-73) have recovered to trade within their Buy Value Range. TROW is being Added to the Dividend Growth Buy List; and at the Market open today, the Dividend Growth Portfolio will purchase a one third position in this stock. VF Corp is being Added to the Dividend Growth watch list.

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

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

The stock price of Paychex (PAYX-$32) has fallen below its Stop Loss Price. At the Market open today, the Dividend Growth Portfolio will Sell a one third position in PAYX.

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

The stock price of Buckeye Pipeline (BPL-$46) has fallen below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the High Yield Buy List. The High Yield Portfolio will continue to Hold BPL.

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

At the Market open today, the Aggressive Growth Portfolio will Sell its remaining one third position in Commercial Metals Corp (CMC-$24).

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

The stock price of Mastercard (MA-$182) has recovered to trade within its Buy Value Range. MA is being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio will Buy a one third position in Mastercard at the Market open this morning.

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

The stock prices of American Eagle Outfitters (AEO-$22) and Nordstrom’s (JWN-$32) have recovered to trade between their respective Stop Loss Prices and the lower boundary of their Buy Value Ranges. They are being Added to the Aggressive Growth watch list.

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

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

Some advice from Barry Ridholz:

http://www.thestreet.com/s/dont-just-do-something-sit-there/newsanalysis/investing/10399641.html

Watch Lists**

Dividend Growth Watch List: Avery Dennison, Bank of Nova Scotia, Brown Forman, Chevron, Clorox, Emerson Electric, Fortune Brands, Genuine Parts, General Electric, Illinois Tool Works, Johnson Controls, Johnson and Johnson, Manulife Financial, McGraw Hill, MDU Resources, Proctor and Gamble, Sysco, T Rowe Price, UPS, VF Corp.,

High Yield Watch List: A.J Gallagher, Alliance Resources, Buckeye Pipeline, LCA-Vision, Plains All American, Quaker Chemical, Reynolds American, Rayonier, US Bancorp.

Aggressive Growth Buy List: Accenture, American Eagle Outfitters, American Vanguard, Amphenol, Best Buy, Bucyrus Int’l, CME Group, Donaldson, Eaton Vance, Expeditors Int’l, Factset Research, Fastenal, Franklin Resources, Landstar, Luxoticca, Mastercard, Nordstrom, Quest Diagnostic, Rockwell Collins, Rocky Mountain Chocolate Factory, Ross Stores, SAP, Schwab, Staples,; and of course I want to re-build the holdings on the 10 Bagger List: US Global Shares-Gold, Medivation, H2 Diesel, ParkerVision

**For the benefit of new subscribers, I started using Watch Lists during severe Market declines. These lists include stocks on our Buy Lists but also equities whose prices has fallen below both their Buy Value Range and their Stop Loss Price but whose Valuation Model (following additional homework on my part) didn’t change appreciably. Historically, the stocks in this latter group will generally trade back into their Valuation Range, sometimes quickly; and I want to be sure I catch that latter group when they do so.

News on Stocks in Our Portfolios

Johnson and Johnson (Dividend Growth Portfolio) reported fourth quarter operating earnings per share of $.88 versus estimates of $.86 and $.81 recorded in the fourth quarter of 2006. For the year, JNJ reported earnings per share of $4.15 versus expectations of $4.13.

A positive write up on US Bancorp (High Yield Portfolio):

http://www.seekingalpha.com/article/61186-three-financials-worth-buying-us-bancorp-part-i

Praxair (Dividend Growth Portfolio) reported fourth quarter earnings per share of $.98 versus expectations of $.97 and $.82 reported in last year’s fourth quarter. It also raised its quarterly dividend from $.30 to $.375.

More Cash in Investors’ Hands