2/1/08

Economics

A long term perspective on jobless claims:

http://bespokeinvest.typepad.com/bespoke/2008/01/initial-jobless.html

More perspective, this time on the magnitude of the sub prime problem:

http://mjperry.blogspot.com/2008/01/subprime-arms-are-only-7-of-loans.html

Finally, a look at real disposable income (how can you think that we are in a recession, when you look at a chart like this?)

http://mjperry.blogspot.com/2008/01/24th-month-of-real-disposable-income.html

Politics

Domestic

Obama on immigration (the commentary is from Mickey Kaus, a Democrat/ blogger): http://www.slate.com/id/2182933/#obamahispander

McCain on immigration (also courtesy Mr. Kaus)

http://www.slate.com/id/2182933/#mccainduck

International War Against Radical Islam

The Market

Technical

The DJIA closed last night at 12650 which put it above the 1982-present up trend line--having been below it for 10 days. A technical purist would insist that the trend line had been broken and discount any return after 10 days as meaningless. Admittedly even for me the distance (about 800 points) and time (10 days) argues that the trend has been broken. However, it was 26 year trend in which DJIA had advanced 16 fold at the point of the break which in my mind significantly diminishes the magnitude of the distance (one sixteenth) and time (one tenth of one percent). This of course could be rendered academic were the DJIA to fall again. Nevertheless, I think it important to watch as a indication as to whether the current rebound is just a rally in a bear market or the start of something more positive. The 1982-present up trend line is now at circa 12500--which curiously enough just happens to the approximate level of the August 2007 sell off intraday low.

Fundamental

The fundamental explanation for yesterday’s fourth monster intraday reversal in the last two weeks was centered on the resolution of the sub prime crisis’ financial impact on the monoline insurers. You will recall yesterday, I said:

“no better proof that the credit market not the economy is the causal factor is the Market action yesterday--despite the Fed rate move and a subsequent 176 point jump in the DJIA, when Fitch announced that it was reviewing the ratings of one of the monoline insurers [the insurers of the securitized mortgage instruments], investors clocked that Average 200 points--investors are worried about the freezing up of liquidity in the banking system,

the resolution of the financial viability of monoline insurers is likely to be the last major hurdle to overcome before investors re-gain confidence in the financial system.” (my emphasis)

Well, yesterday S&P (the rating agency, not the index) joined Fitch (see above) saying that it was reviewing the ratings of securitized mortgage instruments that the monoline insurers had insured--that helped push stock prices down big in the morning. But in a conference call later in the day MBIA (one of the monoline insurers) basically said its finances were sound enough that it could handle any losses that might come from defaults on the mortgage debt instruments it had insured (this morning’s Wall Street Journal, front page, has the complete story)--and the rally was on.

The whole point of this is the same as I made yesterday--the more clarity we receive on the resolution of the sub prime mess, the less fear in the Market and the more likely that it will stop its decline. MBIA’s statement was a clarifying event. Bears will argue that MBIA is doing what Citigroup and Merrill Lynch did at the outset of their woes--which is to lie and attempt to cover up the magnitude of the problem; and therefore, yesterday was not a clarifying event but a ‘smoke and mirror’ event. They may be correct; we will know soon enough. I am a bit less skeptical on the general thesis that MBIA saw what happened to Citigroup, et al and will do its best to avoid making the same mistake.

My bottom line is that, barring some truly unexpected revelation in the sub prime arena, I will be buying any Market declines (which by the way we will surely get) more aggressively.

However, this study does not bode well for the rest of the year (as January goes, so goes the rest of the year)

http://bespokeinvest.typepad.com/bespoke/2008/01/top-ten-worst-j.html

Subscriber Alert

In the meantime, I am also going to use the current lift in stock prices to Sell under performing stocks. Accordingly, the Dividend Growth Portfolio at the Market open this morning will Sell the remainder of its Eli Lilly (LLY-$51) and its holding of Marathon Oil (MRO-$47). Yesterday MRO announced surprisingly poor earnings and a preliminary review of its Valuation Model suggests downward revision of its Valuation Range. Since it closed near its Stop Loss Price and it was a small holding (a one third position) to begin with, this action seems reasonable.

In addition, several more stocks have recovered back into their Buy Value Range and they are being re-Added to their respective Buy Lists. They include Genuine Parts (GPC-$44) and VF Corp (VFC-$77) in the Dividend Growth Universe; Martin Midstream Partners in the High Yield Universe; and Abercrombie & Fitch (ANF-$79), Expeditors Int’l (EXPD-$47) and SAP (SAP-$47) in the Aggressive Growth Universe. EXPD is already owned by the Aggressive Growth Portfolio so no further action is needed. None of the rest will be Bought at this time.

Other stocks that are on our Buy Lists have risen above the upper boundary of their Buy Value Range are, therefore, being Removed. They include Johnson Controls (JCI-$35) on the Dividend Growth Buy List; Quaker Chemical (KWR-$20) on the High Yield Buy List; and Best Buy (BBY-$48) on the Aggressive Growth Buy List. BBY was never purchased by the Aggressive Growth Portfolio, so no further action is needed. JCI and KWR will continue to be Held by their respective Portfolios.

At the Market open this morning, the Aggressive Growth Portfolio will buy a one third position in Sun Hydraulics (SNHY-23).

Finally, Proctor & Gamble is one of the great performing stocks in the Dividend Growth Portfolio. It was purchased in 2001. In 2004 traded into its Sell Half Range and a portion of the holding was Sold. Earlier this month the stock once again traded into its Buy Value Range. When it did so, the relative size of its position was below the normal 3%. Accordingly, at the Market open this morning, additional shares of PG will be bought to bring this holding to a normal size.

News on Stocks in Our Portfolios

Proctor & Gamble (Dividend Growth Portfolio) reported its second fiscal quarter’s earnings per share at $.98 versus expectations of $.96 and $$.84 reported in its 2007 second fiscal quarter.

Peabody Coal (Aggressive Growth Portfolio) reported fourth quarter operating earnings per share $.71 versus expectations of $.79 and $.68 recorded in the comparable 2006 quarter. The primary reasons for the shortfall were weak coal prices, flooding in Australia and foreign exchange losses on a Japanese contract. The company also guided 2008 estimates lower. Operations will continue strong as demand rises in face of low worldwide inventories. However, the company expects further accounting adjustments related to a coal price settlement on a Japanese contract.

Mastercard (Aggressive Growth Portfolio) reported fourth quarter operating earnings per share of $.89 versus expectations of $.73 and $.30 recorded in the fourth quarter 2006.

ExxonMobil (Dividend Growth Portfolio) reported fourth quarter earnings per share of $2.13 versus expectations of $1.95 and $1.69 reported in the comparable 2006 quarter.

More Cash in Investors’ Hands

Microsoft is buying Yahoo for $45 billion, one half of which is in cash.