2/6/08

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.). Pelosi fails to respond:

http://blog.heritage.org/2008/02/04/pelosi-ignores-gops-request-for-earmark-moratorium/

And this one last swipe at W’s last budget and his fiscal legacy:

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/04/AR2008020402429.html

And a look at the defense budget:

http://www.slate.com/id/2183592

Another look at income distribution:

http://mjperry.blogspot.com/2008/02/rich-getting-richer-and-poor-are.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

The DJIA (12265) once again busted through its 1982-present uptrend (circa 12536 at yesterday’s close). Clearly for the DJIA the late January intraday low (circa 11634) is now the level to watch. The S&P (1336) remains well above its 1982-present trend line (circa 1275 at yesterday’s close). The comparable late January intraday low is circa 1263.

We knew that there was likely to be a test after stock prices dramatic bounce; and that’s what we are getting. Others will argue that the recent recovery was simply a rally in a bear market and yesterday was a resumption of that down trend. We will know soon enough.

This chart is a little scary:

http://bespokeinvest.typepad.com/bespoke/2008/02/1-moves-more-co.html

Fundamental

The talking heads attributed yesterday’s sell off to the lower than expected ISM non-manufacturing index which was viewed as a sure sign of recession. That seems somewhat improbable to me. Even if my economic forecast is wrong and there is going to be a recession, it is not like its prospects haven’t been talked about and talked about for the last six months--so a recession, if it occurs, is not going to be a surprise. Witness the fact that the Market (DJIA) is 1900+ points (13.5%) off its high and at least by my our Valuation Model is 8.4% undervalued--meaning that the recession, if it occurs, has to some extent already been discounted.

Rather, yesterday’s action just feels more like the normal investor emotional ebb and flow that occurs around turning points--indeed it is inconceivable to me that stocks wouldn’t sell off after a 1200 point Titan III shot off the DJIA 11600 intraday bottom. What surprised me was how little damage was done to our stocks. To be sure, there were names on our Buy Lists that traded slightly below the lower boundary of their Buy Value Range. However, given the current volatility in stock prices, I am for the moment not going to Remove these names---again simply because they traded only fractionally below their Buy Value Range. (Nevertheless, I have included a list of those names below.) Of course, if today is another day like yesterday, those fractions will undoubtedly grow.

Clearly, it would be stupid not to hold open the probability that another down leg is in the making. Indeed, I said at the outset of this upswing that my confidence that the Market had bottomed would be only slightly better than 50/50 until a test occurred. That seems to be happening now; and as I said above, we will know the outcome soon enough.

Bottom line, given that I think that we are in a test of the bottom, it seems reasonable to put a small amount of money to work (see below). However, for the preponderance of cash reserves, I think we stay patient, watch and let our Price Disciplines do their work. If this is a test, we will put more money to work on the next bounce. If we are going much lower, our 25% cash position and our Stop Loss Discipline will keep our principal in tact.

Stocks that Closed Near the Lower Boundary of their Buy Value Range

Dividend Growth Buy List: GE, T Rowe Price, Manulife Life Insurance

High Yield Buy List: Kimco Realty Trust, Realty Income Trust, Martin Midstream Partners

Aggressive Growth Buy List: Schwab, Abercrombie & Fitch, American Eagle Outfitters, Sun Hydraulics, Expeditors Int’l, SAP

Subscriber Alert

The stock price of CME Group (CME-$588) has declined below the upper boundary of its Buy Value Range. Accordingly, CME is being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio already owns CME, so no additional shares will be bought.

At the Market open this morning:

The Dividend Growth Portfolio will Buy additional shares (1/5 to ¼ positions) in Johnson Controls (JCI-$34) and Northern Trust (NTRS-$69),

The High Yield Portfolio will Buy additional shares (1/5 position) in LCA-Vision (LCAV-$16),

The Aggressive Growth Portfolio will Buy additional shares (1/5 position) in Luxottica (LUX-$27)

News on Stocks in Our Portfolios

CME Group (Aggressive Growth Portfolio) reported fourth quarter earnings per share off $3.75 versus expectations of $3.62 and $2.91 recorded in the comparable 2006 quarter.

A positive write up on Praxair (Dividend Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=6891

More Cash in Investors’ Hands