5/17/08

The Closing Bell

5/17/08

It is almost summer, so it must be beach time. I will be out next week wiggling my toes in the sand and drinking rum punch. As a result, there will be no Morning Calls nor a Closing Bell next week. As always, I will have my computer with me and if developments warrant, I will be in touch.

Statistical Summary

Current Economic Forecast

2007

Real Growth in Gross Domestic Product: 2.0- 2.5%

Inflation: 2 - 2.5 %

Growth in Corporate Profits: 6-8%

2008 (revised-again)

Real Growth in Gross Domestic Product (GDP): .5-1.5%

Inflation: 1.75-2%

Growth in Corporate Profits: 0-5%

Current Market Forecast

Dow Jones Industrial Average

2008

Current Trend:

Short Term Up Trend 12878-13713

Medium Term Trading Range 11600-14203

Long Term Trading Range 7100-14203

Year End Fair Value (revised): 13650-14050

2009 Year End Fair Value (revised): 14050-14893

Standard & Poor’s 500

2008

Current Trend:

Short Term Uptrend 1406-1506

Medium Term Trading Range 1306-1841

Long Term Trading Range 750-1527

Year End Fair Value (revised): 1570-1615

2009 Year End Fair Value (revised): 1615-1711

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 14%

High Yield Portfolio 19%

Aggressive Growth Portfolio 12%

Economics

The economy is a neutral for Your Money. Following a couple of weeks of positive data on the economy, I have been becoming a bit more sanguine with regards to the likelihood (or lack thereof) of recession; but I have restrained myself because neither time period contained a lot of data points. Well, the information dearth problem was solved this week--lots of statistics to mull over. The result: my optimism remains. To be sure, all was not bright and cheery--the consumer continues to struggle though is hardly dead and industrial production was a disappointment. But the big news was the first signs that the housing market could be bottoming--April building permits and housing starts were both unexpectedly up and powerfully so.

I don’t want to get too far ahead of events here, but if we assume that the economic pattern going into the current slowdown, i.e. housing leading the way with industry remaining strong, will be the template for the recovery, then both the improved housing figures and poor industrial measures recorded this week are consistent with a bottoming in economic activity. After only three week’s statistics, I am not going on record as predicting that we are at the lows of this cycle; but I am hypothesizing that we could be--I await additional information to prove or discredit that notion.

One more number: the consumer price index was reasonably positive on its surface (though there are some questions as to the veracity of the underlying statistics--an issue that I covered in Thursday’s Morning Call).

Bottom line: the economy continues weak though the odds of it slipping into recession may be shifting; even if I am wrong and a recession does occur, I don’t think the down turn will be significant. Inflation is rising as my primary concern, this week’s consumer price index notwithstanding.

The specifics:

(1) housing statistics were universally [and surprisingly] positive: [a] April building permits increased 4.9% versus expectations of a drop of 2.2%, [b] April housing starts jumped 8.7% versus estimates of a 1.5% decline, [c] weekly mortgage applications {secondary indicator} rose 2.9% {the second increase in a row},

(2) data that measure the consumer were mixed: [a] April retail sales as calculated by the Commerce Department fell .2% versus expectations that they would be unchanged; however ex autos, sales rose .5% versus estimates of a .3% increase, [b] the International Council of Shopping Centers reported weekly sales of major retailers down 1% but up .5% on a year over year basis; Redbook Research reported month to date retail chain store sales rose 2.1% versus the comparable period in April and 1.7% versus the similar time frame in 2007, [c] weekly jobless claims rose 6,000 versus forecasts of an 8,000 increase, [d] the University of Michigan released its preliminary May index of consumer sentiment which came in at 59.5 versus estimates of 62.3 and the final April reading of 62.6,

(3) industry related numbers were mostly disappointing: [a] March business inventories were up .1% versus forecasts of a rise of .4%; more important, business sales were up 1.0% pushing down the inventory to sales ratio at the end of March, [b] April industrial production fell .7% versus expectations of a .3% decline and a .3% rise in March, [c] April capacity utilization came in at 79.7 versus estimates of 80.1 and 80.5 recorded in March, and two secondary indicators: [d] May Philadelphia Fed index of current business activity was reported at -15.6 versus forecasts of -20.0 and April’s reading of -24.9, [e] the May New York Fed manufacturing survey was reported at -3.2 versus expectations of 0.0 and .63 recorded in April,

(4) macro economic stats were uneven, though certainly the up beat core inflation number could be promising: [a] the April consumer price index increased .2% versus expectations of a rise of .3%; the core index was up .1% versus estimates of up .2%, [b] the Federal budget was $159.3 billion in surplus in April versus expectations of $160 billion and $177 billion recorded in April 2007.

The Economic Risks:

(1) the economy is weaker than expected.

(2) Fed policy (reading the data correctly).

(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).

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

(5) 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.).

(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)

Politics

Both the domestic and international political environments are a negative for Your Money.

http://www.reason.com/news/show/126018.html

http://www.nypost.com/seven/05142008/postopinion/opedcolumnists/enabling_hezbollah_110815.htm?page=0

The Market-Disciplined Investing

Technical

The dominant technical trend for the DJIA (12986) is the March 2008 to date uptrend (current boundaries circa 12878-13713). For the S&P (1425), the dominant trend (s) is (are) the (1) the 1982 to present up trend (circa 1306-1841) and (2) the March 2008 low to present up trend (circa 1406-1506).

Fundamental-A Dividend Growth Investment Strategy

The DJIA (12986) finished this week about 4% below Fair Value (13500) while the S&P closed (1425) around 8% undervalued (1553). Note: I changed the month end Fair Value (see below) to reflect the new Valuation spread introduced last week.

There is not much to add to what has been a really great week for stocks except to repeat an observation that I made a couple of weeks ago--and that is that I can’t remember a time when there have been simultaneously so many stocks on our Buy Lists and so many stocks trading in their Sell Half range. I have no better idea what this means for investment strategy now than I did when I first made the comment. But it does keep me very sensitive to the importance of exercising our Sell Disciplines and sticking with our 10-15% cash position.

Our investment strategy is to:

(a) use any price declines to buy positions in great quality companies whose stocks are trading within their Buy Value Range,

(b) use positive days in the Market to Sell stocks that have traded into that ‘no man’s land’ between the lower boundary of their Buy Value Range and the Stop Loss Price but have been unable to recover into their Buy Value Range,

(e) be mindful that [i] there remains an outside chance that the Market may not have bottomed and [ii] that notwithstanding, a number of our Holdings have traded into their Sell Half Range, so our Sell Disciplines remains critical,

(d) on a longer term basis, recognize that there are fundamental factors that argue for caution and therefore to proceed carefully with our Buying, keeping a larger than normal cash position in anticipation of valuation and strategy changes that could result from a potentially new domestic economic agenda.

DJIA S&P

Current 2008 Year End Fair Value 14050 1615

Fair Value as of 5/31/08 13500 1553

Close this week 12986 1425

Over Valuation vs.5/31 Close

5% overvalued 14175 1630

10% overvalued 14850 1708

Under Valuation vs. 5/31 Close

5% undervalued 12825 1475

10%undervalued 12150 1398

15%undervalued 11475 1320

The Portfolios and Buy Lists are up to date.

Company Highlight:

Sherwin Williams is the largest US producer of paints, varnishes, application equipment and automotive coatings most of which are marketed through over 3,000 company operated stores. SHW has grown profits and dividends at a 10-12% annual rate over the last 10 years earning a 25-30% return on equity. The company should be able to continue this record as a result of acquisitions, new store openings, expansion internationally and an aggressive cost cutting program. Sherwin Williams is rated A by Value Line, has a 14% debt to equity ratio, is currently in the midst of a 27 million share buy back and its stock yields 2.8%.

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

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 38 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.