The Closing Bell

The Closing Bell

5/3/08

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 12549-13426

Medium Term Trading Range 11600-14203

Long Term Trading Range 7100-14203

Year End Fair Value: 14050

2009 Year End Fair Value: 14471-14893

Standard & Poor’s 500

2008

Current Trend:

Short Term Uptrend 1366-1460

Medium Term Trading Range 1298-1840

Long Term Trading Range 750-1527

Year End Fair Value: 1615

2009 Year End Fair Value: 1663-1711

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 16%

High Yield Portfolio 20%

Aggressive Growth Portfolio 14%

Economics

The economy is a neutral for Your Money. While this week’s statistics continue to portray an economy that has slowed substantially, they included signs of sufficient strength that suggests it has still not slipped into recession. Unfortunately, there was no relief visible in a disastrous housing market; but there were two telling bits of data reported amongst a considerable volume of mixed/neutral numbers from consumers and industry. First, April non farm payrolls were not nearly as bad as many expected; indeed the unemployment rate for April fell (remember you can’t have a recession if everyone has a job). Second, further reinforcing the notion of a bounce back in industrial activity in March, that month’s factory orders jumped 1.4% versus forecasts for a .3% rise.

There were two other positive statistics, both of which I commented on in Thursday’s Morning Call: fourth quarter gross domestic product grew faster than anticipated and the personal consumption expenditure index was less inflationary than expected.

Finally, the Fed also met this week. I also covered the results of that meeting in Thursday’s Morning Call--the bottom line of which is that at the moment I am uncomfortable with the lack of emphasis on inflation in the Fed statement. However, a lot of very smart people who I respect disagree with me--so I am currently waffling on my opinion.

The specifics:

(1) in housing the only statistic was weekly mortgage applications {secondary indicator} which fell another 11.1%,

(2) the consumer data was mixed though the non farm payroll report was a major positive : [a] March personal income was up .3% versus estimates of up .5%, [b] March personal spending rose .4%, twice forecasts of up .2%, [c] April non farm payrolls declined 20,000 versus expectations of a drop of 75,000, [d] the unemployment rate at the end of April fell to 5.0% versus estimates of 5.2% and 5.1% reported in March, [e] weekly jobless claims rose 35,000 versus expectations of an increase of 38,000, [f] the International Council of Shopping Centers reported weekly sales of major retailers up .9% and up 1.9% on a year over year basis; on the other hand, Redbook Research reported month to date retail chain store sales down 1.3% versus the comparable period in March but up 1.9% versus the similar time frame in 2007, [g] finally, the Conference Board reported its April index of consumer confidence at 62.3 versus expectations of 63.0 and the March reading of 64.5,

(3) indications of industrial activity contained both positives and negatives: [a] the April Institute for Supply Management manufacturing index came in at 48.6 {any reading below 50 connotes contraction} versus expectations of 47.5 and March’s 48.6 reading, [b] March factory orders rose 1.4% versus forecasts of an increase of .3%, [c] the April Chicago purchasing managers’ index {48.3} was slightly better than both the estimates {48.0} and the March report {48.2} though it was still negative {any reading under 50 connotes contraction},

(4) the macro economic numbers were slightly positive: [a] first quarter preliminary gross domestic product was reported up .6% versus expectations of a .2% increase; inside this number, inventories were up .8% {negative}, consumer spending was up 1% {slightly positive}, business investment down 2.5% {negative}, residential investment down 26.7% {horrible}, exports up 5.5% {positive}, and [b] the first quarter core personal consumption expenditure index was up 2.2% on an annualized basis versus forecasts of a rise of 3.1% and the 2.5% year over year rate recorded in the fourth quarter of 2007, [c] another inflation related statistic, employment costs rose .7% versus estimates of an increase of .8%.

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://article.nationalreview.com/?q=YjlhNzdiMjllOTFmM2QwYmMwYzI4ZGQ4N2JiMjllZWQ=

The Market-Disciplined Investing

Technical

As noted in yesterday’s Morning Call, the DJIA busted through the October 2007 to present down trend pretty decisively. That was punctuated by Friday’s Market performance which greeted a terrific non farm payrolls report with a sell off then promptly reversed itself and closed higher. Barring a major retreat next week I continue to think that dominant technical pattern for the DJIA (13058) is the March 2008 to date uptrend (current boundaries circa 12549-13426). The next visible DJIA resistance level is all the way up at the October 2007 high (14200).

This week the S&P (1413) struggled with both the upper boundary (1406) of its late 2007 to present trading range as well as its October 2007 to present down trend line (1411), but took them both out at week’s end. With the same caveat as the DJIA, the dominant trend (s) is (are) the (1) the 1982 to present up trend (now circa 1298-1840) and (2) the March 2008 low to present up trend (circa 1366-1460). The October 2007 high is 1575.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (13058) finished this week about 3.8% below Fair Value (13583) while the S&P closed (1413) around 9.5% undervalued (1562).

While I am sure that all the bad news on the credit crisis and the slowing economy is not behind us, it is difficult to ignore the improvement in financial market liquidity and the better than expected strength in key economic measures (employment, corporate profits and industrial activity). So it should come as no shock that equity prices are higher. Even more surprising to me is the speed and extent of this recovery considering the black hole into which we all looked not that long ago. Much of the credit goes to the Fed; and I have to again admit that Bernanke who stumbled at the outset of his reign has done a pretty fair job since. Given all this, I am gaining comfort with our latest moves to draw down of our Portfolios’ cash positions.

Of course, I am never happy unless I am worrying about some problem that will negatively impact stock prices. Right now there are two. (1) The easier to deal with is economic; and, in the true spirit of ‘what have you done for me lately’, after having just complimented the Fed, I am now going to bang on it. I think that the Fed has to change its focus to inflation. As noted above in the Economics section, I recognize that guys a whole smarter than me are arguing that in fact it has; but I am going to choose to waffle for a bit if for no other reason than problem number two: (2) with the November elections drawing ever nigh, my ‘fear’ meter is spiking into the red zone over a potential shift in our government’s economic agenda toward an inflationary bias even higher than the one given to us by the current crew of miscreants the American people have put in charge. In other words, even if the Fed slows inflationary forces short term, it may do the economy no more good than a sponge in a hurricane if we get the full complement of higher taxes, higher spending, more regulation and protectionism the Democrats are promising.

Bottom line: there is reason to believe that stock prices may continue to move towards Fair Value and therefore to take our cash positions down into the 10-15% range; but my longer term concerns keep me from taking them any lower.

The long version of 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 there remains an outside chance that the Market may not have bottomed; so our Stop Loss Discipline 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 13583 1562

Close this week 13058 1413

Over Valuation vs.5/31 Close

5% overvalued 14262 1640

10% overvalued 14941 1718

Under Valuation vs. 5/31 Close

5% undervalued 12903 1483

10%undervalued 12224 1409

15%undervalued 11545 1327

The Portfolios and Buy Lists are up to date.

Company Highlight:

Wells Fargo is the fifth largest US bank. It has grown profits and dividends over the past 10 years at a 13-15% annualized rate while earning a 16%+ return on equity. Like most banks, WFC’s earnings have suffered in the recent sub prime credit crisis. However, the bank’s balance sheet exposure to the sub prime mortgage market is relatively small which should enable it increase its earning assets an above average pace. In addition, higher credit and debit card fees, improving sales of consumer finance products and increased focus on risk management and portfolio diversification will also add to Wells’ bottom line. The bank’s stock is rated A+ by Value Line and provides a 4% yield.

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

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.