6/27/08

Economics

The Fed and the dollar. The authors argue that US monetary policy impacts inflation in many other countries because they peg their currency to the dollar:

http://www.ft.com/cms/s/0/d5cd50c4-42e4-11dd-81d0-0000779fd2ac.html?nclick_check=1

A breakdown of the components of yesterday’s first quarter GDP report:

http://bigpicture.typepad.com/comments/2008/06/gdp-final-1.html

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.) A break down in the amount of earmarks in six 2009 FY appropriation bills now in the House:

http://www.cagw.org/site/News2?page=NewsArticle&id=11512

A chart on housing sales:

http://mjperry.blogspot.com/2008/06/signs-of-bottom-to-home-sales.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Brutal. The DJIA (11453) busted through its January 2008 intraday low (11634) while the S&P (1283) continued to drive toward its January 2008 intraday low (1269). Both closed below the lower boundary of their May 2008 to present down trend.

What is next? The next visible DJIA support level is its July 2007 intraday low (10663), while we can only hope that the S&P can hold its January intraday low (1269).

The big question is, was yesterday action a wash out; and, therefore, will today see a big bounce back? I don’t have the answer; but we will know by 3PM. However, I think that there are a couple of factors that weigh against that scenario: (1) volume--yesterday’s trading volume was not indicative of a selling climax, (2) the volatility index [VIX-24]--it didn’t even get close to the highs [35-36] usually seen in wash outs, (3) the quarter’s end--there are a lot of fund managers out there with losses in many stocks who are not going to want those stocks [obvious losses] on the sheets at the end of this reporting period, (4) today’s Friday--most of the fast money guys I know don’t want to go into this weekend net long in any meaningful way.

On the other hand, look at these breadth numbers. They are pointing to a bottom:

http://bespokeinvest.typepad.com/bespoke/2008/06/market-breadth.html

Bottom line: given the heightened degree of uncertainty, I would rather err on the side of conservatism, i.e. assume that stocks have further to go on the downside and if I’m wrong have to buy them at higher prices if the DJIA rallies [above its January low], than get gutsy, buy on the Market open and then watch them continue to sink.

Fundamental

I don’t think that I could better describe what I believe is occurring in investor psychology than I did in yesterday’s Morning Call in my discussion of Fed policy. I quote:

‘I may be wrong but I think that this lack of clarity (in Fed policy viz a viz inflation) will serve to keep investor uncertainty at an elevated level and therefore keep stocks range bound at best. Indeed, I think that the only thing that changes Market psychology is a break in oil prices and that probably is not going to happen until (1) the dollar strengthens [which is not going to happen until monetary policy tightens], (2) the demand for oil [and other commodities] rolls over [which is probably not going to happen if the Fed is correct about the economy] or (3) the supply of oil [and other commodities] improves [if that happens it won’t be because of any help from our elected representatives].’

Add to this, being bombarded everyday with the lunacy coming out of the political class and it is small wonder that investors are questioning their faith in the policies of every segment of the government establishment and as a consequence the price that they are willing to pay for a piece of corporate America.

All that said, some less discouraging news from yesterday’s price action was that once again the stocks in our Portfolios are holding up very well. Most remain in or above their Buy Value Range, few have run into any technical trouble, virtually all are trading above their January 2008 low and most are trading above their April 2008 low. Our task at this point is to preserve that superior performance in this down turn.

So our Portfolios are going to step up their aggressiveness in selling those stocks that are trading between the lower boundary of their Buy Value Range and their Stop Loss Price [category 1]. They are also going to take the unusual step of selling small portions of those stocks that (1) have been among the best performing in the Portfolio, but (2) have experienced visible technical deterioration in the last week, and (3) have technical support levels significantly below their current price level [category 2]. Accordingly, at the Market open this morning.........

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Million Dollar Portfolio Challenge

Portfolio 1 (89.9): Sold: Nucor

Bought: WalMart

Positions: Automatic Data Products, Johnson Controls, WalMart, Canon

Portfolio 2 (89.5%): Sold: Praxair

Bought: Ecolabs

Positions: Franklin Resources, Ecolabs, SAP

Mastercard

Portfolio 3 (92.9%): Sold: Nucor

Bought: Sun Hydraulics

Positions: Sun Hydraulics, Smith Int’l. ConocoPhillips, Mastercard

Portfolio 4 (86.9%): Sold: General Dynamics

Bought: SAP

Positions: Suncor , Colgate Palmolive, Peabody Energy, SAP

News on Stocks in Our Portfolios

Accenture (Aggressive Growth Portfolio) reported third fiscal quarter earnings per share of $.74 versus expectations of $.69 and $.54 recorded in the comparable quarter last year.

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

A positive write up on the coal stocks (Peabody Energy-Aggressive Growth Portfolio):

http://www.zacks.com/newsroom/commentary/index.php?id=7946

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