9/30/08

Economics

Recent Data

August personal income grew .5% versus expectations of a .2% increase; this reverses a dismal July report.

August personal spending was flat versus estimates of a .2% rise.

If we are to believe that at least a part of the current economic malaise is a function of the consumer spending too much and not saving enough, then the solution would be patterned off of these data--earn more, spend less, reduce debt.

Finally, the core personal consumption expenditure index rose .2% in August, down from +.3% in July.

Other

A look at the panic in the credit markets:

http://traderfeed.blogspot.com/2008/09/corporate-bonds-when-safe-asset-classes.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

The indices (DJIA 10365; S&P 1106) closed below their July 2008 lows (10809; 1198). Usually when a stock or index busts through a support or resistance level, I always give it a little time (a couple of days) and distance (1-3%) before declaring the end to a trend. While yesterday is no different, given the magnitude of the distance, it is surely wishful thinking to believe that the July 2008 low was the bottom.

Where are the next support levels? (1) the lower boundaries of the October 2007 to present downtrend [DJIA 10568; S&P 1148] have been penetrated, (2) the lower boundaries of the May to August 2008 downtrend [DJIA 9856; S&P 1097] are still levels to watch, (3) the next support level that I could find go back to 2004 [DJIA 9683; S&P 1062]--not very promising.

Some final observations (1) volume was not as high as the July lows, suggesting there could be more downside and (2) the volatility index rose to the mid 40’s, which is quite high; but remember during past periods of Market panic it has traded to the high 50’s, low 60’s, (3) what would this sell off have been like if investors could short.

Fundamental

Pop Quiz. If the approval rating of congress was 12% before yesterday, what will it be today? I am reminded of the opening sentence of Eric Segal’s Love Story “What do you say about..............”, except he was talking about the love of his life. In this situation, what do you say about a political class that either insufficiently understands or is so partisan that they can’t act in the interest of the country?

I don’t think that the inability to pass the rescue plan yesterday is necessarily the end of the story. And remember, even if the rescue plan had passed yesterday, it would have still taken government machinery a couple of weeks to get the first dime of the $700 billion to those institutions that need liquidity. So yesterday wasn’t a binary event.

Furthermore, the US financial system is not a set of third world institutions. It has multiple components that can deal with this problem while the political class fiddles. Just look at what the FDIC has done in the last couple of days--arranged for orderly transfer of assets of Washington Mutual and Wachovia, two huge banks with little disruption to depositors. Sure the shareholders of those two entities lost big and in the case of Washington Mutual, the bond holders also lost. In addition, in the case of Wachovia, the FDIC ended up with an ownership position as part of the recap plan. Both transactions occurred without a hitch and some might argue that the capitalist system is working. It would probably be helpful if the FDIC would raise the insurance level on deposits (and the insurance premiums) in order to provide more assurance to Main Street that the financial system was not collapsing (that would stabilize the liability side of banks’ the balance sheets). So the model is there; and while it might not be the ultimate solution, it seems to be working as a stop gap measure.

Another helpful step would be for the SEC to revoke the ‘mark to market’ rule (which it has the power to do). It would help stabilize the asset side of the balance sheet. These steps would go a long way to keeping the financial system in tact while other bigger picture measures are debated by hopefully cooler heads--or perhaps even better provide the time to get through the elections and give the electorate the opportunity to throw the group of incompetents currently in power out of office. Could we get that lucky?

Barry Ridholtz disagrees on the need to amend the ‘mark to market’ rule. Here is his position:

http://bigpicture.typepad.com/comments/2008/09/fed-treasury-ne.html

As I stated in last weekend’s Closing Bell, even though our Portfolios sold stocks on Friday, I thought that there was a decent probability that those sales would the ones that fit model of the last sale in a bear market, i.e. the outcome would be that we would have to buy them back 5% higher because the further 10-30% downside didn’t materialize. Any yet here we are again; a sale that risked setting our Portfolios up for a whipsaw looking pretty good in retrospect. We are now down almost 1500 DJIA points since I first made the ‘I’d rather sell and have to buy back higher than not sell and risk more downside’ statement. In that time, our Portfolios have preserved profits in some of our most successful holdings, eliminated positions that had they not been sold would have us puking right now and established initial holdings in the stocks of great companies that suffered severe whackage but appeared to have found a bottom.

This morning it looks like stocks are going to open higher; yet the credit markets are still in a state of seizure. I think that it prudent to use the higher open to take more money off the table. Our Portfolios are going from 22% in cash to 25% in cash. As has been the case for the last 12 months, this move could be the one that necessitates buying stocks back 5% higher.

On the credit markets:

http://calculatedrisk.blogspot.com/2008/09/libor-hits-all-time-high-of-688.html

On the other hand:

http://mjperry.blogspot.com/2008/09/new-banking-data-wheres-credit-crisis.html

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Company Highlight

MDU Resources is a diversified energy company, selling gas and electricity to customers in the upper Midwest and the Northwest, operating units in gas pipelines, oil and gas production, aggregates mining, construction materials and utility line construction and maintenance. The company has grown earnings at a 13-14% rate over the last ten years. While dividends have increased at a slower pace as the MDU’s capital expenditures grew dramatically, their rate of growth should rise in the future. The company’s primary source of profit expansion should come from:

(1) a 12-16% growth in oil and gas production,

(2) acquisitions--the company should close the purchase of a privately held utility in the fourth quarter of 2008.

MDU is rated A+ by Value Line, has a 30% debt to equity ratio and its stock yields 3%.

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

9/08

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