10/23/08

Economics

This Week’s Data

Weekly mortgage applications fell 11%.

Other

Paying the price for protectionism:

http://www.ibdeditorials.com/IBDArticles.aspx?id=309394436809825

A brief look at the role of the rating agencies in the credit crisis:

http://bigpicture.typepad.com/comments/2008/10/ratings-agencie.html

The argument for why we have been in a recession for months:

http://bigpicture.typepad.com/comments/2008/10/happy-birthday.html

Some data suggest that the credit crunch isn’t as bad as is being portrayed:

http://mjperry.blogspot.com/2008/10/what-credit-crisis.html

Politics

Obama and McCain on taxes:

http://www.realclearmarkets.com/articles/2008/10/tax_credits_arent_path_to_econ.html

Democrats and Fannie Mae:

http://online.wsj.com/article/john_fund_on_the_trail.html

Domestic

The NY Times on ACORN:

http://www.nytimes.com/2008/10/22/us/22acorn.html?_r=1&partner=permalink&exprod=permalink&oref=slogin

International War Against Radical Islam

The Market

Technical

The magnitude of this decline in perspective:

http://bespokeinvest.typepad.com/bespoke/2008/10/the-worst-year-ever-sp-500s-worst-declines.html

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It didn’t take long for the indices (DJIA 8519, S&P 896) to test that very short term uptrend off their October 10 low which I mentioned in yesterday’s Morning Call; but even though intraday they traded through that resistance point (DJIA 8438, S&P 887), they nonetheless closed above it. So the question is, will stock prices bounce from here or are we in for a test of the October 10 low? The volatility index (VIX 69) was at a level that would suggest a rebound; in addition, volume picked up which is mildly positive. (At 8:15am CST this morning: it looks as though the futures challenged those up trends and one again bounced.)

Here is a chart depicting the S&P price pattern:

http://bespokeinvest.typepad.com/bespoke/2008/10/sp-500-which-way-will-it-break.html

On the other hand, in yesterday’s comments I noted that at the close Tuesday there were an unsettling number of stocks in our Portfolios that were very close to their October 10 to present uptrend as opposed to the Averages which were 7-8% above them. At yesterday’s close while the DJIA and S&P held above their October 10 to present uptrend, those same stocks blew through their October 10 to present uptrend lines and are now near, at or below their October 10 intraday low.

There are at least two possible explanations for the pattern of this latest sell off:

(1) stocks in general are leading the Averages down; and if not today, then soon, will witness a violation of multiple support levels as stocks sink to new lows [think 2002: DJIA 7146, S&P 766],

(2) all stocks don’t make their lows simultaneously; the Averages made theirs on October 10, but some stocks are only now making their lows.

Overriding all of the above are stories swirling around the Street concerning the resumption of hedge fund liquidations, which if true could nullify any technical or fundamental arguments concerning the near term direction of stock prices.

Taking all these factors in to consideration, I am willing to risk the cash that our Portfolios took out of the Market at higher prices over the last two days by Buying stocks at the open this Morning. To be sure that this is all kept in perspective, that means going from roughly 22% in cash to 20.5% in cash--not an enormous bet. However, since stock prices seem to be at an inflection point, other action may be taken during the day. If so, I will notify you via a Subscriber Alert.

Fundamental

Subscriber Alert

Accordingly, small additions will be made to the following holdings at the Market open:

Dividend Growth Portfolio: Wells Fargo & C0 (WFC), 3M (MMM), Coca Cola (KO) and Home Depot (HD).

High Yield Portfolio: Reynolds American (RAI), BP (BP), Zenith National Insurance (ZNT) and Plains All American PL (PAA).

Aggressive Growth Portfolio: Balchem (BCPC), Peabody Energy (BTU), Walgreen (WAG) and Frontier Oil (FTO) nm

Here is some pretty positive commentary from Dougy Kass, who has been negative for most of the year. His key point: a sure sign of a bottom is increasing stock prices in the midst of declining earnings reports. We aren’t there yet; but that something for which I’m watching.

http://www.thestreet.com/story/10443244/1/kass-buy-it-like-buffett.html?puc=_htmlttt

The High Yield Buy List

Company Close 10/6 Buy Value Range

Pacer In’tl $10.94 $11-13

Pfizer 16.74 17-20

Plains All American PL 38.47 31-36

Reynolds American 48.16 45-52

Sanofi Aventis 28.46 26-30

Zenith Nat’l Ins 30.80 32-37

News on Stocks in Our Portfolios

Positive comments on Becton Dickinson (Aggressive Growth Portfolio):

http://www.zacks.com/blog/post_detail.html?t=15405

Positive comments on Abbott Lab (Dividend Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=8947

ATT (High Yield Portfolio) reported third quarter operating earnings per share of $.67 versus estimates of $.71 and $.55 recorded in the comparable 2007 quarter. http://www.thestreet.com/story/10443751/1/atts-net-falls-short-update.html?puc=_txtmdb

McDonald’s (Dividend Growth Portfolio) reported third quarter earnings per share of $1.05 versus forecasts of $.98 and $.88 reported in its 2007 third quarter.

And some positive comments:

http://seekingalpha.com/article/101413-mcdonald-s-rides-high-by-pricing-low?source=front_page_long_ideas

Boeing (Dividend Growth Portfolio) reported third quarter earnings per share of $.96 versus expectations of $.98 and $1.11 recorded in the prior year’s third quarter.

http://www.thestreet.com/story/10443686/1/boeing-earnings-slide-amid-strike.html

And some negative comments:

http://www.thestreet.com/p/_htmlrmd/rmoney/industrials/10443804.html

Phillip Morris Int’l (Dividend Growth Portfolio) reported third quarter earnings per share of $1.01 versus estimates of $.90 and $.82 reported in the comparable 2007 quarter.

More Cash in Investors’ Hands