The Closing
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)
Real Growth in Gross Domestic Product (GDP): 1.0-2.0%
Inflation: 1.75-2%
Growth in Corporate Profits: 3-5%
Current Market Forecast
Dow Jones Industrial Average
2008
Current Trend:
Short Term Trading Range 11600-12511
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:
Medium Term Uptrend 1269-1722
Medium Term Trading Range 1062-1527
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 18%
High Yield Portfolio 22%
Aggressive Growth Portfolio 21%
Economics
The economy may be a positive for Your Money. There was a lot of economic data points released this week. They universally support the notion of a slowing economy and arguably suggest an even worse scenario; unfortunately, they also raise questions regarding my forecast of moderating inflation. Specifically, housing statistics continued to plunge, consumer data was mixed while the figures on industrial activity were disappointing, as were the macro economic numbers with the inflation indicators in particular being worrisome.
On the other hand despite a load of bad news on Friday, the visibility of the depth and breadth of the sub prime problem continued to increase (Ambac and MBIA had their AAA bond ratings reaffirmed, Ambac will probably receive a capital injection though that was in question at the close Friday [my thinking is that it will receive the funding because basically it has no other option], federal regulators raised the lending limits on Fannie Mae and Freddie Mac) and Fed chief Bernanke assured investors that his first priority is insuring liquidity in the capital markets.
The bottom line: the economy is clearly slowing but steps are being taken to limit the downside risk to economic growth; at the same time, the dangers of inflation are rising which will likely require Fed tightening once the threat associated with illiquidity in the credit markets has subsided.
(1) housing continues to show no improvement: [a] January existing home sales declined .4% versus expectations of a fall of 1.6%, [b] January new home sales dropped 2.8% versus estimates of a 1.2% decrease, [c] weekly mortgage applications {secondary indicator} plunged 19.2%, the second significant decline in two weeks,
(2) except for the poor readings on two sentiment indicators, the consumer stats were mixed: [a] January personal income was up .3% versus expectations of up .2%, [b] while January personal spending rose .4% versus estimates of an increase of .2% {unfortunately these increases were outset by the .4% rise in the January personal consumption expenditure index}, [c] the International Council of Shopping Centers reported weekly sales of major retailers up .5% {the first increase in a couple of weeks} and up 2.3% on a year over year basis; Redbook Research reported month to date retail chain store sales fell 1.2% versus the comparable period in January while rising .6% versus the similar time frame in 2007, [d] weekly jobless claims rose 19,000 versus expectations of an increase of 6,000, [e] the Conference Board’s February index of consumer confidence plunged to 75.0 from January’s 87.9 reading and versus estimates of 80.5, [f] while the University of Michigan’s revised February index of consumer sentiment came in at 70.8 versus the preliminary reading of 69.9 and the final January reading of 78.4,
(3) industry activity numbers continue to weaken: [a] January durable goods orders dropped 5.3% versus expectations of a decrease of 4.0%; as bad as this appears, remember December durable goods orders were up 4.4%, and [b] the February Chicago purchasing managers index {secondary indicator} fell to 44.5 versus forecasts of 50.0 and the January report of 51.5,
(4) the macro data showed an economy growing at a slightly lower rate than anticipated while experiencing unexpectedly higher inflationary pressures: [a] the fourth quarter preliminary gross domestic product growth came in at .6% versus forecasts of up .7%, [b] the fourth quarter core personal consumption expenditure index rose at a 2.7% annualized rate versus estimates of an increase of 2.6%, [c] the January producer price index {PPI} rose 1.0% versus expectations of an increase of .4%; core PPI came in up .4%, twice estimates of up .2%; PPI was up 7.4% on a year over year basis.
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
(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.
The Market
Technical
The DJIA (12266) is in a short term trading range defined by 11622 /11900 (the January intra day low/the January low close) and 12722 (the November 2007 intra day low). With the S&P (1331) I am watching the boundaries of the up trend off the 1982 low (circa 1269-1722), the 750-1527 2002-present trading range and the short term trading range comparable to the DJIA range (1269-1406).
Fundamental
The DJIA (12266) finished this week about 8.3% below Fair Value (13383) while the S&P closed (1331) around 13.6% undervalued (1540).
I covered several developments impacting Market fundamentals this week in various Morning Calls (improved clarity of the resolution of the sub prime problem, Fed focus on insuring that the credit markets have sufficient liquidity to avoid pushing the economy into recession, the risk of rising inflationary pressures). My bottom line is that:
(1) notwithstanding the news events on Friday [AIG took a whopping write off to earnings; there were rumors of a hitch in the Ambac funding negotiations {that doesn’t seem all that unusual to me; those negotiations have to be complicated--although clearly a collapse would not be good news}; and several leveraged municipal bond funds were getting margin calls], the risk of the potential doomsday scenarios that could result from a collapse of the credit markets or an extended recession seems to be lessening which, if true, increases the likelihood that the January intraday low was the bottom of this Market decline.
Somewhat aside, after the close Friday, I re-ran the price screen that I have described to you before, i.e. the closing price of the stocks in our Portfolios against their August 2007 intraday low, their November 2007 intraday low, their January 2008 intraday low and the trend in place in August 2007. However, I added one additional marker: the stock’s price versus any short term down trend line since its mid 2007 price high. Surprisingly, most of our holdings are trading above at least three or four of the five markers and quite a few are above all five. While this positive price performance is no guarantee that stock prices won’t collapse on Monday, it does suggest good relative strength among our positions.
The stocks with weak performance which I will be watching closely are GE and Sysco in the Dividend Growth Portfolio and Schwab, CME Group, Eaton Vance, American Eagle Outfitters, Expeditors Int’l, Rockwell Collins and SAP in the Aggressive Growth Portfolio.
(2) on the other hand, the risk of cyclical inflation has reappeared and may likely rise, the longer it takes the Fed to resolve that the credit crisis is behind us. When added to the risk that a major change in the
(3) that means a sharp focus on individual company fundamentals and valuations, an above average cash position and a decreased willingness to be patient with underperforming stocks.
Our investment strategy is to:
(a) use any price declines to buy positions in great quality companies whose stocks have either remained within their Valuation Range or have briefly traded below it but quickly rebounded,
(b) insure that my research on the Valuation Model especially for those stocks that have broken below or are near their Stop Loss Price is up to date and the Values generated by the Model reflect the current economic reality,
(c) build our Buy Lists, drawing largely from stocks on our Watch Lists as we review their financials and gain confidence in their Value Range [see (a) and (b) above],
(d) use positive days in the Market to Sell stocks that have traded into that ‘no man’s land’ between the lower boundary of their
(e) be mindful that the Market may very well not have bottomed; so our Stop Loss Discipline and a large cash position [see Percentage Cash in Our Portfolios above] remain critical,
(e) on a longer term basis, recognize that there are both technical and 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
Close this week 12266 1331
Over Valuation vs. 2/29 Close
5% overvalued 13981 1608
10% overvalued 14647 1685
Under Valuation vs. 2/29 Close
5% undervalued 12650 1455
10%undervalued 11984 1378
15%undervalued 11375 1309
The Portfolios and Buy Lists are up to date.
Company Highlight:
Martin Midstream Partners LP provides marine transportation, terminalling, distribution and midstream logistical services, owns natural gas-gathering pipelines, gathers, processes and distributes sulfur and manufactures fertilizer. The partnership has provided a 11-15% return on partners’ capital and grown earnings and dividends at a 4-5% pace over the past five years. When coupled with a 7.6% dividend yield, MMLP stock provides an attractive total return. Given the expected growth in off shore drilling and activity in the agriculture market, the partnership should continue to improve profits and raise its dividend. Its stock is rated B++ by Value Line and has a debt/equity ratio of about 46%.
http://finance.yahoo.com/q?s=MMLP
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.
