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 21%
High Yield Portfolio 22%
Aggressive Growth Portfolio 27%
Economics
The economy is a neutral for Your Money. This week’s data did nothing to alter my recently revised forecast that the economy is struggling to maintain a positive rate of growth. There was little positive about the housing stats; the consumer presented a mixed picture--the retail sales figures contained both good news and bad news while the weekly employment number was another positive one; data on industrial activity was a really bright spot with both wholesale and business sales very strong--lending support to the notion that the global economy is helping to moderate domestic weakness; this was bolstered by the January trade figures; in addition, the February consumer price index (CPI) was unchanged--a welcome respite from the recent spat of discouraging inflation data. Bottom line: the economy is weak though it is by no means a forgone conclusion that it will fall into recession and while the CPI report was promising, inflation remains a gnawing problem.
(1) again this week, the only housing number was weekly mortgage applications [secondary indicator] which were down 1.9% and clearly show no sign of improvement,
(2) consumer related data suggested a weak but not declining economy: [a] the International Council of Shopping Centers reported weekly sales of major retailers rose .3% and were up 1.6% on a year over year basis; Redbook Research reported month to date retail chain store sales up 1.6% versus the comparable period in February and up 1.0% over the similar time frame in 2007, [b] February retail sales as measured by the Commerce Department fell .6% versus estimates of a .1% increase; ex autos, sales were down .2% versus expectations of up .2% { http://mjperry.blogspot.com/2008/03/two-stories-of-retail-sales.html }, [c] weekly jobless claims were unchanged versus forecasts of a rise of 4,000, [d] finally the preliminary University of Michigan March index of consumer sentiment was reported at 70.5 versus expectations of 69.0 but was down a little from February’s final reading of 70.8,
(3) industry figures were encouraging: [a] January wholesale inventories jumped .8% versus expectations of a rise of .5%; however, wholesale sales soared 2.7% and December wholesale sales were revised up from -.7% to -.5%; the inventory to sales ratio fell, [b] January business inventories were up .8% versus estimates of up .7%; but like wholesale sales, business sales jumped 1.5% versus forecasts of a .7% decline which drove the business inventory to sales ratio to a record low,
(4) macro economic data was also basically upbeat: [a] the January trade deficit was reported at $58.2 billion versus expectations of $60.0 billion--this in spite of record oil imports, [b] the February budget deficit came in at $175.5 billion versus estimates of $160 billion; this number isn’t quite as bad as it appears because there was a calendar problem; to wit, March 1, a day on which the government pays many bills, fell on a Saturday, so the bills were paid on February 29, [c] most important, the February CPI was unchanged versus forecasts of a .2% increase; similarly, the core CPI was unchanged versus expectations of a .2% rise.
As a final note, the CPI report could be a mixed blessing in that it might lead the Fed to believe that it has additional leeway in reducing the Fed Funds rate. To be clear, I supported the Fed’s recent Fed Funds rate reductions and I believe that it is imperative for the Fed to provide liquidity to the banking system. However, I think further interest rate cuts will be only marginally beneficial to financial system’s liquidity but will definitely impact inflation and the dollar negatively. It seems to me that the swaps that the Fed made available this week are much more effective in unfreezing bank balance sheets and have far less inflationary consequences.
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.
Domestic: http://www.heritage.org/Research/Budget/wm1842.cfm
And this depressing bit of news from our elected representatives:
http://article.nationalreview.com/?q=NzIwMTNiZGQ2ZmE1MzViNTM4YmYzMTE4ODU2N2MwYTc=
International:
http://article.nationalreview.com/?q=NWVjN2JkOTk1MTk4ZDIyZGY3ZTIxNDE5MDE1YmEyNTY=
The Market-Disciplined Investing
Technical
The DJIA (11951) 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 (1288) I am watching the boundaries of the up trend off the 1982 low (circa 1285-1738), the 750-1527 2002-present trading range and the short term trading range comparable to the DJIA range (1269-1406).
This was quite a week, technically speaking. On Monday, stocks tested the January low with the DJIA falling below the January low close (11900) and the S&P breaking the 1982-present uptrend line and closing 3 points off its January intraday low (1269). The Markets then bounced hard the next day; and given my tendency to not get too absolute about a one day break in support or resistance levels, I view these two days as nothing more than a test although I was not quite as sanguine on the finality of this test as many analysts because it lacked the hysteria found in capitulation which tends to define a bottom. Thursday, we got another test of the January low when stocks opened down big on bad news (the insolvency of Carlyle entity), again approached the January lows, but this time on the heavy volume that was missing on Monday and then rallied to close up on the day. Finally, Friday stocks again attacked the January lows on bad news (the potential bankruptcy of Bear Stearns); and while intraday the Averages traded below support levels (DJIA-11900; S&P 1285), they still closed above them.
Whew. So have we experienced a quadruple bottom; was the whole of last week just an extended and agonizing test; or are stocks about to drop off the cliff? and of immediate importance, what happens Monday? As usual I don’t have a clue as the answer. But (1) I stand by my statement in Tuesday’s Morning Call that I continued to believe that the bottom of this Market cycle had been made in January and that I was sticking with our investment strategy till the Market proved me wrong. So far it hasn’t and amazingly in the face of terrible news. And (2) In the final analysis, my position is what it has always been when the Market action makes me want to puke: stay calm in the knowledge that if I am right, we are being presented with the opportunity to Buy the stocks of great companies at attractive prices; if I am wrong, our Price Disciplines will push us out of weak stocks/companies, preserve our Portfolios’ principal while keeping us invested in those stocks that will be leaders in the next Market up trend.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (11951) finished this week about 11.1% below Fair Value (13449) while the S&P closed (1288) around 16.7% undervalued (1548).
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 (but keeping a minimum cash position of 15%),
(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 [i] 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 3/31//08 13449 1548
Close this week 11951 1288
Over Valuation vs. 3/31 Close
5% overvalued 14121 1625
10% overvalued 14794 1703
Under Valuation vs. 3/31 Close
5% undervalued 12777 1471
10%undervalued 12104 1393
15%undervalued 11431 1316
20%undervalued 10759 1238
The Portfolios and Buy Lists are up to date.
Company Highlight:
Reliance Steel provides value-added metals processing services and distributes more than 100,000 metal products. The company has grown profits and dividends at a 15%+ rate and earned in excess of 20% return on equity over the last five years. RS should be able to continue this record as a result of expanding growth in its core customer base (aerospace and energy), an aggressive acquisition strategy to consolidate a fragmented industry, expansion internationally and an excellent cost control discipline. The company is rated B++ by Value Line, has a debt/equity ratio of approximately 35% and its stock yields .6%
http://finance.yahoo.com/q?s=RS
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.
