The Disciplined Dividend Investor: 2008-10-05

Friday, October 10, 2008

10/10/08

Just a reminder that there will be no Closing Bell this week.

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Economics

Recent Data

We got good news and bad news yesterday:

Weekly jobless claims fell 20,000 versus expectations of a rise of 2,000. This is the first decline in four weeks; but it is also the first week free of any impact from Hurricane Ike. While the growth in jobs is declining, it is nowhere near recession levels.

August wholesale inventories were up .8% while wholesale sales fell 1.0%. This pushed up the inventory to sales ratio which does not bode well for future production.

Other

Great analysis from Barry Ridholtz on working our way out of this credit crisis:

http://bigpicture.typepad.com/comments/2008/10/fix-the-credit.html

Graphics on our future inflation problem:

http://bigpicture.typepad.com/comments/2008/10/adjusted-reserv.html

More chart porn on median household income:

http://mjperry.blogspot.com/2008/10/forget-everything-youve-been-told-b.html

And who pays taxes:

http://mjperry.blogspot.com/2008/10/top-1-paid-more-in-federal-income-taxes.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical/ Fundamental

Both indices (DJIA 8579; S&P 909) continue to fall toward the only easily identifiable support level (DJIA 7146; S&P 766). While that might seem a long way away, it is fewer points that they have already dropped this week. The volatility index surged again to over 60; and though volume rose, it isn’t approaching historic panic sell off levels. (Here’s a chart of the volatility index):

http://econompicdata.blogspot.com/2008/10/speechless.html

I think US officials are doing all they can to instill confidence; ditto the Brits. The rest of Europe seems to be having cognitive dissonance problems which isn’t helping. Indeed, it has put an end to the temporary thawing in the credit markets, which is the biggest most immediate fundamental global problem. (Here is a chart of the credit index):

http://econompicdata.blogspot.com/2008/10/are-equities-least-of-our-worries.html

I believe that the credit problem is being exacerbated by the relentless selling resulting from margin calls at large hedge funds, though I will have no way of substantiating it until after the fact.

At this point in the Market cycle, there is nothing reasonable that can be said about how deal with the carnage because current Market psychology is irrational. The best I can do is say that I been here before and sooner or later it will end.

With that said, I have to say that now my biggest worry is having too much cash (now at between 40% and 45%). Unless the world is coming to an end, many, many stocks have become grossly undervalued. Plus I know from talking to other professionals that there are hoards and hoards of cash sitting on the sidelines waiting for this hedge fund liquidation to end. When those responsible for the investment of that money decide to buy, I believe that there will be an explosion to the upside so violent that it will be extremely difficult to get money back to work at anywhere near the prices available right now. The point here is that I think that we are in the middle of the end. I have no idea how much more damage is going to be done; but I think that we need to be buying through it.

So I for one will start nibbling today. From this point forward, I have a multi branch decision tree and it will likely change daily:

For today, my first objective is to put 8-10% (5% of the total Portfolio) of our Portfolios’ cash to work at the open.

If we get a weak rally intraday, I may actually sell a small bit of some stocks where there doesn’t seem to have any support near term. But I will re-invest the cash generated.

If we get another flush like yesterday but with no sign of a rebound, I will spend another 5% before the close.

If we get a climactic sell off with a strong bounce (which I don’t think likely today), I want to have 50-60% (that will take total cash to 17-20%) of our Portfolios cash invested by the end of the day.

Our Portfolios I will be buying stocks whose rate of price decline has been much slower in the last couple of days than the Market in general and/or stocks that are at or near multi year support levels.

If our Portfolios take any action during the day (other than the Buy at the open), I will be in touch via a Subscriber Alert.

Subscriber Alert

At the Market open this morning, our Portfolios will spend 8-10% of their cash as follows:

Dividend Growth Portfolio: Federated Investors (FII), Northern Trust (NTRS), T Rowe Price (TROW), Paychex (PAYX), Boeing (BA—which is being Added to the Buy List), Canon (CAJ), ExxonMobil (XOM) and Linear Technologies (LLTC).

High Yield Portfolio: AJ Gallagher (AJG), Rayonier (RYN), Kinder Morgan Energy Ptrs (KMP), Alliance Resource Ptrs (ARLP), Cato Corp (CTR), Quaker Chemical (KWR) and Universal (UVV).

Aggressive Growth Portfolio: Schwab (SCHW), Lowe’s (LOW), Bucyrus Int’l (BUCY), Matthews Corp (MATW—which is being Added to the Buy List), Amphenol (APH) and Qualcomm (QCOM).

News on Stocks in Our Portfolios

Positive comments on Reynolds American (High Yield Portfolio):

http://www.thestreet.com/story/10441472/1/tobacco-stocks-not-for-the-nervous-investor.html?puc=_txtmdb

More Cash in Investors’ Hands

Thursday, October 9, 2008

10/9/08

Economics

Recent Data

Believe it or not, yesterday we got two positive data points in housing:

(1) weekly mortgage applications [secondary indicator] rose 3.2%,

(2) August pending home sales increased 7.4% versus July and 8.8% on a year over year basis. Even Barry Ridholtz had something positive to say:

http://bigpicture.typepad.com/comments/2008/10/pending-home-sa.html

Other

There is plenty of blame to go around for the current financial crisis. This brief note on Greenspan’s contribution simply adds another piece to the puzzle.

http://bigpicture.typepad.com/comments/2008/10/deconstructing.html

Politics

Domestic

John Fund on the Saturday Night Live skit that I linked to in Monday’s Morning Call:

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

Biden and the facts:

http://article.nationalreview.com/?q=YjU0ZWU3YTcxODcyMDA1NzBjZmE1ZDg0NjJhOTFkMTE=

International War Against Radical Islam

Options on Iran:

http://www.american.com/archive/2008/september-october-magazine/closing-iran2019s-oil-spigot

The Market

Technical/ Fundamental

A great contrary indicator:

http://bigpicture.typepad.com/comments/2008/10/time-cover-soup.html

Some sage advice:

http://traderfeed.blogspot.com/2008/10/need-to-be-right-versus-need-to-make.html

Some thoughts on the proximity of a bottom:

http://traderfeed.blogspot.com/2008/10/how-weak-is-this-market.html

Chart porn on the S&P and its 200 day moving average:

http://bespokeinvest.typepad.com/bespoke/2008/10/sp-500-26-below.html

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Both indices closed down again, leaving them below their 2004 support levels and unfortunately with a lot of distance between their current prices (DJIA 9758; S&P 984) and the next visible support level (DJIA 7146, S&P 766). The volatility index was up again leaving it at the ‘hysterical’ level--not good but history suggests that it can not stay at its current extended level for a long period of time. In addition, volume at last started to pick up--not to the extent that one would expect in a panic sell off, but headed in the right direction.

In addition, the pin action inside the market had promise; by that I mean that in a DJIA 189 point down day, some of the better quality stocks in the sectors that have heretofore led the Market down (financials, oils) were up on the day, while stocks in the sectors that have held up the best (consumer staples, healthcare) got popped. When the best quality companies in industries with the most stable earnings get whacked, it is usually a sign that the end is nigh.

Another positive is that there were signs that the credit markets are starting to unfreeze, i.e. short term Treasury rates were rising in the face of the global central bank rate cuts suggesting that investors were selling those securities (rising rates = more sellers than buyers) and buying something else. Since anything else is more risky than Treasury bills, this is the first sign that the supply of equity buyers could be building. Of course, one day does not a trend make; but it is a start and if it continues that is a major positive.

I think that this is potentially a significant sign regarding the supply of buyers and their willingness to commit capital. If we can just get hedge fund liquidations out of the way; things are falling in place for a bottom.

Make money by accessing all our Portfolios, the supporting research and Price Disciplines at www.strategic-stock-investments.com. Our work is focused on making money for our Portfolios not as some academic exercise in Internet investing. Check our performance (audited)--our Dividend Growth Portfolio has beaten the S&P by 500 basis points per year for the last seven years but with a beta of only .62. (Mandatory Disclaimer: past performance is not a guarantee of future results.) We give you everything you need to duplicate our results, in particular, a strict price discipline for both Buying and Selling.

News on Stocks in Our Portfolios

Positive comments on United Technologies (Dividend Growth Portfolio):

http://seekingalpha.com/article/99108-stock-analysis-united-technologies-a-buy-at-these-prices?source=front_page_long_ideas

More Cash in Investors’ Hands

Wednesday, October 8, 2008

10/8/08

Economics

Recent Data

The International Council of Shopping Centers reported weekly sales of major retailers up .1% versus the prior week and up 1.3% on a year over year basis; Redbook Research reported month to date retail chain store sales up .8% versus the comparable period last year. These numbers don’t suggest aggressive consumer spending; but they are better than the negative figures that we have gotten the prior couple of weeks.

Other

The big news this morning is the coordinated global rate cuts to fight the financial crisis. In the US, the Fed cut Fed Funds rate 50 basis points. The Fed’s statement:

http://bigpicture.typepad.com/comments/2008/10/emergency-globa.html

More humor for a tough environment:

http://bigpicture.typepad.com/comments/2008/10/new-stock-marke.html

Eye candy on commercial and industrial loans:

http://mjperry.blogspot.com/2008/10/commercial-and-industrial-loans-set-new.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical/ Fundamental

Whew. Both Averages (DJIA 9447; S&P 996) closed below the lower boundary of their May/August downtrend as well as their 2004 lows (DJIA 9707, S&P 1062). Next identifiable support level--2002 lows (DJIA 7146, S&P 766). Despite the DJIA 500 point decline, the volatility index didn’t spike to an appreciably higher level than Monday’s close (not good); and once again, there was a dearth of volume (really not good). Current conditions are looking more and more like the final phase of a painful bear market; all that we are missing is the climactic sell off.

The biggest problem that I had with yesterday’s pin action is that a large number of our Portfolios’ stocks that had heretofore held above support/stop loss prices suffered some serious whackage. To be honest by the close Monday, I thought that most of the stocks that we own had sold off sufficiently, reached their individual lows for this cycle, might sell through their support/stop loss level in the midst of a panic sell off day but otherwise were in decent technical shape. Yes, I knew that I would be wrong about a couple of stocks; but nothing like what happened yesterday; and while our Portfolios were down only about half as much as the Averages yesterday, the dramatic technical breakdown of many of our stocks is disconcerting. So I have to ask myself:

(1) was yesterday the beginning of an end which is just going to be rougher than I expected? If this one is going to be uglier than most, then the stomach cramps are going to be excruciating.

(2) or do I simply have no clue what I am talking about? The light that I see at the end of the tunnel is an on rushing train. A severe global recession is upon us.

My conclusion: market action to the contrary, neither the anecdotal evidence (like the C&I loan chart and weekly retail sales data above. They are not robust but the consumer is not falling off a cliff) nor the actions by the government and corporations are pointing to severe global recession.

Having said that in spite of the revelation Monday of additional details of Fed/Treasury plan for bringing confidence back to the financial markets, investors just didn’t seem to care. The news yesterday was not focused on the details of the plan but on the fact that they weren’t implemented seconds after the enactment of the plan; not on the fact that the Fed was starting to lend in the commercial paper market but that it wasn’t acting as the guarantor of borrowers to traditional lenders; not on Bernanke’s statement that the Fed stood ready to inject liquidity when needed but on his reference to inflation (OK may be that was a stupid comment). The point being that no matter what actions are taken, they are not good enough for market participants or investors.

I postulated in last week’s Closing Bell that the explanation for this phenomenon was not a horrible economy causing investor dismay but rather negative investor psychology forecasting a horrible economy. I see no reason to change that point of view; there just isn’t sufficient evidence to support of doomsday scenario. On the other hand, there is plenty of evidence that some large investors (hedge funds primarily) are in full liquidation mode via margin calls and investor redemptions and that is creating an immense supply/demand imbalance that is depressing equity prices and with it general market sentiment.

Which leaves us with two questions: is there anyway of knowing when this stressful affair will be over? and what do we do in the meantime?

My bottom line is that yesterday I was wrong to start getting circumspect about our stocks holding above fundamental boundaries and technical stop loss prices. To be sure, my gut is still telling me that that stocks are somewhere near a bottom. Nevertheless, the problem is that fundamental developments are having no lasting impact on a Market that is being dominated by liquidation.

So in the absence of getting the famous final flush, I would like to take a little more off the table; but it makes no sense to do it in a disorderly market. So if we get a bounce today, our Portfolios will do a little selling. The actions if they occur will be as they always are when I get really conflicted--a compromise (a cowardly hedge), i.e. instead of reducing those holdings which experienced a technical breakdown yesterday to the size that their price action calls for, our Portfolios will sell one half that amount. The net effect will be to raise cash by about 5%. As a final repetitious note, we may buy this stocks back soon at a higher price; but that is a risk that I am willing to take.

Company Highlight

Home Depot operates a chain of retail building supply/home improvement stores in the US and Canada. The company has grown profits and dividends at a 15-20% pace over the past 10 years earning 20% return on equity. HD is not expected to duplicate this record over the near term as housing remains weak and consumers remain very defensive in their spending. However,

(1) the bad news appears to be well reflected in the current stock price; and management indicates that it expects to continue to grow its dividend at an 8-9% pace while they wait for an earnings recovery [the current $.90 per share dividend is supported by $3.00 per share cash flow],

(2) the housing market will recover as will consumer spending; when that happens, this quality retailer should witness a big improvement in earnings growth.

Home Depot is rated A++ by Value Line, carries a 38% debt to equity ratio and its stock yields 3.5%+.

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

10/08

News on Stocks in Our Portfolios

Positive comments on Bucyrus Int’l (Aggressive Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=8815

More Cash in Investors’ Hands

Tuesday, October 7, 2008

10/7/08

Economics

Recent Data

Other

ACORN, Fannie Mae and the credit crisis:

http://article.nationalreview.com/?q=ZjRjYzE0YmQxNzU4MDJjYWE5MjIzMTMxMmNhZWQ1MTA=

The declining cost of food and fuel:

http://bespokeinvest.typepad.com/bespoke/2008/10/cost-benefit-of.html

Politics

Domestic

This article from 1997 on the Ayers/Obama connection:

http://chronicle.uchicago.edu/971106/justice.shtml

International War Against Radical Islam

Christopher Hitchens on Afghanistan:

http://www.slate.com/id/2201622/

The Market

Technical

More technical analysis:

http://www.thestreet.com/p/_htmlrmd/rmoney/technicalanalysis/10440855.html

Market performance following the broad weakness like we have had of late:

http://traderfeed.blogspot.com/2008/10/look-at-broad-weakness-in-stock-market.html

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Having traded down huge during the day, yesterday the DJIA (9955) managed to close above the 2004 support level of 9707; unfortunately, the S&P (1056) wasn’t as successful (?). The volatility index closed at 52, which is approaching an historic high, a good sign that some kind of bottom could be near. Volume, however, was pathetically low--not positive at all.

Mid afternoon with the DJIA down 500-600 points, I was hopeful that we would get a selling climax where stocks traded down another 500-600 points (we almost got that), volatility spiking to the high 50’s-low 60’s (we almost got that), on huge volume (not even close). Understand that when I say that I was ‘hopeful’, the meaning is that since I think that the end of this decline is going to look like that described above, the quicker it happens, the sooner this agony is over.

Fundamental

In yesterday’s Morning Call, I said that I would like to ‘sell bits of some of our holdings today. However, based on what looks like a big down opening, I am waiting to see if we get any kind of rebound’. Well, we never did (get a rebound), so our Portfolios made no additional sales.

By about noon, I was regretting not having sold on the open and was trying to decide whether or not to go on blow them out, when a funny thing happened--the news started getting better as stock prices were sinking. By the ‘news started getting better’ I mean that details of Fed and Treasury actions related to the rescue plan began leaking out to the public. Here is some of the clarifying information that we received yesterday:

(1) the Fed is meeting today with two exchanges with the purpose of setting up a market making function for the exotic instruments that are causing the valuation problems for financial institutions. [a solution will solve the problems of regulatory oversight and transparency, i.e. an easily understood valuation process] That doesn’t mean the effort will be successful; but it does mean our regulators are focusing on a major cause of current difficulties. Positive.

(2) the Fed announced that it would begin paying interest of bank’s required reserves which will help un-freeze these assets [sources of liquidity], Positive.

(3) the Fed is working on a solution to illiquidity in the corporate commercial paper market [heretofore much of this paper was sold to money market funds which are now shunning it]; talk is that it will either lend directly to corporations or act as a guarantor between the lender and borrower, Positive. [ 8:05am a plan was just announced]

http://www.bloggingstocks.com/2008/10/07/biggest-fed-step-ever-buy-debt-from-companies/

(4) the Fed is making massive injections of money into the banking system which is starting to show up in growth of the money supply [remember, this could lead to future inflation problems; but that is not the issue today. Deflation is; and the Fed’s action helps], Positive.

(5) the Treasury and Fed are moving very rapidly implementing the rescue plans. The head of the project was announced yesterday and meetings are scheduled with firms who are expected to assist in valuing [and bidding on] the illiquid assets that are causing the current problem, Positive.

(6) the Treasury confirmed that the rescue plan gives it the authority to directly inject capital into problem institutions. Positive.

http://paul.kedrosky.com/archives/2008/10/06/treasury_to_sta.html

Bottom line: we are likely in the midst of a bottoming process (the technical aspects are negative and the fundamentals are more positive than stock prices indicate). The problem is a supply/demand--we simply don’t know how much more stock is left to be puked out by the hedge funds or a panicked public. Until we see a pick up in volume on the buy side, stocks will most likely continue to decline irrespective of the fundamentals. However, in my opinion, it is too late to sell [yes, this reverses my inclinations to sell yesterday] into a decline. And of course I could be wrong about some sort of panic sell off; and yesterday was the bottom.

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

Monday, October 6, 2008

10/6/08

Economics

Recent Data

Other

The final chapter on the demise of Lehman Bros has yet to be written. The more information we have the more it looks like it will have an ugly ending:

http://bigpicture.typepad.com/comments/2008/10/did-jpm-cash-ca.html

This is good news:

http://www.marketwatch.com/news/story/bank-america-84-bln-settlement/story.aspx?guid=%7BB11B5371-8243-47C9-90D1-8D59D52324F6%7D&dist=hpts

Some humor for what it looks like will otherwise be a dismal morning:

http://www.clubforgrowth.org/2008/10/saturday_night_live_on_the_bai.php

http://mjperry.blogspot.com/2008/10/tina-fey-as-sarah-palin-nails-it-again.html

Politics

Domestic

McCain on Fannie Mae/Freddie Mac:

http://hughhewitt.townhall.com/blog/g/5378e38c-b4f1-4d4a-9162-774fa9c7101a

International War Against Radical Islam

The Market