11/6/08

Economics

This Week’s Data

Weekly mortgage applications fell 14%--really disappointing after some tentative signs of improvement in the housing market.

The Institute for Supply Management reported its October nonmanufacturing index at 44.4 versus expectations of 48.0 and 50.2 recorded in September.

Other

Politics

Domestic

International War Against Radical Islam

The Market

Technical

A look at historically how the stock market has performed in November following a down October (must read):

http://bigpicture.typepad.com/comments/2008/11/novembers-in-th.html

How the market performs following a down day after a presidential election:

http://bespokeinvest.typepad.com/bespoke/2008/11/the-market-votes.html

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The indices (DJIA 9139, S&P 952) remain in a trading range (DJIA 7853--9707; S&P 839--1062), after having traded up to prior resistance levels (the 2004 low in the case of the DJIA and the recent trading high for the S&P). The volatility rebounded but did not rise above the lower boundary of the uptrend off the September low. That suggests further weakness in the VIX which in turn points to higher stock prices. Volume continues low. The day started with more poor economic numbers--again; but stock prices didn’t roll over till later in the day. Finally, the late in the day sell off hinted that margin call/fund redemptions may not be over.

Cramer thinks there is more hedge fund selling to come:

http://www.thestreet.com/p/_htmlrmd/rmoney/jimcramerblog/10446286.html

Bottom line: nothing suggests that stocks won’t stay in the current trading range. Tuesday and Wednesday’s pin action added strength to the notion of the October 2004 low’s as a resistance level (the top of the trading range). Right now I am focusing on two things (1) on the level at which stocks will find support. Right now there are two easily identifiable ones: the 10/10 intraday lows [see above] and the up trend line defined by the series of higher lows off the 10/10 intraday low. (2) a Buy List when that support level is more clearly defined.

Fundamental

The High Yield Buy List

Company Close 11/5 Buy Value Range

Leggett & Platt $16.69 $14-16

Mercury General 42.23 40-46

Pacer Int’l 11.00 11-13

Pfizer 17.00 17-20

Reynolds American 47.07 45-52

Sanofi Aventis 29.69 26-30

Zenith Nat’l Ins 31.34 32-37

News on Stocks in Our Portfolios

Tuesday, Sun Hydraulic (Aggressive Growth Portfolio) reported third quarter earnings per share of $.40 versus expectations of $.41 and $32 recorded in the comparable 2007 quarter. However, the stock got whacked (-20%) on management’s cautious comments about fourth quarter earnings. Like Alcon and Avon, I think that this sell off was overdone--the stock traded down to its 10/10 low. I am doing more work but Aggressive Growth Portfolio will probably Buy more shares (approximately half of the shares of the original position had been sold in prior transactions) assuming that I don’t come up with anything more negative than what we already know and the stock stabilizes as ACL and AVP did.

Wells Fargo (Dividend Growth Portfolio) announced yesterday that it would issue $10 billion in common stock which was approximately one half of what it had previously said that it issue.

A positive write up on Manulife Financial (Dividend Growth Portfolio):

http://seekingalpha.com/article/104395-manulife-financial-enduring-value?source=front_page_long_ideas

More Cash in Investors’ Hands

11/5/08

Economics

This Week’s Data

September factory orders dropped 2.5% versus expectations of a .5% decline and August’s -4.0% report.

The International Council of Shopping Centers reported weekly sales of major retailers up .6% versus the prior week and up .9% versus the comparable period in 2007; Redbook Research reported month to date retail chain store sales up .3% on an annualized basis, an historically weak level.

Other

More on economic inequality:

http://www.ibdeditorials.com/IBDArticles.aspx?id=310602019188647

Libor rates continue to improve (fall):

http://econompicdata.blogspot.com/2008/11/libor-improves-again.html

Update on credit crisis indicators:

http://calculatedrisk.blogspot.com/2008/11/credit-crisis-indicators-more-progress.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical/Fundamental

Chart on new highs versus new lows:

http://traderfeed.blogspot.com/2008/11/new-highs-and-new-lows-stock-market.html

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What a great day. The Averages (DJIA 9625, S&P 1005) closed up big on the day, though both remain within a trading range (DJIA 7853--9707; S&P 839--1062). The S&P also manage to close above a previous mid October high that the DJIA left behind a week ago. The volatility index fell a lot again, though it is still high (47); and volume finally picked up a bit.

Other positives include: (1) another day absent a late day margin call driven sell off and (2) another day that greeted the Market with disappointing economic statistics [see above] yet stocks rose in spite of it.

To be sure the positives are just that; but rather than persuading me to buy, they just raise my confidence that the 10/10 lows marked the bottom of this latest down cycle. I am not flinching (at least not yet) from my opinion that the Market will trade in a range until we get more data on the length and depth of the current down turn. I may be wrong about the boundaries of that trading range but for the moment I think that the oft repeated parameters listed above are a good operating model.

So with yesterday’s bounce, I want to scale back further on those holdings that have really spiked in this latest up move--and I am going to. However, because our Portfolios are already at their maximum cash position (25%) under our current strategy, the funds received from those sales will be reinvested into holdings that have remained above their 10/10 lows, have made higher lows but have lagged or performed in line with the Market in general.

Subscriber Alert

The following transactions will be executed at the Market open this morning:

In the Dividend Growth Portfolio:

Selling small pieces of Wells Fargo (WFC), UGI (UGI) and Chevron (CVX).

Buying small pieces of Manulife Financial (MFC), MDU Resources (MDU) and Marathon Oil (MRO)

In the High Yield Portfolio:

Selling small pieces of Alliance Resource Gp (ARLP), Sanofi-Aventis (SNY) and ATT (T)

Buying small pieces of Quaker Chemical (KWR) and Plains All American PL (PAA)

In the Aggressive Growth Portfolio:

Selling small pieces of SEI Investments (SEIC), Luxoticca (LUX), CH Robinson (CHRW) and

Peabody Energy (BTU)

Buying small pieces of CME Group (CME), Avon Products (AVP), JTX Corp (TJX), Reliance Steel (RS), Alcon (ACL) and Rockwell Collins (COL).

I recognize that AVP and ACL are exceptions to the criteria that I laid out above (i.e. they are trading above their 10/10 lows and have made higher lows). As you know both stocks were whacked hard on earnings disappointments. I think that this damage was way over done and that is the reason for including these two stocks in the purchase list.

Company Highlight

Matthews Int’l manufacturers and markets custom made products that are used to identify people, places, products and events (trophies, rings, plaques) as well as caskets. The company has grown profits and dividends 12-15% annually over the last 10 years earning a 16-17% return on equity. The company should continue to perform as a result of:

(1) a recent move to direct distribution of caskets which has led to both higher volume and higher prices,

(2) an aggressive acquisition program,

(3) management’s ongoing cost cutting effort.

MATW is rated B+ by Value Line, has a debt to equity ratio of 22% and its stock yields .5%.

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

11/08

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

11/4/08

Economics

This Week’s Data

September construction spending fell .3% versus expectations of a .8% decline; however, the July and August reports were revised down.

The Institute for Supply Management reported its October manufacturing index at 38.9 (anything under 50 signifies contraction) versus estimates of 41.4 and 43.5 recorded in September.

http://econompicdata.blogspot.com/2008/11/ism-report.html

More dismal numbers from the auto industry:

http://econompicdata.blogspot.com/2008/10/auto-sales-start-to-look-like-home.html

Other

The problem with raising capital gains tax rates:

http://www.american.com/archive/2008/november-11-08/don2019t-raise-capital-gains-taxes

Politics

Domestic

Today puts an end to a process that we probably all wish could have been shorter. If one believes the polls then we are going to wake up tomorrow with a Democratic president and quite likely a filibuster proof senate. I have fretted a lot about such a result to the extent that it seems likely to lead to more regulation, higher trade barriers and higher taxes, none of which are good for Your Money. Not included in the list of the above woes are higher spending which W and a spendthrift Republican congress have already foisted on us and higher inflation with which the Fed is now playing Russian roulette.

All that said, to those of you who are discouraged by these events, I would voice a little caution. For one, you would have to be blind, deaf and dumb not to know that polls have Obama as an overwhelming favorite. That suggests to me that investors have collectively discounted their worst fears. Second, I have already factored these developments into our Valuation Model (though I could clearly be wrong about their order of magnitude) and stocks are still dramatically undervalued. Finally, events have a way of overwhelming the best laid plans. Obama is if nothing a consummate politician and I am not sure that the economic environment is going to be conducive to any radical shift in policy whatever his motives may be. Furthermore, Joe Biden’s comments about an early testing of Obama’s steel could very well be closer to the truth than any of us want; and historically, a major realignment in economic policy is tough to pull off in the midst of a foreign policy crisis. Bottom line: before I start discounting a scenario worse than I already have in our Model, I think that we need more evidence of it occurring.

As a final note, I suppose that there is some probability that McCain could pull an upset or that the Republicans could retain enough seats in the Senate to sustain a filibuster. That would surely bolster investor confidence and improve equity valuation metrics irrespective of the depth or length of the current slowdown.

International War Against Radical Islam

The Market

Technical/ Fundamental

Technical update from Traderfeed:

http://traderfeed.blogspot.com/2008/11/indicator-update-for-november-3rd.html

Update of third quarter S&P earnings:

http://bespokeinvest.typepad.com/bespoke/2008/11/q3-earnings-growth-not-all-that-bad.html

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Yesterday, the indices (DJIA 9319, S&P 966) stayed within a trading range (DJIA 7853--9707; S&P 839--1062). The volatility index fell once again (54) and closed well below the lower boundary of the uptrend off the early September low. Nevertheless, it is still at an historically elevated level, i.e. it is approximately where it was immediately following 9/11. Volume continues to show a lack of interest.

The good news is that (1) we lived through another day with no late sell off from margin calls/fund redemptions and (2) despite the fact that I don’t think we have a very good idea about the depth and breadth of the impending (current?) slowdown, we are, nevertheless, getting enough discouraging data with sufficient regularity [as we did yesterday--see above] that clarity on the downturn develops daily.

Two points: one fundamental, one technical.

(1) I hesitate to assume that improving visibility means that the worst economic case is priced into stocks today because I over rated the clarity we got early on in the financial crisis; as you may recall that led me to wrongly assume that the July low was the bottom and prematurely commit cash reserves. I don’t want to make that same mistake again.

(2) it is tough coming off the volatility ‘high’ October spawned; I keep looking for an excuse to trade. However, this current move in Market sentiment back toward normalcy is good news; and in normal times, nothing (not trading) is often the best thing to do. While it still may be a bit premature to loosen up on the tight Stop Loss Prices set during the turmoil in October, I am nonetheless working right now on expanding the technical parameters I used in that high volatility environment. I have long believed that except in extraordinary circumstances too tight a Valuation Range or technical range results in unnecessary and costly trading expenses that negatively impact performance. Right now a deep breathe and broadened perspective is the right prescription.

So in the absence of a move above DJIA 9707/S&P 1062 on strong volume, I remain content to await a pull back before trading our Portfolios’ cash position from 25% down towards 15%.

The Dividend Growth Buy List

Company Close 11/3 Buy Value Range

Automatic Data Processing $33.27 $34-39

Canon Inc 34.77 31-36

Johnson & Johnson 61.16 63-71

Manulife Financial 22.09 21-25

McDonald’s 57.03 55-61

McCormick 33.35 34-39

Nokia Inc 15.82 15-18

Paychex Inc 28.90 26-31

Pepisco Inc 57.47 52-60

Sysco Corp 25.47 26-30

UGI Corp 23.80 21-25

Wells Fargo 33.80 30-35

News on Stocks in Our Portfolios

Mastercard (Aggressive Growth Portfolio) reported third quarter earnings per share of $2.47 versus expectations of $2.22 and $2.32 recorded in the comparable 2007 quarter.

Positive comments on Mastercard:

http://www.thestreet.com/p/_htmlrmm/rmoney/financials/10445629.html

More Cash in Investors’ Hands

11/3/08

Economics

This Week’s Data

Other

Putting current bank failures in perspective:

http://calculatedrisk.blogspot.com/2008/10/fdic-bank-failures.html

Update on credit crisis indicators:

http://calculatedrisk.blogspot.com/2008/10/credit-crisis-indicators-some-progress_31.html

Another credit crisis indicator: write downs versus capital raised:

http://bespokeinvest.typepad.com/bespoke/2008/10/global-writedowns-vs-capital-raised.html

The virtue of doing nothing:

http://online.wsj.com/article/SB122541582835686689.html

Housing affordability index:

http://mjperry.blogspot.com/2008/11/housing-affordability-close-to-4-year.html

Here is a great (though a little long) article on the role that securitization of mortgages and how they weren’t regulated contributed to the financial crisis:

http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aYJZOB_gZi0I

Politics

Domestic

Obama on the Fairness Doctrine:

http://www.r8ny.com/blog/jerry_skurnik/pulitzer_prize_winner_needs_a_fact_checker.html

Of course, there are other ways of dealing with the issue:

http://elections.foxnews.com/2008/10/31/obama-plane-pitches-reporters-mccain-endorsing-papers/

Here is the audio clip of Obama’s comments on the coal industry:

http://hughhewitt.townhall.com/blog/g/e68e2f07-3514-41fe-882f-2808907a0f05

Monday morning humor:

http://www.powerlineblog.com/archives/2008/11/021955.php

International War Against Radical Islam

The Market

Technical

On hedge fund liquidations:

http://www.thestreet.com/story/10445360/1/hedge-fund-liquidations-five-things-you-need-to-know.html?puc=_htmlbooyah

Update on money flow:

http://traderfeed.blogspot.com/2008/10/further-signs-of-stock-market-strength.html

Fundamental

News on Stocks in Our Portfolios

Positive comments on Becton Dickinson (Aggressive Growth Portfolio):
http://www.zacks.com/rank/zcommentary/?id=9041

Positive comments on McDonald’s (Dividend Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=9056

More Cash in Investors’ Hands