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Domestic
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The Market
Technical
Friday had to be brutal. Believe it or not, for us it is worse not to live through a really tough day and then try to figure out what happened after the fact than it is to participate first hand and get a sense of what’s transpiring.
As we try to make sense of a day when fear runs rampant, the first thing we rely on is our Valuation Model. Taking the DJIA (13181) and S&P 500 (1433) together, we would judge stocks to be fairly valued (and we knew when they were overvalued that one alternative to returning to fair value was a precipitous plunge). However, while our Model can be very useful on issues of valuation and can push us to make strategic buy/sell decisions (as it recently did when stocks got to be over valued--we took profits when stocks hit their Sell Half Price, we sold the stocks of companies that were on the margins of our Quality Discipline and we bought gold as a hedge); it is less helpful on the day to day issues of Market direction.
For that, especially when investors are in the grip of fear/greed, we fall back on technical analysis to provide some structure to the way of viewing the Market and making investment decisions. We pointed out last Tuesday that if stocks broke below the DJIA 13200 and S&P 1449 levels (areas of buying support), then the next stop for the DJIA was the lower ascending boundary of its uptrend (12783) and for the S&P (which is no longer in an ascending trend) a past support level of (1370). At that time, both indices held those support levels and that was a positive--though it clearly didn’t guarantee that the worst was over. Today we are faced with the same proposition as last Tuesday. Although stocks closed below the 13200/1449 level, the big question today is will they bounce back above the 13200/1449 levels or not. If they do, it will reinforce these support levels and give us more confidence that the worst of the Market decline is behind us. If not, we clearly have more downside; and as we said last Tuesday, it looks to us like DJIA 12783 and S&P 1370 is the next area of support.
The good news is that this decline is being led by the financial stocks and we had considerably reduced our Portfolios’ exposure to this sector a couple of weeks ago. In fact, we cut so much, we would feel uncomfortable cutting it further because (1) there are still a lot of good quality companies in this sector whose stocks are being crushed [unfairly] along with the of the poorer quality companies and (2) we don’t want to be completely un-invested in this area when prices rebound--which they will and when they do, it is likely to be a violent reaction to the upside.
The other good news, (1) our Portfolios have cash, (2) the stock prices of great companies are getting cheaper, (3) the stocks we own by and large continue to do all the right things (eg. the P&G stock buyback, ITW raises its dividend), (4) for those who don’t, our Stop Loss discipline is there to protect our Portfolios and (5) the annual dividend income from our Portfolios continues to rise. There may still be some rough times ahead--but we have done the right things to prepare for it.
Fundamental
News on Stocks in Our Portfolios
Clorox (Dividend Growth Portfolio) is commencing a $750 million stock buy back.
EPS: 2006 $2.89, 2007 $3.25, 2008 $3.60; DVD: $1.31, YLD 2.6%
http://finance.yahoo.com/q?s=CLX
Market Analysis
More Cash in Investors’ Hands
