8/8/07

Economics

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.).

http://article.nationalreview.com/?q=ZTQxMGM3OWVkZWUwNjg5ZGYxYTBlOTE3MGRlNjkxNjk=

The Fed

The Fed met yesterday. In the press release following the meeting, it said:

(1) the economy is growing moderately and should continue to do so, although

(2) the financial markets are experiencing increased volatility,

(3) credit markets are tightening,

(4) the housing downturn is continuing, and

(5) while inflation is moderating, price pressures continue and, therefore, it remains the Fed’s biggest concern.

In summary, the Fed thinks that the economy will get through the credit problems without any material impact on economic growth.

In our opinion, this statement is as close to a Goldilocks ‘just right’ statement as we could have hoped for--meaning that the Fed is not restricting monetary growth nor does it at the moment see a reason for easing. Equity market gave it a mixed review--the biggest complaint apparently being that it didn’t indicate a more forceful move toward ease. By way of response, we want to make one important point and it is very similar to our point on oil--it is not the price of credit that will cause economic dislocation, it is the availability; and the Fed basically said that it is fully aware that there could be an issue with availability. That is all that we think that investors could hope--assurance that the Fed is attuned to the risks in the system.

On a related item, pricing stability appears to be returning to the higher risk sectors of the credit market. This also is clearly a positive--enough so to raise our confidence to continue to slowly average into the stocks of non financial firms, but, in our opinion, not enough so to warrant increasing our Portfolios’ commitments in financial stocks.

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

For those who want more background on the current credit problem, the excellent (and somewhat long) Wall Street Journal article is a must read:

http://online.wsj.com/article/SB118643226865289581.html

News on Stocks in Our Portfolios

Hershey (Dividend Growth Portfolio) raised its quarterly dividend 10% to $.2975 per share.

EPS: 2006 $2.34, 2007 $2.25, 2008 $2.45; DVD: $1.19 YLD 2.4%

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

Expeditors International (Aggressive Growth Portfolio) reported second quarter earnings per share of $.30 versus $.25 reported in the second quarter of 2006.

EPS: 2006 $1.08, 2007 $1.25, 2008 $1.45; DVD: $.28 YLD 0.6%

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

A positive article on Proctor & Gamble (Dividend Growth Portfolio):

http://www.zacks.com/newsroom/commentary/?id=5622

Progress Energy (High Yield Portfolio) reported second quarter operating earnings per share of $.59 versus $.47 reported in the comparable 2006 quarter

EPS: 2006 $2.05, 2007 $2.80, 2008 $2.90; DVD: $2.44 YLD 4.7%

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

Integrys Energy (High Yield Portfolio) reported second quarter operating earnings per share of ($>27) versus $.63 recorded in 2006’s second quarter. The loss was the result of expenses related to the consolidation of its merger with Peoples Energy as well as outages at an electric facility which raised maintenance expenses and necessitated the purchase of high cost substitute electricity.

EPS: 2006 $3.54, 2007 $3.45, 2008 $3.80; DVD: $2.54 YLD 5.0%

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

ParkerVision (10 Bagger) reported second quarter earnings per share of (.18) versus ($.18) reported in last year’s second quarter.

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

More Cash in Investors’ Hands

8/7/07

Economics

protectionism (Free trade is a major positive for world and US economic growth.)

http://www.realclearpolitics.com/articles/2007/08/the_democrats_dither_on_trade.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

If you are getting seasick with all the ups and downs, join the crowd. We said yesterday morning that the key to the short term movement in the Market likely depended on whether or not the DJIA and S&P could close back above their respective support levels--admittedly having not the slightest clue that stocks would bounce as violently as they did. Today, we would make two points:

(1) it is a good sign that the Averages immediately bounced back above the support levels to which we have previously referred [DJIA 13200 and S&P 1449]. From our perspective, that now means that investors have become aggressive buyers twice at those levels--each time following major negative news events; which suggests that in aggregate investors see value at those price levels. We don’t think that it necessarily follows that the worst is over; but it does increase the probability that it is. A short term key to Market direction will be some sort of acknowledgement by the Fed in its meeting today that it is aware of the crisis in the credit markets [meaning that it is prepared to act if the worse case develops].

(2) the financial stocks fully participated in this latest bounce, also suggesting that investors are becoming at least slightly more sanguine about likelihood [or lack thereof] of a disaster in the credit markets. We frankly have our doubts that there aren’t further shoes to drop in this sector. That said, the credit market problem isn’t new and most investors by now probably appreciate the likelihood of further bad news--which means that those risks are starting to be discounted in equity prices.

The stocks of a number of major participants in the credit markets have traded into their Buy Value Ranges, Accordingly, they are being Added to our Buy Lists BUTARE NOT BEING BOUGHT AT THIS TIME. The point of this exercise is to let you know that (1) we think that the time to Buy the financial stocks may be getting closer--though it still isn’t here, (2) as we suggested in yesterday’s blog, when the time to Buy comes, it is likely to be very volatile to the upside and (3) therefore, a quick response on our part may be necessary.

The second successful test of the DJIA/S&P support level raises our confidence that the credit problem is becoming a more contained which prompts us to continue to average into non-financial related stocks; however, we think it prudent to get today’s Fed meeting behind us, just in case they say something stupid.

The new names that are being Added to our Buy Lists are:

Dividend Growth Buy List

Merrill Lynch (MER-$70)

EPS: 2006 $6.64, 2007 $8.75, 2008 $8.70; DVD: $1.40 YLD 1.6%

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

High Yield Buy List

Citicorp (C-$48)

EPS: 2006 $4.25, 2007 $4.45, 2008 $4.95; DVD: $2.16 YLD 4.5%

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

Aggressive Growth Buy List

Schwab

EPS: 2006 $.80, 2007 $.95, 2008 $1.20; DVD: $.20 YLD .9%

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

We stress that our Portfolios are NOT taking positions in these stocks; we will notify you when purchases are made.

News on Stocks in Our Portfolios

Emerson Electric (Dividend Growth Portfolio) reported its third fiscal quarter earnings per share of $.72 versus expectations of $.69 and $.59 reported its 2006 third fiscal quarter.

EPS: 2006 $2.24, 2007 $2.55, 2008 $2.90; DVD: $1.08 YLD 2.2%

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

Otter Tail (High Yield Portfolio) reported second quarter earnings per share of $.53 versus $.37 recorded in the comparable 2006 quarter.

EPS: 2006 $1.69, 2007 $1.65, 2008 $1.75; DVD: $1.17 YLD 3.7%

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

Market Analysis

More Cash in Investors’ Hands

Wells Fargo is buying back 50 million shares.

8/6/07

Economics

Politics

Domestic

International War Against Radical Islam

We haven’t linked to Iraq the Model lately, but this is a worthwhile read:

http://www.iraqthemodel.blogspot.com/

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