8/9/07

Economics

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

http://www.clubforgrowth.org/2007/08/free_trade_with_korea_in_jeopa.php

And this threat from China (which we think unlikely but still a sign of unnecessary discord)

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

Politics

Domestic

Border security--W just doesn’t get it:

http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20070809/NATION/108090083/1001

International War Against Radical Islam

The Market

Technical

Watch DJIA 13701. A close above that level could be positive.

Fundamental

Liquidity is returning to the debt markets; as the default risks become better defined (transactions are the best guide), the broader risks to the economy are also easier to identify and discount in stock prices. Meanwhile, second quarter corporate profits have been coming in at a rate of two times estimates, employment is strong and global economic growth is smoking, all of which should further serve to isolate credit problems largely to financial institutions. What that means to us right now is that it makes sense to average into new holdings in non financial stocks that have suffered price erosion over the last month.

On the other hand, we recognize that by ignoring our Price Discipline and not buying the financial stocks, many of whom have declined sharply and by any measure in our Valuation Model should be bought, we are violating every rule that we have ever quoted to you. However, in prior times, the facts related to any negative event or series of events were basically knowable; our Quality Discipline, Valuation Model and Price Discipline simply disagreed with other investors in the interpretation of those facts. Not to be repetitive, but this time the important facts, i.e. how low quality credits are being priced by the major institutions, the amount of low quality credits owned by those institutions and the extent to which medium quality assets that they own will become worthless as the lower tier debts default, aren’t knowable because they depend on non objective internal pricing decisions by the managements of those financial institutions and the communication of that information to the public--which isn’t being done until the institution or its funds or both are in bankruptcy; and therefore the risk can’t be known until it becomes manifest and then it is too late.

That is not to say that we are ignoring the financial stocks. We are paying very close attention; and truth be told we are as nervous about not buying them as we would be if we did buy them. But we think that additional transparency is needed before it makes sense to begin purchasing them. What does that mean? Something like--but not necessarily limited to (1) sufficient time passes during which investors in aggregate agree on the pricing of more and more lower quality debt instruments, (2) major financial institutions announce to the Street how much sub prime and second and third tier debt they own and how they are pricing it, (3) a major transaction occurs in the low quality debt market that is well received by institutional buyers or (4) a major institution announces a problem and financial stocks rise, i.e. the worst case has been discounted. So far none of these have happened; so we wait.

However, this is a positive sign:

http://www.thestreet.com/p/_htmlrmm/rmoney/financials/10373064.html

So is this (must read):

http://www.thestreet.com/p/_htmlrmd/rmoney/technicalanalysis/10373148.html

News on Stocks in Our Portfolios

A positive article on Altria (Dividend Growth Portfolio):

http://retail.seekingalpha.com/article/43982

American Vanguard (Aggressive Growth Portfolio) reported second quarter earnings per share of $.13 versus $.12 reported in the comparable quarter of 2006.

EPS: 2006 $.57, 2007 $.75, 2008 .95; DVD: $.08 YLD 0.5%

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

Ecolabs (Aggressive Growth Portfolio) is buying Microtek Medical, a supplier of infection and fluid control products, for $274 million.

EPS: 2006 $1.43, 2007 $1.65, 2008 $1.85; DVD: $.40 YLD 1.2%

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

More Cash in Investors’ Hands

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.