1/30/08

Economics

These are not signs of a recession:

http://mjperry.blogspot.com/2008/01/durable-goods-strength-suggests-no.html

http://mjperry.blogspot.com/2008/01/due-to-falling-unemployment-claims-in.html

Politics

Domestic

International War Against Radical Islam

On the renewal of FISA:

http://article.nationalreview.com/?q=NWQ1ZmMyZDc4OTEzNGJmMmFhMTI2YWZlNjFjNWE2MWY=

The Market

Technical

The DJIA ascending 1982-present trend line is now at the circa 12524 level with the Dow closing yesterday at 12480; so this Average is still struggling to re-establish itself in a positive trend. While the flow of news both on the economy and on the sub prime mess (Lehman Brothers, a potential big victim of the credit crisis, raised its dividend last night) has me feeling a little more comfortable that we may have seen a Market bottom, the best we can say right now is that stocks are in a trading range.

A technical look at the Market by sector:

http://bespokeinvest.typepad.com/bespoke/2008/01/bespokes-sect-1.html

Fundamental

With another positive day, I concentrated last night on the stocks that we own that “have traded into that ‘no man’s land’ between the lower boundary of their Buy Value Range and the Stop Loss Price but have been unable to recover into their Buy Value Range,” I am focused on this group because it seems to me that these are the stocks about which the Valuation Model is most likely to be wrong (i.e. all stocks got whacked, many traded outside their Valuation Range, some of those recovered to trade back into that Range, what is left is where I am probably wrong.); and if that is so, then there is more downside risk and less upside potential in each.

Accordingly, at the Market open this morning, the Dividend Growth Portfolio is Selling the remainder of its position in Paychex (PAYX-$34) and the High Yield Portfolio is Selling the remainder of its position in Verizon (VZ-$38).

Company Highlight

McGraw Hill was one of those stocks that we Bought as Market was getting pounded last August by the first round of fears over the sub prime crisis; by the time I had checked my research and adjusted its Valuation Range, the stock had through its Stop Loss and we Sold it. During the ‘flush’ last week, it traded to the low of its new Buy Value Range, and then recovered and that’s when we Bought back a partial position. We will be Adding to this holding as the Market backs and fills.

McGraw Hill Co. is a global information provider serving the financial, education and business markets via Standard & Poor’s, McGraw Hill Education, Business Week, Aviation Week and Platts. MHP earns an amazing 25-35% return on equity, with virtually no debt and has grown profits and dividends 8-14% annually over the last 10 years. The company should continue to grow as a result of:

(1) as the leading performer in the textbook publishing, MHP is benefiting from the current strong textbook adoption cycle, helped by the $1 billion Reading First initiative of No Child Left Behind,

(2) increasing demand for independent equity research which is a major positive for S&P,

(3) management’s significant efforts to streamline operations and lower costs [the company reduced its workforce by 3% in 2007],

(4) its strong cash flow which funds acquisitions, an aggressive stock buyback program and a rapidly growing dividend.

McGraw Hill has virtually no debt, is rated A+ by Value Line and its stock yields approximately 1.7%
http://finance.yahoo.com/q?s=MHP

News on Stocks in Our Portfolios

3M (Dividend Growth Portfolio) reported fourth quarter and full year operating earnings per share of $1.19 and $4.98 respectively versus $1.04 and $4.49 recorded in the comparable 2006 periods.

A positive write up on Accenture (Aggressive Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=6840

Smith Int’l (Aggressive Growth Portfolio) reported fourth quarter earnings per share of $.71 versus expectations of $.88. the short fall was due to slower development of US offshore fields and weather delays in starting new projects.

UGI (Dividend Growth Portfolio) reported its first fiscal quarter earnings pre share of $.74 versus $.58 recorded in the comparable 2007 fiscal quarter.

More Cash in Investors’ Hands

1/29/08

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.) W once again fails at the job of fiscal responsibility:

http://www.examiner.com/blogs/tapscotts_copy_desk/2008/1/28/Bush-earmark-cavein-shows-GOP-death-wish

Politics

Obama on immigration:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/28/MNH1UL57Q.DTL&type=politics

McCain on the judicial appointments:

http://campaignspot.nationalreview.com/post/?q=NmNjZDZmZGIyNmI4ZjVjMzc5OTU2NjQ4N2E3MDdhNjg=

Domestic

International War Against Radical Islam

The Market

Technical

A study on the S&P’s performance in years that start poorly:

http://bespokeinvest.typepad.com/bespoke/2008/01/worst-starts--1.html

Fundamental

Sunday 60 Minutes had a big segment on how terrible the housing market is and recounted the multiple sins of lenders/borrowers; then yesterday; the lead in this week’s edition of Newsweek is the recession. As you probably know when the main stream media starts putting the economy or Market on the front page, it usually means that it is yesterday’s story. All we need for the hat trick is for Time’s front page to bemoan the decline in stock prices. The point being that seeing the media tell the public what most of us knew six months ago is a reassuring sign that a good deal of the bad news is behind us (and as if to punctuate this point, this morning December durable goods were reported up 5.2% versus estimates of a 2% increase).

An update on the monocline insurer’s problems:

http://bigpicture.typepad.com/comments/2008/01/monoline-insura.html

Subscriber Alert

The stock prices of United Technologies (UTX-$73) and United Parcel Service (UPS-$71) have recovered to their respective Buy Value Ranges. Accordingly, they are being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio will purchase a one third position in UTX at the Market open this morning. The Dividend Growth Portfolio already owns UPS, so no further shares will be bought.

The Dividend Growth Portfolio will purchase the final one third position in T Rowe Price (TROW-$52) at the Market open this morning.

At the Market open this morning, the Aggressive Growth Portfolio will purchase additional shares in Mastercard (MA-$189) and a second one third position in Luxoticca (LUX-$26).

Company Highlight

I wanted to focus on the Defense Department’s hardware budget because Iraq War or no, there is a lot of re-constitution of materiel that needs to be done; and it won’t likely matter which political party is in control of the budgetary purse strings. (But note that General Dynamics is not currently on the Buy List.)

General Dynamics is a leading defense contractor supplying products and technology to marine systems, combat systems, information systems and aerospace (basically submarines, tanks, aircraft and command and control systems). The company has grown earnings and dividends 14% and 10% respectively over the last 10 years and has earned a consistently high 17-18% return on equity. GD should be able to continue to match that record because of:

(1) the expected increase in spending to modernize the Armed Forces,

(2) an aggressive acquisition program that has increased GD’s exposure to the growing defense information technology market and extending its reach into the intelligence sector; recently the company has acquired companies that complemented its existing command, control and communications capabilities, enhanced its expertise in rugged wireless computing, visualization and collaboration technologies, increased its ability to provide mission, operational and IT enterprise services and improved the quality of ammunition and related products. As important, most of these acquisitions were accretive to earnings.

(3) its Gulfstream division is benefiting from increased demand which not only helps revenue growth but also has stabilized the prices of used jets allowing the company to no longer lose money on trade-ins,

(4) robust cash generation is financing an aggressive stock buy back program.

GD has a debt to equity ratio of approximately 26%, is rated A++ by Value Line and its stock provides a yield of 1.3%.

Buy Value Range: $69-79 Stop Loss Price: $59 Sell Half Price: $92

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

News on Stocks in Our Portfolios

A positive write up on Abbott Labs (Dividend Growth Portfolio):

http://www.zacks.com/newsroom/commentary/index_pdf.php?id=6822

T Rowe Price (Dividend Growth Portfolio) reported fourth quarter and full year earnings per share of $.68 and $2.40 respectively versus $.53 and $1.90 recorded in the comparable 2006 periods.

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

Eli Lilly (Dividend Growth Portfolio) reported fourth quarter operating earnings per share of $.90 versus expectations of $.85 and $.82 reported in the fourth quarter of 2006.

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

Verizon (High Yield Portfolio) reported fourth quarter operating earnings per share of $.62 in line with expectations.

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

More Cash in Investors’ Hands

1/28/08

Economics

How about an optimistic economic forecast?

http://www.usnews.com/blogs/capital-commerce/2008/1/23/a-bit-of-cheer-dow-15000-by-year-end.html

OK, two positive outlooks:

http://online.wsj.com/article/SB120147855494820719.html?mod=opinion_main_commentaries

a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)

http://online.wsj.com/article/SB120122126173315299.html?mod=opinion_main_commentaries

Politics

Domestic

Romney on taxes:

http://article.nationalreview.com/?q=YjdmZmM2MzFiYzEzYmNjN2MxZDUwYjcxYjY5ZmUxYjA=

Huckabee and Obama on foreign policy:

http://www.jpost.com/servlet/Satellite?apage=1&cid=1200572509823&pagename=JPost%2FJPArticle%2FShowFull

McCain on immigration:

http://www.slate.com/id/2182933/#drmexicofirst

International War Against Radical Islam

The Market

Technical

Fundamental

Some interesting data on relative valuation by industry sector:

http://bespokeinvest.typepad.com/bespoke/2008/01/sector-pe-ratio.html

Also an historical look at Market performance following big intraday reversals—like last Tuesday and Wednesday:

http://bespokeinvest.typepad.com/bespoke/2008/01/recent-bespoke.html

Subscriber Alert

The stock price of Abbott Labs (ABT-$55) has fallen below the upper boundary of its Buy Value Range. Accordingly, ABT is being Added to the Dividend Growth Buy List. Since the Dividend Growth Portfolio already owns this stock, no additional shares will be purchased.

Watch Lists**

Dividend Growth Watch List: Avery Dennison, Bank of Nova Scotia, Brown Forman, Canadian Nat’l RR, Chevron, Clorox, Emerson Electric, Genuine Parts, General Electric, Illinois Tool Works, Ingersoll Rand, Johnson Controls, Johnson and Johnson, 3M, Manulife Financial, McGraw Hill, MDU Resources, Proctor and Gamble, Sysco, T Rowe Price, UPS, United Technologies, VF Corp.,

High Yield Watch List: A.J Gallagher, Alliance Resources, Buckeye Pipeline, LCA-Vision, Plains All American, Quaker Chemical, Reynolds American, Rayonier, Realty Income Trust, US Bancorp.

Aggressive Growth Buy List: Accenture, American Eagle Outfitters, American Vanguard, Amphenol, Avon Products, Best Buy, Bucyrus Int’l, CME Group, Donaldson, Eaton Vance, Expeditors Int’l, Factset Research, Fastenal, Franklin Resources, Landstar, Luxoticca, Mastercard, Nordstrom, Quest Diagnostic, Rockwell Collins, Ross Stores, SAP, Schwab, Simpson Manufacturing, Staples,; and of course I want to re-build the holdings: US Global Shares-Gold

**For the benefit of new subscribers, I started using Watch Lists during severe Market declines. These lists include stocks on our Buy Lists but also equities whose prices has fallen below both their Buy Value Range and their Stop Loss Price but whose Valuation Model (following additional homework on my part) didn’t change appreciably. Historically, the stocks in this latter group will generally trade back into their Valuation Range, sometimes quickly; and I want to be sure I catch that latter group when they do so.

News on Stocks in Our Portfolios

Donaldson (Aggressive Growth Portfolio) raised its quarterly dividend per share from $.10 to $.11.

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

Medivation (10 Bagger) is initiating Phase III trials for Dimebon:

http://www.marketwatch.com/News/Story/Story.aspx?guid={D68FD113-DCA4-4CD9-906A-742FE3AD7E35}&siteid=nbs

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

Verizon (High Yield Portfolio) reported fourth quarter operating profit of $.62 in line with expectations and unchanged from the comparable 2006 quarter.

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

More Cash in Investors’ Hands