2/6/08

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.). Pelosi fails to respond:

http://blog.heritage.org/2008/02/04/pelosi-ignores-gops-request-for-earmark-moratorium/

And this one last swipe at W’s last budget and his fiscal legacy:

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/04/AR2008020402429.html

And a look at the defense budget:

http://www.slate.com/id/2183592

Another look at income distribution:

http://mjperry.blogspot.com/2008/02/rich-getting-richer-and-poor-are.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

The DJIA (12265) once again busted through its 1982-present uptrend (circa 12536 at yesterday’s close). Clearly for the DJIA the late January intraday low (circa 11634) is now the level to watch. The S&P (1336) remains well above its 1982-present trend line (circa 1275 at yesterday’s close). The comparable late January intraday low is circa 1263.

We knew that there was likely to be a test after stock prices dramatic bounce; and that’s what we are getting. Others will argue that the recent recovery was simply a rally in a bear market and yesterday was a resumption of that down trend. We will know soon enough.

This chart is a little scary:

http://bespokeinvest.typepad.com/bespoke/2008/02/1-moves-more-co.html

Fundamental

The talking heads attributed yesterday’s sell off to the lower than expected ISM non-manufacturing index which was viewed as a sure sign of recession. That seems somewhat improbable to me. Even if my economic forecast is wrong and there is going to be a recession, it is not like its prospects haven’t been talked about and talked about for the last six months--so a recession, if it occurs, is not going to be a surprise. Witness the fact that the Market (DJIA) is 1900+ points (13.5%) off its high and at least by my our Valuation Model is 8.4% undervalued--meaning that the recession, if it occurs, has to some extent already been discounted.

Rather, yesterday’s action just feels more like the normal investor emotional ebb and flow that occurs around turning points--indeed it is inconceivable to me that stocks wouldn’t sell off after a 1200 point Titan III shot off the DJIA 11600 intraday bottom. What surprised me was how little damage was done to our stocks. To be sure, there were names on our Buy Lists that traded slightly below the lower boundary of their Buy Value Range. However, given the current volatility in stock prices, I am for the moment not going to Remove these names---again simply because they traded only fractionally below their Buy Value Range. (Nevertheless, I have included a list of those names below.) Of course, if today is another day like yesterday, those fractions will undoubtedly grow.

Clearly, it would be stupid not to hold open the probability that another down leg is in the making. Indeed, I said at the outset of this upswing that my confidence that the Market had bottomed would be only slightly better than 50/50 until a test occurred. That seems to be happening now; and as I said above, we will know the outcome soon enough.

Bottom line, given that I think that we are in a test of the bottom, it seems reasonable to put a small amount of money to work (see below). However, for the preponderance of cash reserves, I think we stay patient, watch and let our Price Disciplines do their work. If this is a test, we will put more money to work on the next bounce. If we are going much lower, our 25% cash position and our Stop Loss Discipline will keep our principal in tact.

Stocks that Closed Near the Lower Boundary of their Buy Value Range

Dividend Growth Buy List: GE, T Rowe Price, Manulife Life Insurance

High Yield Buy List: Kimco Realty Trust, Realty Income Trust, Martin Midstream Partners

Aggressive Growth Buy List: Schwab, Abercrombie & Fitch, American Eagle Outfitters, Sun Hydraulics, Expeditors Int’l, SAP

Subscriber Alert

The stock price of CME Group (CME-$588) has declined below the upper boundary of its Buy Value Range. Accordingly, CME is being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio already owns CME, so no additional shares will be bought.

At the Market open this morning:

The Dividend Growth Portfolio will Buy additional shares (1/5 to ¼ positions) in Johnson Controls (JCI-$34) and Northern Trust (NTRS-$69),

The High Yield Portfolio will Buy additional shares (1/5 position) in LCA-Vision (LCAV-$16),

The Aggressive Growth Portfolio will Buy additional shares (1/5 position) in Luxottica (LUX-$27)

News on Stocks in Our Portfolios

CME Group (Aggressive Growth Portfolio) reported fourth quarter earnings per share off $3.75 versus expectations of $3.62 and $2.91 recorded in the comparable 2006 quarter.

A positive write up on Praxair (Dividend Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=6891

More Cash in Investors’ Hands

2/5/08

Economics

The latest figures on commercial loan growth (what recession?):

http://mjperry.blogspot.com/2008/02/commercial-lending-growth-shows-ongoing.html

Politics

Domestic

McCain on defense and the war against radical Islam:

http://article.nationalreview.com/?q=YjE5MDE4ZDA2OTIyYzA2NzJiNDkyNGQxNjA2YzNhYWI=

International War Against Radical Islam

Another look at W’s failed policy on North Korean nuclear disarmament:

http://www.slate.com/id/2183541

The Market

Technical

Fundamental

Stocks undervalued or earning estimates too high?

http://bigpicture.typepad.com/comments/2008/02/the-flawed-fed.html

Update on fourth quarter earnings reports:

http://bespokeinvest.typepad.com/bespoke/2008/02/sector-earnings.html

One of my focuses continues to be on consumer staple companies that should be able to navigate any economic difficulties with fewer problems than other sectors:

Reynolds American is the second largest producer of cigarettes in the US; its brands including Winston, Camel, Salem, Pall Mall, Kool, Vantage and Doral. The company has earned a 16-18% return on equity over the last five years on a capital structure with 38% debt. It has also grown profits and dividends in the 8-10% range which when coupled with a 5%+ yield on its stock provides an attractive total return. RAI should be able to continue to grow its earnings and dividends as a result of:

(1) a major restructuring plan that is forecast to reduce the company’s work force by 40%, eliminate expensive marketing programs and trim overhead,

(2) the merger with Brown & Williamson which not only raised market share [revenues] but also provided a major opportunity for continuing incremental cost savings [$500 million over the next 5 years],

(3) the merger with Conwood [Kodiak and Grizzly moist snuff] which provides an entry into smokeless tobacco, the fastest growing segment of the tobacco market,

(4) a more aggressive brand building strategy,

(5) resolution of two government lawsuits which reduces both litigation expenses and risks.

RAI is rated by B+ by Value Line, its stock yields 5%+, and management has been conscientious in distributing the benefits of the company’s improving cash flow to shareholders via a rising dividend.

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

News on Stocks in Our Portfolios

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

http://www.zacks.com/rank/zcommentary/?id=6871

Avon Products (Aggressive Growth Portfolio) reported fourth quarter and full year operating earnings per share of $.64 and $1.21 respectively versus $.54 and $1.06 in the comparable periods on 2006.

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

More Cash in Investors’ Hands

2/4/08

Economics

Another main stream media prediction of doom:

http://bespokeinvest.typepad.com/bespoke/2008/02/magazine-cover.html

A scorecard for the current earnings report season:

http://bespokeinvest.typepad.com/bespoke/2008/02/fourth-quarter.html

ExxonMobil’s tax bill, in perspective:

http://mjperry.blogspot.com/2008/02/putting-exxons-tax-bill-in-perspective.html

Politics

Domestic

Earmarks: Hillary versus McCain:

http://www.examiner.com/a-1194444%7ETimothy_Carney__McCain_vs__Hillary_on_earmarks__Good_government_vs__pay_to_play.html

Romney on abortion:

http://article.nationalreview.com/?q=ZGYyZWE4OGI5YzNlZTc1M2M2OTRiYmMzMjEzMDlkNzA=

Hillary, in her own words:

http://online.wsj.com/article/SB120209390867639897.html?mod=opinion_main_commentaries

International War Against Radical Islam

Good news:

http://www.csmonitor.com/2008/0201/p25s04-wosc.html

And bad news:

http://article.nationalreview.com/?q=N2UzN2ViOGViYTFkYTAwMjRkZDc5MWYwZDYwMWEwNDY=

And more bad news:

http://abumuqawama.blogspot.com/2008/02/afghan-study-group-wheels-done-come-off.html

The war in Pakistan:

http://www.longwarjournal.org/archives/2008/02/swat_fighting_more_d.php

The Market

Technical

Charts on commodities:

http://bespokeinvest.typepad.com/bespoke/2008/02/bespokes-commod.html

Fundamental

Subscriber Alert

The stock price of Realty Income Trust (O-$25) has risen back into its Buy Value Range; so it is being re-Added to the High Yield Buy List. The High Yield Portfolio will not Buy any shares in O at this time.

At the Market open this morning, the Aggressive Growth Portfolio will Buy a one third position in Avon Products (AVP-$34)

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 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, Kimco Realty Trust, LCA-Vision, Plains All American, Quaker Chemical, Reynolds American, Rayonier, Realty Income Trust, US Bancorp.

Aggressive Growth Buy List: Abercrombie & Fitch, Accenture, American Eagle Outfitters, American Vanguard, Amphenol, Avon Products, Bucyrus Int’l, Donaldson, Eaton Vance, Expeditors Int’l, Factset Research, Fastenal, Franklin Resources, Luxoticca, Quest Diagnostic, Rockwell Collins, SAP, Schwab, Simpson Manufacturing, Staples,; and of course I want to re-build the holding: 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

The FDA approved Medtronics’ (Aggressive Growth Portfolio) drug coated stent.

Clorox (Dividend Growth Portfolio) reported second fiscal quarter earnings per share of $.65 versus $.62 recorded in the comparable 2007 fiscal quarter.

More Cash in Investors’ Hands