3/5/08

Economics

The Federal Budget dissected (this is a little long but not overwhelming; and it is a must read):

http://www.heritage.org/Research/Taxes/wm1829.cfm

The economics of drug development:

http://www.american.com/archive/2008/march-02-08/protecting-patents-saving-lives

New data on who pays taxes:

http://www.taxfoundation.org/news/show/22652.html

Politics

Domestic

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.). John Boehner on Medicare:

http://article.nationalreview.com/?q=OTQxMGE0MDc1ZGQ3NWE0MzJmY2MxZGZmYzU4ZjA4YmM=

International War Against Radical Islam

The Market

Technical

How the current correction stacks up (length and depth) historically:

http://bespokeinvest.typepad.com/bespoke/2008/03/how-the-decline.html

Fundamental

One o’clock yesterday afternoon I thought that we were in the midst of the kind of emotional Market flush that would either help confirm the January 2008 low or demonstrate that it was just another minor support level on the way to lower lows (as you know my vote is with the former). Then of all things we got some good news (more clarity on solving Ambac’s capital problems) and stocks rallied. My gut tells me that the real test is yet to come; but it could be that yesterday was it. So I want to put some money to work (see Subscriber Alert below). This, of course, assumes that (a) any slowdown/recession is discounted in stock prices and (b) the Fed/government knows enough about the extent of the liquidity problem that it will take whatever actions are necessary to prevent a crisis [I know I’m a cockeyed optimist] and (c) therefore the January low is the bottom of this decline.

That said, I also think that this Market is not going to resume any meaningful up trend until (1) there is near perfect clarity to the current liquidity problem, (2) the Fed adjusts policy to deal with potential inflation, and (3) we know the outcome of the 2008 election. In other words, I am reiterating my opinion that stocks are likely in a trading range. So while I want to Buy stocks that have held up in this latest decline, I want to Sell the weak Holdings on any rallies. So my objective is to pull down the cash position in our Portfolios to around 15% in these dips (Buying the stocks that have performed well) and raise it to 20% on rallies (Selling those stocks that can’t move out of that zone between the lower boundary of their Buy Value Range and their Stop Loss Price).

Here’s a look at how tough this Market has been; note that our US Global Gold Shares are among the best performing funds:

http://www.thestreet.com/s/a-worse-bear-market-than-2001/funds/retirement-strategies/10406119.html?puc=_htmlbooyah

This is not a good sign for near term Market performance:

http://bespokeinvest.typepad.com/bespoke/2008/03/high-yield-spre.html

Subscriber Alert

At the Market open this morning, the Canadian National Railway (CNI-$52 is being Added to the Dividend Growth Buy List and a one half position is being Bought by the Dividend Growth Portfolio. In addition, Praxair (PX -$79) is also being Added to the Dividend Growth Buy List. Since the Dividend Growth Portfolio already owns this stock, no additional shares will be purchased.

The High Yield Portfolio will Buy the second one half of a position in Pfizer (PFE-$22).

The Aggressive Buy List will Add Reliance Steel (RS-$57) and Franklin Resources (BEN-$94) and a one half position will be purchased in each by the Aggressive Growth Portfolio.

Both CNI and RS are stocks that had been previously bought then sold when they hit their Stop Loss Prices. Since then those stocks have recovered and now trade in their Buy Value Range. Getting Stopped Out of a stock in the midst of an emotional decline, then having to Buy it back at higher prices is one of the shortcomings of my Price Disciplines. However, I am ready to live with it because I can’t know in advance how far down a stock will trade so I developed our Sell Discipline’s with the primary purpose of avoiding large losses. I could of course ignore the stock afterwards to avoid the seemingly embarrassing predicament of having to Buy it back at higher prices; but in my opinion that would simply compound the shortcoming.

News on Stocks in Our Portfolios

Sun Hydraulics (Aggressive Growth Portfolio) reported fourth quarter earnings per share of $.31 versus $.23 reported in the comparable 2006 quarter.

American Vanguard (Aggressive Growth Portfolio) reported fourth quaqrter earnings per share of $.28 versus $.20 recorded in the 2006 fourth quarter.

More Cash in Investors’ Hands

3/4/08

Economics

Manufacturing, productivity and NAFTA:

http://mjperry.blogspot.com/2008/03/increases-in-productivity-have-caused.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

This is not very encouraging:

http://bigpicture.typepad.com/comments/2008/03/would-you-buy-t.html

A chart of the dollar:

http://bespokeinvest.typepad.com/bespoke/2008/03/dollar-collapse.html

Fundamental

After the Market’s lousy performance last Friday, I was hoping for a big follow on sell off yesterday that would successfully test the January lows and more clearly establish that a bottom had been made. And it looked like that might happen when we got some disappointing economic data (January construction spending and the Institute for Supply Management’s February manufacturing index) near the opening Bell. But in the end, those unimpressive economic stats did little to move stock prices.

That is a bit disappointing because I do think that the January lows are going to be tested and I would just as soon get it over with. Until that happens, I will be concentrating on the poorer performing stocks in our Portfolio. The challenge will be to eliminate those that are trading below their Buy Value Range but above their Stop Loss Price and are unable to trade back into their Buy Value Range when stock prices rally--much like Quest Diagnostics, a position I recently eliminated in the Aggressive Growth Portfolio. I will continue providing lists of these stocks in The Morning Call.

Year end consensus Fair Value for the S&P:

http://bespokeinvest.typepad.com/bespoke/2008/03/sp-500-price-ta.html

A look at international revenues as a percent of total revenues by S&P sector:

http://bespokeinvest.typepad.com/bespoke/2008/03/earnings-here-v.html

News on Stocks in Our Portfolios

Bank of Nova Scotia (Dividend Growth Portfolio) reported fourth quarter earnings per share of $.82 versus $1.01 in the comparable 2006 quarter. Currency translation and turmoil in the financial markets were blamed for the shortfall.

Staples (Aggressive Growth Portfolio) reported fourth quarter earnings per share of $.47 versus $.46 recorded in the 2006 fourth quarter.

More Cash in Investors’ Hands

3/3/08

Economics

A solution for stagflation (if you think that that is the problem):

http://blogs.forbes.com/digitalrules/2008/02/stagflations-su.html

A look at real disposable income:

http://mjperry.blogspot.com/2008/02/25th-month-of-real-disposable-income.html

And how W’s tax cuts impacted both high and low income households:

http://krusekronicle.typepad.com/kruse_kronicle/2008/02/taxing-question.html

Politics

Domestic

Obama on free trade:

http://www.usnews.com/blogs/capital-commerce/2008/02/29/trade-wars-obama-vs--obama.html

McCain on pork:

http://americansforprosperity.org/index.php?page=blog

If you happened to see the 60 Minutes report on the Republican conspiracy to imprison the former Democratic governor of Alabama, and you care, here is an analysis of the testimony of the leading witness in 60 Minutes story. This is a bit long, has nothing to do the economy or the Market, but is another remarkable example of how untrustworthy the main stream media has become.

http://www.powerlineblog.com/archives2/2008/03/019926.php

International War Against Radical Islam

This probably won’t be good for stocks:

http://hughhewitt.townhall.com/blog/g/a08a8dc4-a8ec-4564-8f20-4482b75f1e40

The Market

Technical

The Market performance after three down months in a row:

http://bespokeinvest.typepad.com/bespoke/2008/02/down-four-month.html

Fundamental

Aggressive Growth Buy List

Company Close 2/29 Buy Value Range

Accenture Ltd $35.25 $32-36

Amphenol 36.97 35-40

Best Buy 43.01 42-48

Fastenal Inc 40.66 36-41

Microsoft 27.19 26-30

SAP Inc 47.41 46-54

Sun Hydraulics 21.73 21-25

Subscriber Alert

The stock price of American Eagle Outfitters (AEO-$22) has fallen below the lower boundary of its Buy Value Range. Accordingly, it is being Removed from the Aggressive Growth Buy List. AEO’s price remains well above its Stop Loss Price; so for the moment, the Aggressive Growth Portfolio will continue to Hold this stock.

Company Highlight

Smith International produces drill bits; markets pipes, valves and fittings; supplies drilling-fluid systems, solids control and rig instrumentation equipment and waste management services; and provides equipment and services for well drilling, work over and completion. The company has grown profits at a 25% pace over the last 5 years, earning over a 20% return on equity utilizing little debt (14%). SII should continue its above average earnings performance as a result of:

(1) worldwide hydrocarbon demand along with rising prices continues spurring growth in exploration,

(2) SSI’s international exposure: non US exploration is growing at an even higher rate than domestic exploration,

(3) strong demand provides the company with pricing power allowing it to more than offset the increased cost of raw materials,

(4) the company maintains a very successful product development effort making it a leader in technological innovation,

(5) SSI also has an aggressive acquisition program which concentrates on proven products from niche industry players.

In addition, management is focused on returning capital to shareholders via the rapid growth of its dividend as well as an active share buyback program. SSI is rated B++ by Value Line, has a 29% debt to equity ratio and its stock yields about 1%.

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

News on Stocks in Our Portfolios

United Technologies (Dividend Growth Portfolio) has proposed acquiring Diebold for $40 a share in cash.

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

More Cash in Investors’ Hands