The Disciplined Dividend Investor

Wednesday, March 12, 2008

3/12/08

Economics

A look at yesterday trade deficit report:

http://mjperry.blogspot.com/2008/03/us-exports-at-record-high-show-strong.html

More on the income ‘squeeze’ on the middle class:

http://mjperry.blogspot.com/2008/03/cant-we-bury-middle-class-income-myths.html

And income inequality:

http://mjperry.blogspot.com/2008/03/college-educated-are-getting-richer.html

Don’t believe the 1970’s stagflation doomsayers:

http://mjperry.blogspot.com/2008/03/inflation-in-pictures-its-sure-not-like.html

A first step in curbing out of control Medicare costs:

http://article.nationalreview.com/?q=MzE3M2M1Y2RkNmMxZWRhZGE5YzNhNGRiMDI0NGZlMTY=

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The big news yesterday was the Fed’s move to provide an additional $200 billion lending facility to embattled financial institutions--in essence, the Fed will lend US Treasury bills (it owns about $800 billion) for 28 days to the banks and investment banks in exchange for mortgage backed securities, which at the moment can’t be accurately valued. The purpose is to (1) prevent the financial institutions from having to markdown their portfolios or meet margin calls based on the lack of pricing [value] certainty surrounding their illiquid asset backed securities and (2) perhaps sell the [some] Treasuries and use the funds received to make new loans--presumably with tighter credit standards than previously employed; but nonetheless, it should provide liquidity for loans to keep business activity growing. Further, the Fed said that it could expand (more loans) and/or extend (longer than 28 days) this program.

Two points:

(1) the Fed action doesn’t mean that loan losses won’t be incurred by financial institutions and it doesn’t mean that home prices (houses being the asset behind much of these derivative loans) will stop declining. What this action does is buy time so that a more orderly market in the various financial derivative instruments can develop,

(2) by providing liquidity in this manner [a] it does not expand the money supply--they are simply trading one security for another and [b] it opens the possibility that the Fed will be less aggressive in lowering the Fed Funds rate. Both of these factors will help assuage the consternation among investors about inflation and the weak dollar. Incidentally, another measure the Fed took yesterday was to do $36 billion in currency swaps with foreign central banks to help stabilize the dollar.

Did someone say ‘more visibility to the resolution of the credit crisis’?

Politics

Domestic

International War Against Radical Islam

The Market-Disciplined Investing

Technical

What a difference a day makes. When I said in yesterday’s Morning Call, that if the DJIA and S&P rallied back above the support levels (DJIA 11900; S&P 1282) they had broken on Monday, I wouldn’t view the break as of much consequence, little did I expect Tuesday’s upward explosion in stock prices. Today as I look at the Market technically, stock prices are back in the trading ranges that have been operative since January (DJIA 11600/11900--12722; S&P 1282--1735).

That said, I do not think that yesterday’s Titan III performance signified a beginning of a new Bull Market. Yes, it had volume; yes, it was more than short covering; but I am uncomfortable that this upturn in price and volume didn’t occur either during a day or immediately following a day of complete capitulation. It seems to me that investors have simply not yet thrown in the towel; so I am concerned that we haven’t seen the final ‘flush’. At the moment, stocks are back in the old trading ranges mentioned above; and until investor sentiment can push them above the August intraday low (DJIA-12506; S&P 1370) and November intraday low (DJIA-12722; S&P-1406) or below DJIA 11600 and S&P 1269, they will be until they are not.

Subscriber Alert

Given the above conclusion, our investment strategy remains unchanged--we need to be Buying stocks during weakness and Selling into strength. At the moment, I am focused on moving out of those stocks that have been performing weakly in terms of both their fundamentals and their technical picture. I am defining that as stocks (1) which are and have been trading between the lower boundary of their Buy Value Range and their Stop Loss price and can’t recover into their Buy Value Range AND (2) which are trading below at least four of the five technical markers that I have been monitoring over the last month (the August 2007 intraday low, the November 2007 intraday low, the January 2008 low close, the January 2008 intraday low close, the trend in place in August 2007, the trend since August 2007).

At the close of business yesterday there are several stocks that fit the above criteria. Accordingly at the Market open this morning:

The Dividend Growth Portfolio will Sell one half of its positions in General Electric (GE-$33), Abbott Labs (ABT-$51) and McGraw Hill (MHP-$37).

The Aggressive Growth Portfolio will Sell one half of its positions in CME Group (CME-$504), Eaton Vance (EV-$31), Expeditors Int’l (EXPD-$41) and Rockwell Collins (COL-$57).

When UnitedHealth (UNH-$37) opened down yesterday morning, the Aggressive Growth Portfolio Sold one half of its position, as I outlined in yesterday’s Morning Call: “Accordingly, the Aggressive Growth Portfolio will wait till the Market opens this morning and in the absence of any rebound; it will Sell one half of its position in UNH.”

Again, I want to wait through the opening this morning; and again, if we don’t witness a rebound in UNH, the Aggressive Growth Portfolio will Sell its remaining one half position.

The above sales are creating more cash in the Aggressive Growth Portfolio than I want (30%+), so at the Market open today, the Aggressive Growth Portfolio will Buy additional shares in Mastercard (MA-$195) and Franklin Resources (BEN-$94).

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A look at the outstanding short interest:

http://bespokeinvest.typepad.com/bespoke/2008/03/sp-1500-short-i.html

A look at what happens the day after a big rise:

http://bespokeinvest.typepad.com/bespoke/2008/03/largest-positiv.html

Fundamental-A Dividend Growth Investment Strategy

News on Stocks in Our Portfolios

A positive write up on Bucyrus Int’l (Aggressive Growth Portfolio):

http://www.zacks.com/rank/zcommentary/?id=7155

This looks like good news for Medivation (10 Bagger):

http://www.marketwatch.com/News/Story/Story.aspx?guid={8F4C8AE2-8368-4CC7-B8B5-5B48D97F1011}&siteid=nbs

More Cash in Investors’ Hands

Tuesday, March 11, 2008

3/11/08

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.). Congress’s new budget:

http://article.nationalreview.com/?q=YzZjOWU1Mjc5OGJkODhmMTkyZTEwZDJlNzQxNTVhZjM=&w=MA==

But there may be some good news:

http://ap.google.com/article/ALeqM5goOfAhUcl4B7Muf5clVilvIrhewgD8VAR96G3

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Tough day, yesterday. The DJIA (11740) is now well below the January low close (circa 11900) and is only 140 points over the January intra day close (circa 11600). Meanwhile, the S&P (1273) busted through the 1982-present up trend line (circa 1282) and hovers just over its January intra day low (1269). If this had all happened in the midst of an emotional sell off, I would probably have bought some stock, as I mentioned in last week’s Closing Bell. Alas, it was not to be--and indeed the lack of an anxiety ridden flush is really bothersome primarily because (1) the DJIA and the S&P blew through the aforementioned support levels (DJIA--11900; S&P--1282) like a hot knife through butter on such mediocre volume--no indication of capitulation here, (2) so it likely means that there is still more to come and (3) in a technical sense, there is not enough ‘flush’ room left on the downside. In other words, another day like yesterday, stocks could end below all major support levels with no sign of capitulation in sight and the next major support levels a scary distance away (DJIA-9644, S&P 1062).

As you know, I tend to give support (resistance) levels a little leeway in terms of time and distance. And to be sure, today stock prices could reset above these old support levels and I wouldn’t view yesterday’s technical damage as particularly worrisome. But the current decline on low volume is my worst case scenario, i.e. it makes the strongest case that I am wrong, that stocks didn’t make a bottom in January and therefore this isn’t a test and that stock prices have further downside. My discipline is to make the Market prove me wrong, that is, to hang tough till the DJIA busts 11600 and the S&P breaks 1269, before altering my investment strategy. The really good news is that stock prices are a fraction of a percentage away from that test.

Let’s see how today goes.

Subscriber Alert

The stock price of United Technologies (UTX-$66) has fallen below the lower boundary of its Buy Value Range. Therefore, it is being Removed from the Dividend Growth Buy List. For the moment, the Dividend Growth Portfolio will continue to Hold UTX.

The stock price of Unitedhealth (UNH-$41) suffered yesterday along with the stocks of other managed healthcare companies when Wellpoint lowered its earnings outlook. UNH stock traded below its Stop Loss Price after hours. Accordingly, the Aggressive Growth Portfolio will wait till the Market opens this morning and in the absence of any rebound; it will Sell one half of its position in UNH.

At the Market open this morning, the Aggressive Growth Portfolio will Sell the remaining one half of its position in American Eagle Outfitters (AEO-$17).

Fundamental

This is a pretty good article on spotting the end of the credit crisis but his conclusion is a bit weak:

http://www.thestreet.com/p/_htmlrmd/rmoney/bonds/10407038.html

Oil, gold and the S&P:

http://bespokeinvest.typepad.com/bespoke/2008/03/oil-and-gold-cr.html

Fourth quarter S&P earnings are in:

http://bespokeinvest.typepad.com/bespoke/2008/03/a-final-look-at.html

The Dividend Growth Buy List

Company Close 3/10 Buy Value Range

Canadian Nat’l RR $50.33 $45-52

Clorox 56.57 56-64

Johnson & Johnson 61.33 60-69

Praxair 77.74 74-85

Proctor & Gamble 66.97 66-75

UPS 71.92 67-77

VF Corp 72.21 72-83

Company Highlight

Canadian National Railway operates Canada’s largest railroad system spanning the East/West width of the country plus a North/South axis that runs through the US mid West to the Gulf of Mexico. The railroad has grown its profits and dividends at a 20% pace over the past 10 years earning a 15%+ return on equity. Earnings should continue to increase at an above average pace as result of:

(1) volume growth resulting from [a] the opening of the Prince Rupert Intermodal Terminal, a new container terminal that provides the fastest and most cost effective route between Asia and the interior of North America, and [b] increased resource demand particularly in coal,

(2) its newly established division providing nonrail capabilities such as warehousing and distribution, customs services, truck brokerage and supply chain tools,

(3) aggressive productivity improvement and cost control measures.

In addition to growing its dividend at an above average pace, CNI also has been consistently buy back its shares. The company is rated B++ by Value Line, has a debt/equity ratio of approximately 35% and its stock yields 1.7%.

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

News on Stocks in Our Portfolios

A positive article of Schwab (Aggressive Growth Portfolio):

http://www.bloggingstocks.com/2008/03/10/charles-schwab-corporation-not-bothered-by-subprime-mess/

More Cash in Investors’ Hands

Monday, March 10, 2008

3/10/08

Economics

a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.) Our political class’s latest stab at energy policy:

http://www.realclearpolitics.com/articles/2008/03/congress_punishes_american_oil.html

A look a ‘decoupling’:

http://mjperry.blogspot.com/2008/03/why-decoupling-may-save-world-economy.html

Charts on the monetary aggregates:

http://mjperry.blogspot.com/2008/03/monetary-mystery.html

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

http://mjperry.blogspot.com/2008/03/trade-isnt-threat-its-why-we-are.html

Some thoughts on the dollar:

http://online.wsj.com/article/SB120494525597321677.html?mod=opinion_main_commentaries

The price of gas versus per capita GDP:

http://mjperry.blogspot.com/2008/03/gas-prices-as-percent-of-income-are.html

Politics