4/4/08
Number one grandson arrives Saturday on his spring break. That means golf, Six Flags, laser tag, etc., etc. Hence, barring a significant occurrence, I will not be writing a Morning Call or a Closing Bell next week. However, I will as always be monitoring Market developments and if action is required, I will let you know what our Portfolios are doing via a Subscriber Alert (s).
Statistical Summary
Current Economic Forecast
2007
Real Growth in Gross Domestic Product: 2.0- 2.5%
Inflation: 2 - 2.5 %
Growth in Corporate Profits: 6-8%
2008 (revised-again)
Real Growth in Gross Domestic Product (GDP): .5-1.5%
Inflation: 1.75-2%
Growth in Corporate Profits: 0-5%
Current Market Forecast
Dow Jones Industrial Average
2008
Current Trend:
Short Term Trading Range 11600-12722
Medium Term Trading Range 11600-14203
Long Term Trading Range 7100-14203
Year End Fair Value: 14050
2009 Year End Fair Value: 14471-14893
Standard & Poor’s 500
2008
Current Trend:
Medium Term Uptrend 1293-1722
Medium Term Trading Range 1293-1406
Long Term Trading Range 750-1527
Year End Fair Value: 1615
2009 Year End Fair Value: 1663-1711
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 18%
High Yield Portfolio 20%
Aggressive Growth Portfolio 21%
Economics
The economy is a neutral for Your Money; and we may, in fact, be passed the point where the combination of the lack of clarity on the resolution of the credit crisis and the economic fallout from the credit crisis will have much further negative impact on Your Money. That doesn’t mean that there aren’t additional shocks coming to the financial system; nor does it mean that we won’t have a recession--in fact, it now appears that we are in one (more on that below). But stocks have absorbed a huge amount of negative data related to both and each bit of new bad news seems to be having an increasingly marginal affect on their prices.
That said, this week’s economic statistics, while mixed, revealed a continuing weakening consumer with the employment numbers being particularly disappointing. Indeed, the lousy March non farm payroll report (see below) was the third in a row. That almost assuredly means that first quarter 2008 economic growth will be negative. That gets us half way towards a recession as defined by the government statisticians and convinces me that this slowdown has turned into a recession.
Nevertheless, at the risk of being called a cockeyed optimist, the data measuring industrial activity showed a marked improvement from February to March, suggesting that the notion that the global economy will soften the US economic cycle may still prove valid. One month, of course, does not a trend make; but it is a hopeful sign that even if we haven’t avoided a recession, it may be a very shallow one.
Bottom line: the economy has weakened sufficiently that there will be little or no growth over the next couple of quarters; but there is enough evidence to suggest that even if we are in a recession, it will be a mild one. Mild enough that I am only shading my 2008 forecast for economic growth by .5%; I am also widening the range of corporate profit growth from 3-5% to 0-5%. Unfortunately, I don’t think a mild recession is the real problem. Rather, everyday that goes by in which the Fed must focus on the credit crisis (with which I agree), inflationary pressures grow; and that is the next issue about which we have to worry.
(1) the only housing number was weekly mortgage applications [secondary indicator] which plunged 28.7%; but remember they were up 41.1% last week,
(2) there was not a lot to be happy about in the consumer statistics: [a] March non farm payrolls fell 80,000 much more than estimates of a decline of 50,000, [b] putting the unemployment rate at the end of March at 5.1% versus expectations of 5.0% and up from February’s 4.8% reading, [c] weekly jobless claims jumped 38,000 versus estimates of a 2,000 increase, [d] the International Council of Shopping Centers reported weekly sales of major retailers fell .2% but increased 1.0% on a year over year basis; Redbook Research reported month to date retail chain store sales rose 1.7% versus the comparable period in February and were up 1.1% over the similar timeframe in 2007. [e] March auto and light truck sales were down 12% versus expectations of a flat performance,
(3) industry data showed signs of improvement in March: [a] the Institute for Supply Management {ISM} reported its March manufacturing index at 48.6 versus expectations of 47.3 and 48.3 recorded in February, [b] the ISM March non manufacturing index {measures approximately 90% of the economy} was reported at 49.6 versus forecasts of 49.0 and up from February’s 49.3 reading, [c] February construction spending fell .3% versus estimates of a decline of 1.0%, [d] February factory orders dropped 1.3% versus forecasts of a .8% decrease {note that this is a February number while the ISM reports are March statistics}, [e] the March Chicago purchasing managers’ index {secondary indicator} came in at 48.2 {any number under 50.0 connotes contraction} versus expectations 46.7 and 44.5 recorded in February.
The Economic Risks:
(1) the economy is weaker than expected.
(2) Fed policy (reading the data correctly).
(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).
(4) protectionism (Free trade is a major positive for world and US economic growth.).
(5) 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.).
(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)
Politics
Both the domestic and international political environments are a negative for Your Money.
http://www.townhall.com/columnists/TonyBlankley/2008/04/02/trouble_in_pakistan_and_turkey
http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=555465&in_page_id=1770&ct=5
The Market-Disciplined Investing
Technical
The DJIA (12609) is in a short term trading range defined by 11622 /11900 (the January2008 intra day low/the January 2008 low close) and 12722 (the November 2007 intraday low). With the S&P (1370) I am watching the lower boundary of the up trend off the 1982 low (circa 1293) and the November 2007 intraday low (1406) plus the 750-1527 2002-present trading range.
Since the Averages are approaching their November intraday lows, a look ahead at what could happen might be helpful. First, the November low resistance level could again prove too formidable to surmount (remember stocks have already tried twice and failed to break through DJIA 12722/S&P 1406); or second, they could successfully penetrate this barrier. If so, the next level to watch would be the October 2007 to present downtrend line (DJIA circa 13042; S&P circa 1430).
I’m inclined toward option one simple because I think we need a bit more clarity on the credit crisis, the depth of the recession and the outcome of the November elections before stock prices lift back towards Fair Value. Of course, as we just witnessed with regard to my recession (or lack thereof) call, I am subject to being wrong. If this were to prove to be the case (i.e. stocks break above DJIA 12722/S&P 1406), I will probably shift the range of cash positions in our Portfolio down to the 10-15% versus the current 12 ½-17 ½%.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (12609) finished this week about 7% below Fair Value (13517) while the S&P closed (1370) around 11% undervalued (1548).
As I hinted at in the Economics section above, the thing that most warrants mention about this week’s Market performance was that stocks held the huge gain they logged on Tuesday (1) contrary to their performance in recent months where a big up day was followed almost immediately by equal volatility to the downside and (2) in the face of poor economic news--reinforcing the notion that the January low was indeed the bottom of this Market cycle and supporting our current investment strategy towards a slightly lower cash position:
The short version of our investment strategy is to Buy stocks during Market declines, pulling cash reserves down to 12 ½%; and Sell those stocks that can’t regain their Buy Value Range and are selling below at least three of the technical markers that I have been monitoring, rebuilding cash reserves to 17 ½%.
The long version of our investment strategy is to:
(a) use any price declines to buy positions in great quality companies whose stocks have either remained within their Valuation Range or have briefly traded below it but quickly rebounded (but keeping a minimum cash position of 12 ½ %),
(b) insure that my research on the Valuation Model especially for those stocks that have broken below or are near their Stop Loss Price is up to date and the Values generated by the Model reflect the current economic reality,
(c) build our Buy Lists, drawing largely from stocks on our Watch Lists as we review their financials and gain confidence in their Value Range [see (a) and (b) above],
(d) use positive days in the Market to Sell stocks that [i] 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 and [ii] sell below at least three of the five technical price markers defining the July/August 2007 to present decline,
(e) be mindful that the Market may very well not have bottomed; so our Stop Loss Discipline and a large cash position [see Percentage Cash in Our Portfolios above] remain critical,
(e) on a longer term basis, recognize that there are both technical and fundamental factors that argue for caution and therefore to proceed carefully with our Buying, keeping a larger than normal cash position in anticipation of valuation and strategy changes that could result from a potentially new domestic economic agenda.
DJIA S&P
Current 2008 Year End Fair Value 14050 1615
Fair Value as of 4/30/08 13517 1555
Close this week 12609 1370
Over Valuation vs. 4/30 Close
5% overvalued 14192 1632
10% overvalued 14868 1710
Under Valuation vs. 4/30 Close
5% undervalued 12841 1477
10%undervalued 12165 1399
15%undervalued 11489 1321
The Portfolios and Buy Lists are up to date.
Company Highlight:
Mastercard is a global leader in electronic payments serving as a processor and advisor to approximately 25,000 financial institutions for their credit, debit and other payment programs. In addition, it manages a family of payment card brands. Importantly, MA does not extend credit; it simply acts as a toll collector and is paid on both transaction volume and dollar volume. The company earns in excess of a 25% return on equity and has grown profits from $1.76 in 2004 to $5.71 in 2007 and its dividend from $.09 in 2006 to $.54 in 2007. Growth should continue as credit and debit cards account for an increasing percentage of purchase transactions and MA expands outside the US. Mastercard is rated A by Value Line, debt accounts for only 5% of its capitalization and its stock provides a .3% yield.
http://finance.yahoo.com/q?s=MA
Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 38 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.
