9/10/08

Economics

Recent Data

July wholesale inventories jumped 1.4% versus expectations of an increase of .6%; perhaps more important, wholesale sales fell .3%. You may recall that sales growth has been consistently outpacing the increase in inventory; this is the first sign of a reversal in this pattern and is not promising. Pictorially:

http://econompicdata.blogspot.com/2008/09/wholesale-trade-sales-july.html

The International Council of Shopping Centers reported weekly sales of major retailers down .1% but up 1.9% on a year over year basis; Redbook Research reported month to date retail chain store sales up 1.8% versus the comparable period in 2007. Both numbers were impacted by the rash of hurricanes that plagued the Gulf and Atlantic coasts.

Other

protectionism (Free trade is a major positive for world and US economic growth.). There are still three free trade agreements before the Senate for approval:

http://www.orlandosentinel.com/news/opinion/orl-ed08108sep08,0,3876867.story

An economist looks at cap and trade:

http://www.american.com/archive/2008/september-09-08/the-pigou-club-goes-to-washington

An update on credit spreads:

http://econompicdata.blogspot.com/2008/09/corporate-mortgage-backed-security.html

Thoughts on the mandated reduction in Fannie/Freddie’s mortgage portfolios:

http://econompicdata.blogspot.com/2008/09/fannie-freddie-portfolios-250b-by-year.html

Politics

Domestic

Understanding Obama’s role as a community organizer:

http://article.nationalreview.com/?q=OWMxNGUxZWJjYzg1NjA0MTlmZDZmMjUwZGU3ZjAwNmU=

Some quotes from Alaskan newspapers on Palin’s role in the bridge to nowhere:

http://www.powerlineblog.com/archives2/2008/09/021462.php

International War Against Radical Islam

The Market

Technical

Eye candy on the NYSE cumulative tick:

http://traderfeed.blogspot.com/2008/09/cumulative-nyse-tick-look-at-short-term.html

A positive read on the Market’s current pin action:

http://traderfeed.blogspot.com/2008/09/introduction-to-trading-stock-market.html

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Technically speaking, it appears that Monday was the eye of the storm. I don’t have to tell you yesterday was brutal. Stock prices were down big, the volatility index spiked from 22 to 26 and looks to headed for the 30-36 area that typically marks support levels (bottoms). As the day went on, I recalled the conversations with the floor traders that I had last Friday and that I recounted in last week’s Closing Bell--the gist of which was that they were very gloomy about the prospects for stock price performance on Monday and Tuesday this week, expecting a firm test of the July 2008 low. It would appear that they were right, it just got postponed by a day. Hold on to your shorts, tomorrow may be rough but hopefully it will be THE (successful) test of the July low.

Fundamental

There appeared to be two driving forces behind stocks dismal performance yesterday:

(1) Lehman Bros. which has been on the ‘sick’ list of financial institutions, has apparently become the focus of the short seller/hedge fund crowd. From the tone of the news/rumors on the Street and the pin action of the stock, it seems that investors are betting that it will not survive in its current form. This, in turn, led to some serious whackage of many financial stocks. If history repeats itself, this situation will likely resolve itself, just like the Bear Stearns and Fannie/Freddie did [see below]. The good news from our limited perspective is that we only own one bank--Northern Trust which, as you know, has been hitting all time price highs--and one broker/dealer--Charles Schwab which has also traded near its Sell Half Price—though yesterday it sold below a pre-set Stop Loss [see below]. The remainder of our positions in the financial sector are trading well within their long term trends and their Valuation Ranges. The only exception is Mastercard where the Aggressive Growth Portfolio sold some shares last week to protect profits and where it will sell more this morning [see below].

Here is Lehman’s proposed resolution to its problems:

http://online.wsj.com/article/SB122103219388318869.html?mod=hpp_us_whats_news&apl=y&r=769188

(2) liquidation of energy/commodity stocks. We are not so lucky here. Last week when the Ospraie hedge fund closed its doors, I posed the question; ‘is the demise of this hedge fund a singular event or are there committee meetings at hedge funds, pension funds and foundations going on as you read this deciding whether or not the commodity bubble has burst and whether to liquidate or substantially reduce exposure to this investment class. We have to be alert to this possibility and.... we will know the answer soon enough.’ The price action of these stocks over the past week suggests that we now know, i.e. it looks to me like these stocks are being subject to mass liquidation with the result that some of the stocks in our Portfolios are being hit very hard.

The dilemma here is that while I believe that the global industrialization thesis remains in tact, I don’t know how long this liquidation will last and how far down these stocks will fall before the selling subsides. My solution is always the same--protect capital first.

Here is Cramer’s take:

http://www.thestreet.com/p/_htmlrmd/rmoney/jimcramerblog/10436522.html

Unfortunately, a number of our Portfolios holdings are trading through our pre-set Stop Loss prices which I established to protect profits. In fact there are more of them than I can ever remember in prior Market declines. However, given the Averages proximity to their July lows, I want to be cautious about any wholesale liquidation. Therefore in my analysis following yesterday’s Market close, I focused just on those stocks that not only traded below our pre-set Stop but also have little technical support within 10% of their current price. Accordingly at the Market open this morning---

Subscriber Alert

The Dividend Growth Portfolio will Sell sufficient shares in Illinois Tool Works (ITW-$48) and ExxonMobil (XOM-$73) to reduce the size of these holdings to one half of normal. In conjunction with that ITW and MDU Resources (MDU-$28) are being Removed from the Dividend Growth Buy List as a result of their shares selling below the lower boundary of the Buy Value Range. In addition, the stock price of Marathon Oil (MRO-$40) has traded below its Stop Loss Price. All but a one quarter position in this stock will be Sold

The High Yield Portfolio will Sell sufficient shares in Rayonier (RYN-$44), Nustar Energy (NS-$48) and Oneok Partners (OKS-$58) to reduce the size of these positions to one half of normal. In addition, Plains All American Pipeline (PAA-$44) is being Removed from the High Yield Buy List as a result of its shares selling below the lower boundary of its Buy Value Range.

The Aggressive Growth Portfolio will Sell sufficient shares of Charles Schwab (SCHW-$23), American Vanguard (AVD-$13) and Smith Int’l (SII-$60) to reduce the size of these position to one half of normal; it will Sell sufficient shares of Bucyrus Int’l (BUCY-$43), XTO Energy (XTO-$45) and Suncor Energy (SU-$43) to reduce the size of these holdings to one quarter of normal. The stock prices of Mastercard (MA-$206) and Reliance Steel (RS-$45) have traded below their respective Stop Loss Prices. All shares will be sold. Finally, the stock price of Frontier Oil (FTO-$18) has traded below the lower boundary of its Buy Value Range; therefore FTO will be Removed from the Aggressive Growth Buy List. The Aggressive Growth Portfolio will Hold this stock for the time being.

As a final thought, I want to re-emphasize that these actions are being taken for one reason and one reason alone: to protect capital. Given the proximity of stock prices to the July lows, the end of this decline could very well come in the next couple of days; and even though I believe that the July lows will hold, I am unwilling to risk capital to prove that point. As I said last Thursday, I would rather buy stocks back up 5% than assume the risk of holding them down 10% to 20%.

Company Highlight

Aflac Inc is the world’s largest underwriter of supplemental cancer insurance primarily through business and employee organizations in Japan (72% of revenue) and sells life, Medicare supplement, accident and long term convalescent care in the US. The company has grown profits and dividends 16-20% over the last ten years earning an 18% return on equity. AFL should continue this above average record as a result of:

(1) improving margins due to the introduction of new products with lower loss ratios,

(2) deregulation in the Japanese market allowing the company to begin selling it policies at bank branches; plus the company was selected to be the exclusive cancer insurance provider to the Japan Post Network [postal service],

(3) Japan’s aging population facing significant deficiencies in that country’s national health plan.

Aflac is rated A by Value Line, carries a 17% debt to equity ratio, aggressively utilizes its excess cash flow to repurchase stock and raise its dividend and its stock yields 1.6%.

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

9/08

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

9/9/08

Economics

Recent Data

July consumer credit grew by $4.5 billion versus expectations of a $6.2 billion increase. This was the slowest rise of the year although the June rise of $14.3 billion was the largest since November 2007. Conclusion: volatility but not contraction.

Other

The impact of the ethanol mandate:

http://mjperry.blogspot.com/2008/09/demon-ethanols-great-disruption-100.html

Another indicator of recession (this one is positive):

http://mjperry.blogspot.com/2008/09/based-on-hours-worked-no-recession.html

Politics

Domestic

International War Against Radical Islam

This is a very long article about what is going on inside Pakistan, but it is worth the time to read it:

http://www.nytimes.com/2008/09/07/magazine/07pakistan-t.html?pagewanted=all

The Market

Technical/ Fundamental

A not too positive look at US stock valuation:

http://www.capitalspectator.com/archives/2008/09/still_searching.html#more

Chart porn on stock performance post labor day in a Presidential election year:

http://bespokeinvest.typepad.com/bespoke/2008/09/post-labor-day.html

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Great rally. Unfortunately neither index (DJIA 11510; S&P 1267) was able to break above the upper boundary (DJIA 11517; S&P 1280) of the May/August short term down trend; though the S&P did regain the March 2008 support level (1256). Clearly the Averages have some work to do just to establish themselves in a trading range; and until they do, we need to be extra careful.

Adding to that sense of caution is that fact that as nice as a DJIA +289 point day may have been, the internal pin action was schizophrenic. The stock groups that were getting whacked last week were either down or rallied so pathetically that we have to assume these stocks have more downside. On the other hand, the stocks that had been performing well in last week’s decline continued to move up strongly.

The point here is that the inconsistency of the stock price action among various industry groups results in a seemingly inconsistent investment strategy and is really a continuation of what we witnessed last week: energy, materials and technology stocks acting terrible even when the Market is up while financial and consumer stocks are doing very well even when the Averages are down.

By way of illustration:

http://bespokeinvest.typepad.com/bespoke/2008/09/financial-secto.html

http://bespokeinvest.typepad.com/bespoke/2008/09/sp-energy-secto.html

In yesterday’s price spike some of our holdings actually moved into their Sell Half Range while others were not only unable to recover to the lower end of their Buy Value Range, they declined. Needless to say this is making our stated strategy of selling stocks when the Market is up and buying them on declines a little difficult; witness that today we are selling both stocks that have had truly great performance and those where we are trying to protect profits.

Subscriber Alert

The stock prices of Northern Trust (NTRS-$84) and Proctor & Gamble (PG-$72) traded into their Sell Half Range. Accordingly, at the Market open this morning, the Dividend Growth Portfolio will Sell sufficient shares to reduce these holdings to a normal size.

The stock price of Nokia (NOK-$19) couldn’t even muster an up tick, so the Dividend Growth Portfolio will Sell its remaining share of this position.

The stock price of Penn Virginia (PVR-$22) below the lower boundary of its Buy Value Range. The High Yield Portfolio will Sell approximately 20% of this position.

The stock prices of American Vanguard (AVD-$13) and Suncor Energy (SU-$46) also did poorly in yesterday’s Market. The Aggressive Growth Portfolio is reducing these positions to one half of normal.

The High Yield Buy List

Company Close 9/9 Buy Value Range

Dow Chemical $33.03 $32-37

Gannett 18.50 18-21

Pfizer 19.14 19-22

Plains All American 46.09 45-52

RPM Int’l 21.10 19-22

News on Stocks in Our Portfolios

Altria (High Yield Portfolio) is acquiring UST for $11 billion.

http://www.thestreet.com/story/10436175/1/altria-agrees-to-buy-ust.html?puc=_htmlbtb

A positive review of Avon Products (Aggressive Growth Portfolio):

http://www.zacks.com/newsroom/commentary/?id=8020

More Cash in Investors’ Hands

9/8/08

Economics

Recent Data

Other

All you want to know but were afraid to ask. Barry Ridholtz has done his usual excellent job aggregating the weekend news on the Treasury takeover of Fannie/Freddie:

http://bigpicture.typepad.com/comments/2008/09/fannie-freddi-2.html

And the key points:

http://bigpicture.typepad.com/comments/2008/09/gse-takeover-ov.html

Politics

Domestic

This article contains are interesting debate about Obama’s tax policy (must read):

http://gregmankiw.blogspot.com/2008/09/when-co-teachers-collide.html

Are Republican Presidents better for the stock market, a study:

http://www.bloggingstocks.com/2008/09/05/are-republican-presidents-better-for-the-stock-market/

A look at Obama’s national service corps idea:

http://www.ibdeditorials.com/IBDArticles.aspx?id=305420655186700

International War Against Radical Islam

The Market

Technical

Some thoughts on the technical strength of the Market, before the impact of the Treasury’s action on Fannie/Freddie:

http://traderfeed.blogspot.com/2008/09/sector-update-for-september-7th.html

And an updated assessment (a chart feast):

http://traderfeed.blogspot.com/2008/09/indicator-update-for-september-8th.html

Fundamental

You can read as much or as little as you want on the Treasury takeover of Fannie/Freddie above. My bottom line is that:

(1) subordinating the common and preferred shareholders and firing management incorporates moral hazard into this action--that is good [though some observers think that the common and preferred holders should have been wiped out], except of course for the common and preferred shareholders. To the extent that some banks own Fannie/Freddie preferreds, it will impact them,

A contrary opinion:

http://article.nationalreview.com/?q=NmRmYzY1MTY4N2MxYjMxNmM5MzhmNzZkYTBmZjQ3YjE=

(2) with the Treasury commitment in the form of a preferred rather debt, that takes the risk out of Fannie/Freddie debt [it keeps it in senior position] which is held by both domestic and foreign banks and institutions which in turn removes investor concern about the viability of these institutions. I would think that this would have a positive impact on their equity valuation [the foreign banks and institutions],

(3) removing investor concern about the financial viability of Fannie/Freddie should lower their capital [borrowing] costs which in turn will lower mortgage financing costs as well as hopefully improving the availability of mortgage credit. I would think that this would in some way help shorten the crisis in the housing market,

(4) I think that stocks rally on this news which means to me that from a technical standpoint, the July 2008 low has been successfully tested. Fundamentally, it means as I said in the week’s Closing Bell ‘it would likely mark another of those defining moments of clarity in the resolution of the financial crisis and will also lead to a turn around in investor psychology and stock prices.’

From the stand point of investment strategy, I don’t think that this means all is clear sailing for equities. Even though there is more clarity in the resolution of problems in the financial system, it still has its difficulties. In addition, we have a recession at home and the growing recognition that the economies of Europe and Japan are faltering. The question is, how much of that is already in the price of stocks? The answer as usual is that I don’t know; but what I do know is that as of today, there are now fewer unknowns. That suggests to me that there is no reason to alter our strategy of managing our cash position between 15% and 20%--drawing it down to 15% when stocks get hit and building it back up when stocks rise.

We got thrown off that strategy over the last couple of weeks when many stocks of companies in the energy, materials and technology sectors (1) broke through technically sensitive support levels and (2) fell into that no man’s zone that our Price Disciplines create between the lower boundary of a stock’s Buy Value Range and its Stop Loss Price. That action forced the sale of a portion of a number of our Portfolios’ holdings in these sectors. While our strategy of averaging out of stocks that trade in this price zone has worked well in this recent down turn, as I said in this week’s Closing Bell, those latest sales may look stupid by the end of trading today. However, for the moment until those stocks recover to a more firm technical/fundamental footing, our Portfolios will continue to treat them cautiously and act to protect our profit/avoid large losses. (Indeed, the Dividend Growth Portfolio will continue to average out of its position in Nokia (NOK-$21) at the Market open this morning. I said Friday that in absence of a price recovery, the Dividend Growth Portfolio would Sell all remaining shares Monday. However, given the likelihood of a bounce this morning, it is only selling one half of what is left [leavi

ng a one quarter position]).

Which perhaps makes my big mistake Friday not selling the stocks we sold but rather not immediately reinvesting the funds in technically stronger stocks that were trading above the lower boundary of their Buy Value Range. I am going to correct that this morning and return to trading our cash position between 15-20%. At the close Friday, our Portfolios’ cash position was between 20- 22%. I am taking it to 17-18% this morning.

Accordingly, at the Market open this morning,

(a) the Dividend Growth Portfolio will Buy new positions in McDonald’s (MCD-$60) and Aflac (AFL-$57) [both of these stocks are on the Dividend Growth Buy List, but to date no shares have been purchased] and Add to its holdings in Praxair (PX-$86. In addition, the stock price of Home Depot (HD-$29) has returned to its Buy Value Range. It is being Added to the Dividend Growth Buy List and a one half position is being bought.

(b) the High Yield Portfolio will Add to its holdings of Bank of Nova Scotia (BNS-$44), Altria (MO-$21) and Pfizer (PFE-$18). In addition, the stock price of Gannett Co (GCI-$18) has fallen below the upper boundary of its Buy Value. It is being Added to the High Yield Buy List and a one quarter position is being bought.

(c) The Aggressive Growth Portfolio will Add to its holdings of Luxottica (LUX-$25) and Rockwell Collins (COL-$52). In addition, the stock prices of Stryker (SYK-$65), Lowe’s (LOW-$26) and Walgreen (WAG-$35) has entered their respective Buy Value Ranges. A full position is being Bought in SYK and one half positions are being Bought in LOW and WAG.

News on Stocks in Our Portfolios

More Cash in Investors’ Hands