The Closing
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): -1.0 - +1.05%
Inflation: 2-3%
Growth in Corporate Profits: 0-5%
Current Market Forecast
Dow Jones Industrial Average
2008
Current Trend:
Short Term Trading Range 10809-11866
Short Term Downtrend 10090-11477
Medium Term Downtrend 10658-12605
Long Term Trading Range 7100-14203
Year End Fair Value (revised): 13450-13850
2009 Year End Fair Value (revised): 13850-14250
Standard & Poor’s 500
2008
Current Trend:
Short Term Trading Range 1198-1311
Short Term Downtrend 1122-1273
Medium Term Downtrend 1155-1374
Long Term Trading Range 750-1527
Long term Up Trend 1317-1797
Year End Fair Value (revised): 1533-1577
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 19%
High Yield Portfolio 21%
Aggressive Growth Portfolio 24%
Economics
I am still rating the economy as a neutral for Your Money; but the destruction of credit in our financial system will have a negative impact on the economy’s ability to prevent weakness in the consumer and industrial sectors and finance future growth. I am not sure that the macroeconomic affects will show up in the final stats for 2008; but it will almost certainly influence economic activity in 2009. I haven’t finished my forecast for that year but it appears that it will likely be another year of slightly negative to slightly positive growth.
I have suggested in comments over the last two weeks that we could probably take inflation off the table for the moment; and this week’s August consumer price index report supports that notion. However, the events of the last week (the Federal government pumping billions of dollars into the financial system) argue for leaving inflation as a major risk. To be sure, these funds will have an inflationary effect if the banking system lends that money. However, at the moment the problem is the opposite--banks and other lending institutions are hoarding cash. Once this credit crisis starts to correct itself, we will have to start paying close attention to how quickly the Fed withdraws the liquidity that it is now supplying.
This week (1) the housing numbers contained more bad news though paradoxically that may be good news. August housing starts and building permits declined precipitously while weekly mortgage applications rose 2.4%. The more building (supply) slows and applications (demand) rise, the faster inventories are reduced and construction activity can start to recover; (2) retail sales and jobless claims continued to disappoint, (3) as did the industrial sector--August industrial production fell more than expected while two secondary indicators were mixed: the September Empire State Manufacturing survey index reading was more negative than expected while the September Philadelphia Fed manufacturing index came in above forecasts. (4) finally, August leading economic indicators fell more than estimates; while the one good bit of news this week, the August consumer price index, was reported down .1%.
The real news this week was the Treasury and Fed actions. I covered those in the Morning Calls; but bottom line, Bernanke and Paulson, in my opinion, did what they had to do and for that they get above average marks. The SEC is another story.
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
(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.
Some thoughts of foreign policy expertise of the candidates:
p://article.nationalreview.co/?q=OTFkZTJmODA0MjNmYTQ5MTlkNjE2OTczNjM4N2JhNWM=
The Market-Disciplined Investing
Technical
With the Thursday/Friday price spike:
(1) the DJIA (11388) closed above the upper boundary of the short term May/August 2008 downtrend (circa 9997-11364)--a very promising sign; while the S&P (1255) remained within this downtrend (circa 1116-1261). Both closed within the medium term down trend extending back to October 2007 whose boundaries are DJIA circa 10672-12599 and S&P circa 1152-1374.
(2) I am again operating on the assumption that July 2008 low marked the bottom of this cycle (DJIA 10809; S&P 1198)--so these are the most important downside numbers for me at the moment. [I should note that even if we get a down day Monday, which seems likely, and the DJIA trades back below the upper boundary of that May/August downtrend, it wouldn’t change my view that the July lows are the bottom.] If we assume that stocks are now in a trading range then the first identifiable resistance level is the August 2008 trading high (DJIA 11866: S&P 1311). Bottom line: The Thursday/Friday rally rekindled my belief that the July intraday lows will mark the bottom to this Market cycle and that the dominant trend is now a trading range tentatively being defined by the July 2008 lows and the August 2008 highs (DJIA 10809-11866; S&P 1198-1311) [that range should widen later].
Thoughts on the wisdom on the new SEC edict banning short selling:
http://www.informationarbitrage.com/2008/09/from-capitalism.html
Fundamental-A Dividend Growth Investment Strategy
The DJIA (11388) finished this week about 15.9% below Fair Value (13549) while the S&P closed (1255) around 18.8% undervalued (1547).
I have covered all the fundamental developments this week in the Morning Calls. My bottom line (quoting from Friday’s Morning Call): ‘.....as the outline of the Treasury’s RTC-redux plan becomes clear, it will at the least allow equities to find a valuation level absent the fear of financial collapse but commensurate with an economy with a crippled but in tact financial system that is likely to grow at a below average pace for some time. Hence, it doesn’t solve all our economic problems nor does it bring any clarity to the long term issue of the impact of a potential shift in the political landscape and what that shift might mean economically. But based on our Valuation Model, those problems were in the price of stocks at higher levels.’
Our short term strategy has returned to focusing on the management of our cash balances between 15-20% as a way of dealing with risk in what I believe will be a weak economy and a volatile political season. On Thursday our Portfolios took their cash position from about 34% to circa 20% (see above for their cash value at the close Friday).
Questions Paulson needs to answer about his government bailout plan:
http://www.forbes.com/home/2008/09/19/banking-bailout-paulson-biz-wall-cx_lm_0919questions.html
One final note. I said in yesterday’s Morning Call that our Portfolios would likely move a further step towards a 17% cash position that day. They didn’t because (1) I was expecting more Market weakness than we got, plus (2) the volatility index never got below 30, which is too high to suggest a further sustained rally from these levels. I think that we will get a better opportunity to Buy next week--so our Portfolios did nothing.
Our investment strategy includes:
(a) defense is still important--protect profits and avoid losses,
(b) use price weakness as an opportunity to buy the stocks of attractive companies at attractive prices; use price strength to take profits when a stock’s price moves into its Sell Half Range or to move out of those stocks that traded below their Buy Value Range in the recent decline but can not recover to within that Range,
(c) on a longer term basis, recognize that there remain 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 13650 1555
Fair Value as of 9/30//08 13549 1547
Close this week 11388 1255
Over Valuation vs. 9/30 Close
5% overvalued 14226 1626
10% overvalued 14904 1701
Under Valuation vs. 9/30 Close
5% undervalued 12872 1469
10%undervalued 12194 1392
15%undervalued 11516 1315
20%undervalued 10839 1238
The Portfolios and Buy Lists are up to date.
Company Highlight:
Walgreen’s (WAG) is the second largest drugstore operator in the
(1) the +60 year old population, which is the largest user of drugs, is growing faster than any other segment of the population,
(2) it recently introduced a pharmacy benefits manager for Medicare prescription drug plans which should accelerate revenue growth, and
(3) not only does WAG operate an aggressive new store introduction campaign, its strategy focuses on convenient locations and many are 24/7 stores,
(4) the company also is expanding via acquisition into pharmacy and health services [seven in the last three years]. This year WAG created a new division which will manage health centers and pharmacies at large company worksites.
WAG is rated A+ by Value Line, has no debt, is in the midst of a $1 billion stock buy back program and its stock yield 1%
http://finance.yahoo.com/q?s=WAG
9/08
Make money by accessing all our Portfolios, the supporting research and Price Disciplines at www.strategic-stock-investments.com. Our work is focused on making money for our Portfolios not as some academic exercise in Internet investing. Check our performance (audited)--our Dividend Growth Portfolio has beaten the S&P 500 basis points per year for the last seven years but with a beta of only .62. (Mandatory Disclaimer: past performance is not a guarantee of future results.) We give you everything you need to duplicate our results, in particular, a strict price discipline for both Buying and Selling.
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.
