The Disciplined Dividend Investor

Friday was an unusual day. It opened up down 600 DJIA points then rallied big, faded, rallied, then faded at the end. I thought after the first hour that we had seen the capitulation. Certainly, the volatility index (spiked over 70) and the volume (heavy) would argue that we have. But instead of being off to the races after that morning flush, the sellers kept coming back--hence the down close marked by the continued relentless selling of the groups that heretofore have performed the best in this bear market (consumer staples and healthcare).

I said Friday morning that we are in the middle of the end and by the close Friday, we were that much closer to the end. I continue to believe that the key to the end is the completion of the forced liquidation of the hedge funds. While Friday’s action suggests that it is not over, the magnitude of the selling may be tapering off. That is very positive. The question is, are we at the point where a sufficient number of buyers step in and simply overwhelm the remaining sellers?

We will know soon enough. In the meantime, the fundamentals of credit market continue to improve as governments world wide appear to be doing their best to bolster confidence among credit market participants.

http://calculatedrisk.blogspot.com/2008/10/fed-federal-reserve-and-other-central.html

Our Portfolios ended Friday with a cash position between 35-40%.

Here is the strategy for today.

It looks like a strong open, so our Portfolios will sell a small bit of some stocks where there doesn’t seem to have any support near term. But the cash generated will be reinvested immediately.

Next I want to put 20-25% (10% of the total Portfolio) of our Portfolios’ cash to work (that will get cash down to 25-30%). Our Portfolios will buy a part of that at the open, then average in during the day.

If we get another big flush, I will spend another 20% cash (5% of the Portfolio) before the close (that will take cash to 20-25%). If I decide to do that I will alert you.

Our Portfolios I will be buying stocks whose rate of price decline has been much slower in the last couple of days than the Market in general and/or stocks that are at or near multi year support levels.

Subscriber Alert

Here are the names our Portfolios will be Buying:

Dividend Growth Portfolio: Federated Investors (FII), T Rowe Price (TROW), Boeing (BA), Canon (CAJ), Wells Fargo (WFC), Aflac (AFL), Home Depot9HD), Johnson Controls (JCI), Praxair (PX (PX), General Electric (GE), 3M (MMM), MDU Resources (MDU), Nucor (NUE), Abbott Labs (ABT), VF Corp (VFC).

High Yield Portfolio: Rayonier (RYN), Quaker Chemicals (KWR), Realty Income Trust (O), Pacer Int’l (PACR), Sanofi Aventis (NY-new name being Added to Buy List), Alliance Resources (ARLP), Cato Corp (CTR), Worthington Ind (WOR).

Aggressive Growth Portfolio: Bucyrus Int’l (BUCY), Matthews Corp (MATW), Amphenol (APH), Qualcomm (QCOM), Blackrock (BLK), Franklin Resources (BEN), Sigma Aldrich (SIAL), American Vanguard (AVD), Balchem (BCPC), Accenture (ACN), Ecolabs (ECL), Factset Research (FDS), SAP (SAP), Smith Int’l (SII), Donaldson (DCI), SEI Investments (SEIC), XTO Energy (XTO), Walgreen (WAG), Sun Hydraulics (SNHY, Microsoft (MSFT), CH Robinson (CHRW), Mastercard (MA), Becton Dickinson (BDX).

News on Stocks in Our Portfolios

More Cash in Investors’ Hands

Friday, October 10, 2008

10/10/08

Just a reminder that there will be no Closing Bell this week.

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Economics

Recent Data

We got good news and bad news yesterday:

Weekly jobless claims fell 20,000 versus expectations of a rise of 2,000. This is the first decline in four weeks; but it is also the first week free of any impact from Hurricane Ike. While the growth in jobs is declining, it is nowhere near recession levels.

August wholesale inventories were up .8% while wholesale sales fell 1.0%. This pushed up the inventory to sales ratio which does not bode well for future production.

Other

Great analysis from Barry Ridholtz on working our way out of this credit crisis:

http://bigpicture.typepad.com/comments/2008/10/fix-the-credit.html

Graphics on our future inflation problem:

http://bigpicture.typepad.com/comments/2008/10/adjusted-reserv.html

More chart porn on median household income:

http://mjperry.blogspot.com/2008/10/forget-everything-youve-been-told-b.html

And who pays taxes:

http://mjperry.blogspot.com/2008/10/top-1-paid-more-in-federal-income-taxes.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical/ Fundamental

Both indices (DJIA 8579; S&P 909) continue to fall toward the only easily identifiable support level (DJIA 7146; S&P 766). While that might seem a long way away, it is fewer points that they have already dropped this week. The volatility index surged again to over 60; and though volume rose, it isn’t approaching historic panic sell off levels. (Here’s a chart of the volatility index):

http://econompicdata.blogspot.com/2008/10/speechless.html

I think US officials are doing all they can to instill confidence; ditto the Brits. The rest of Europe seems to be having cognitive dissonance problems which isn’t helping. Indeed, it has put an end to the temporary thawing in the credit markets, which is the biggest most immediate fundamental global problem. (Here is a chart of the credit index):

http://econompicdata.blogspot.com/2008/10/are-equities-least-of-our-worries.html

I believe that the credit problem is being exacerbated by the relentless selling resulting from margin calls at large hedge funds, though I will have no way of substantiating it until after the fact.

At this point in the Market cycle, there is nothing reasonable that can be said about how deal with the carnage because current Market psychology is irrational. The best I can do is say that I been here before and sooner or later it will end.

With that said, I have to say that now my biggest worry is having too much cash (now at between 40% and 45%). Unless the world is coming to an end, many, many stocks have become grossly undervalued. Plus I know from talking to other professionals that there are hoards and hoards of cash sitting on the sidelines waiting for this hedge fund liquidation to end. When those responsible for the investment of that money decide to buy, I believe that there will be an explosion to the upside so violent that it will be extremely difficult to get money back to work at anywhere near the prices available right now. The point here is that I think that we are in the middle of the end. I have no idea how much more damage is going to be done; but I think that we need to be buying through it.

So I for one will start nibbling today. From this point forward, I have a multi branch decision tree and it will likely change daily:

For today, my first objective is to put 8-10% (5% of the total Portfolio) of our Portfolios’ cash to work at the open.

If we get a weak rally intraday, I may actually sell a small bit of some stocks where there doesn’t seem to have any support near term. But I will re-invest the cash generated.

If we get another flush like yesterday but with no sign of a rebound, I will spend another 5% before the close.

If we get a climactic sell off with a strong bounce (which I don’t think likely today), I want to have 50-60% (that will take total cash to 17-20%) of our Portfolios cash invested by the end of the day.

If our Portfolios take any action during the day (other than the Buy at the open), I will be in touch via a Subscriber Alert.

Subscriber Alert

At the Market open this morning, our Portfolios will spend 8-10% of their cash as follows:

Dividend Growth Portfolio: Federated Investors (FII), Northern Trust (NTRS), T Rowe Price (TROW), Paychex (PAYX), Boeing (BA—which is being Added to the Buy List), Canon (CAJ), ExxonMobil (XOM) and Linear Technologies (LLTC).

High Yield Portfolio: AJ Gallagher (AJG), Rayonier (RYN), Kinder Morgan Energy Ptrs (KMP), Alliance Resource Ptrs (ARLP), Cato Corp (CTR), Quaker Chemical (KWR) and Universal (UVV).

Aggressive Growth Portfolio: Schwab (SCHW), Lowe’s (LOW), Bucyrus Int’l (BUCY), Matthews Corp (MATW—which is being Added to the Buy List), Amphenol (APH) and Qualcomm (QCOM).

News on Stocks in Our Portfolios

Positive comments on Reynolds American (High Yield Portfolio):

http://www.thestreet.com/story/10441472/1/tobacco-stocks-not-for-the-nervous-investor.html?puc=_txtmdb

More Cash in Investors’ Hands

Thursday, October 9, 2008

10/9/08

Economics

Recent Data

Believe it or not, yesterday we got two positive data points in housing:

(1) weekly mortgage applications [secondary indicator] rose 3.2%,

(2) August pending home sales increased 7.4% versus July and 8.8% on a year over year basis. Even Barry Ridholtz had something positive to say:

http://bigpicture.typepad.com/comments/2008/10/pending-home-sa.html

Other

There is plenty of blame to go around for the current financial crisis. This brief note on Greenspan’s contribution simply adds another piece to the puzzle.

http://bigpicture.typepad.com/comments/2008/10/deconstructing.html

Politics

Domestic

John Fund on the Saturday Night Live skit that I linked to in Monday’s Morning Call:

http://online.wsj.com/article/john_fund_on_the_trail.html

Biden and the facts:

http://article.nationalreview.com/?q=YjU0ZWU3YTcxODcyMDA1NzBjZmE1ZDg0NjJhOTFkMTE=

International War Against Radical Islam

Options on Iran:

http://www.american.com/archive/2008/september-october-magazine/closing-iran2019s-oil-spigot

The Market

Technical/ Fundamental

A great contrary indicator:

http://bigpicture.typepad.com/comments/2008/10/time-cover-soup.html

Some sage advice:

http://traderfeed.blogspot.com/2008/10/need-to-be-right-versus-need-to-make.html

Some thoughts on the proximity of a bottom:

http://traderfeed.blogspot.com/2008/10/how-weak-is-this-market.html

Chart porn on the S&P and its 200 day moving average:

http://bespokeinvest.typepad.com/bespoke/2008/10/sp-500-26-below.html

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Both indices closed down again, leaving them below their 2004 support levels and unfortunately with a lot of distance between their current prices (DJIA 9758; S&P 984) and the next visible support level (DJIA 7146, S&P 766). The volatility index was up again leaving it at the ‘hysterical’ level--not good but history suggests that it can not stay at its current extended level for a long period of time. In addition, volume at last started to pick up--not to the extent that one would expect in a panic sell off, but headed in the right direction.

In addition, the pin action inside the market had promise; by that I mean that in a DJIA 189 point down day, some of the better quality stocks in the sectors that have heretofore led the Market down (financials, oils) were up on the day, while stocks in the sectors that have held up the best (consumer staples, healthcare) got popped. When the best quality companies in industries with the most stable earnings get whacked, it is usually a sign that the end is nigh.

Another positive is that there were signs that the credit markets are starting to unfreeze, i.e. short term Treasury rates were rising in the face of the global central bank rate cuts suggesting that investors were selling those securities (rising rates = more sellers than buyers) and buying something else. Since anything else is more risky than Treasury bills, this is the first sign that the supply of equity buyers could be building. Of course, one day does not a trend make; but it is a start and if it continues that is a major positive.

I think that this is potentially a significant sign regarding the supply of buyers and their willingness to commit capital. If we can just get hedge fund liquidations out of the way; things are falling in place for a bottom.

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 by 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.

News on Stocks in Our Portfolios

Positive comments on United Technologies (Dividend Growth Portfolio):

http://seekingalpha.com/article/99108-stock-analysis-united-technologies-a-buy-at-these-prices?source=front_page_long_ideas

More Cash in Investors’ Hands

The Disciplined Dividend Investor

Monday, October 13, 2008

10/13/08

Friday, October 10, 2008

10/10/08

Thursday, October 9, 2008

10/9/08

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