9/22/07

The Closing Bell

The Bottom line

Statistical Summary

Current Economic Forecast

2007

Real Growth in Gross Domestic Product (revised): 2.0- 2.5%

Inflation: 2 - 2.5 %

Growth in Corporate Profits (revised): 6-8%

2008

Real Growth in Gross Domestic Product (GDP): 3-3.25%

Inflation: 1.75-2%

Growth in Corporate Profits: 7-9%

Current Market Forecast

Dow Jones Industrial Average

2007

Current Trend:

Medium Term Uptrend 13030-14592

Long Term Uptrend 11757-23751

Year End Fair Value (revised): 13250

2008 Year End Fair Value (revised): 14250

Standard & Poor’s 500

2007

Current Trend:

Medium Term Uptrend (?) 1449-1585

Long Term Uptrend 1225-2400

Former Long Term Trading Range (?) 750-1527

Year End Fair Value (revised): 1525

2008 Year End Fair Value (revised): 1640

2008 Year End Fair Value: 1625

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 7%

High Yield Portfolio 30%

Aggressive Growth Portfolio 5%

Economics

Three points following a big week:

(1) the Fed’s action Tuesday means that a recession isn’t assured; but that doesn’t mean that it still isn’t a decent probability. The economic statistics remain worrisome. Our forecast [the ‘soft’ landing] is not changing but seems to becoming progressively less likely.

(2) we said last week that the Fed has a choice between two evils: recession and inflation. It chose to attempt to avoid recession--with which we agree. Unfortunately, we must now contend with the lesser evil: the risk of a resurgence in inflation--and at time when we have our political eye focused on November 2008, i.e. the increasing probability of the Democrats taking control of both the executive and legislative branches and our belief that their current platform fosters inflation. Bottom line: any weakness in gold prices will likely prompt us to raise our Portfolios’ commitment to USERX.

(3) the narrative in the financial press notwithstanding, the poor housing market was, in our opinion, only a peripheral cause of the Fed’s rate cut. The freeze up in corporate credit was the primary culprit--Uncle Ben was worried that corporate America couldn’t finance its daily credit needs. The point here is that more rate cuts are dependent on the lack of liquidity in commercial paper market versus how poorly the housing market is performing.

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

Domestic

International War Against Radical Islam

The Market

Technical

The DJIA is in an up trend defined by the approximate boundaries of 13030 and 14592. The S&P remains in its seven year trading range with boundaries of 750-1527.

Fundamental

The DJIA (13820) finished this week more than 5% over valued (13751) while the S&P (1525) is right on Fair Value (1525).

Our investment strategy is:

(1) use our Price Disciplines to take advantage of the ongoing heightened volatility to upgrade the quality of our Portfolios by taking profits in our weakest holdings when prices spike to the upside and buying the stocks of great companies when opportunities present themselves,

(2) insure that our Portfolios can ride out any further turmoil brought on by trouble in the credit markets

DJIA S&P

Current 2007 Year End Fair Value 13250 1525

Fair Value as of 9/30/07 13062 1503

Close this week 13820 1525

Over Valuation vs. 9/30 Close

5% overvalued 13715 1578

10% overvalued 14368 1653

Under Valuation vs. 9/30 Close

5% undervaluation 12409 1427

10%undervaluation 11755 1352

The Portfolios and Buy Lists are up to date.

News on Stocks in Our Portfolios

Market Analysis

Company Highlight:

Background Analysis

The Numbers

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.

9/14/07

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.). The transportation bill:

http://www.captainsquartersblog.com/mt/archives/013024.php

A couple of very positive pieces of news yesterday:

(1) in the last week, approximately $8 billion in commercial paper was not able to be refinanced--which compares with approximately $70 billion a week in CP that couldn’t be rolled over during the last three weeks. This follows the news Wednesday that American Express had refinanced approximately $2 billion in CP with little trouble, and

(2) the weekly data released by both the Fed and the European Central Bank indicated that each had injected substantial funds into their respective monetary supplies.

If you have been following our rantings about the need for liquidity injections by the Fed to forestall a recession, then it is easy to deduce how important we think that these developments are. Item (2) above directly addresses our concern; item (1) above is anecdotal evidence that either (2) is working and/or that markets are adjusting and isolating the sub prime problem. We clearly need to await further data to be sure that these developments aren’t just flukes; but taken together the AXP refinancing, the dramatic increase in this week’s CP roll over rate and the central bank injection of liquidity are fairly significant signals that the freeze up in non sub prime business financial transactions is thawing.

This, of course, means that we have to completely re-write the Economics section of this week’s The Closing Bell in which we strongly condemn the Fed for its lack of response to the liquidity problems in the commercial paper market and conclude that if the Fed didn’t take action by the end of next week, the chances of the US economy avoiding a recession were, in our opinion, no better than 50/50--but the alternative (not re-writing it) is so much worse.

If we are correct this won’t mean that the economy isn’t slowing more than we originally expected; but it will mean that there is a decent probability of avoiding a recession.

One final point: long time subscribers will recall that at the beginning of Bernanke’s reign we constantly complained about the ineffective way the Fed was communicating with the Street. Well, here we go again: the credit markets have been in vapor lock, the Fed takes steps to correct it but for no apparent reason remains mute; certainly, once the data is out everyone will know--but that is beside the point. That point being that a word from the Fed that it recognizes the problem and is taking action just might prevent credit market participants who are under psychological as well as financial stress from making potentially harmful decisions that they otherwise wouldn’t make.

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

Here is an opposing view on what the Fed should be doing with regards to the credit crunch:

http://www.poorandstupid.com/2007_09_09_chronArchive.asp#4536475116948792401

And here is one on what happens to stock prices after the Fed cuts the Fed Funds rate (must read):

http://www.hussman.net/rsi/fedfundscut.htm

News on Stocks in Our Portfolios

Staples’ (Aggressive Growth Portfolio) Board of Directors will propose amending the company’s charter removing the provision that requires a 2/3 majority versus a simple majority to approve a significant corporate transaction; in other words, the company would be making itself easier to acquire.

EPS: 2006 $1.26, 2007 $1.47, 2008 $1.70; DVD: $.29 YLD 1.6%

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

Microsoft (Aggressive Growth Portfolio) has raised its quarterly dividend per share from $.10 to $.11.

EPS: 2006 $1.20, 2007 $1.42, 2008 $1.70; DVD: $.39 YLD 1.4%

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

UPS (Dividend Growth Portfolio) has been granted authority to expand operations in Japan.

EPS: 2006 $3.86, 2007 $4.15, 2008 $4.50; DVD: $1.68 YLD 2.2%

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

A positive article on the outlook for gold:

http://www.seekingalpha.com/article/47072-is-gold-ready-to-break-new-cycle-highs

More Cash in Investors’ Hands

9/13/07

Economics

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

http://article.nationalreview.com/?q=ODNhNTAyOTQyZjk5NjIwYTZjYWI0Yjk1YzIyNDhkMTY=

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.).

http://www.clubforgrowth.org/2007/09/update_on_senate_pork_debate.php

http://www.realclearpolitics.com/articles/2007/09/americas_absurd_farm_subsidies.html

Politics

Domestic

International War Against Radical Islam

That Israeli air raid over Syria was apparently to attack a nuclear installation paid for by Iran and supplied by North Korea:

http://www.ynetnews.com/articles/0,7340,L-3448829,00.html

The Market

Technical

Technical thoughts:

http://www.bloggingstocks.com/2007/09/12/marketwatch-technican-sets-sandp-breakout-levels/

Fundamental

In an environment where the US economy appears to be hovering between a ‘soft’ landing and a recession and the global economy continues to grow, large international consumer staple companies will likely be investor favorites. We remind you that we have two quality giants that fit this description on our Dividend Growth Buy List:

Johnson & Johnson ($62)

Johnson & Johnson is a major manufacturer and marketer of health care products. Its major divisions are: Consumer (baby care, non-prescription drugs, sanitary protection and skin care), Medical Devices (wound closures, minimally invasive surgical instruments, diagnostics, orthopedics and contact lenses) and Pharmaceuticals (contraceptives, psychiatric, anti-infective and dermatological). This company has maintained an amazing 28-30% return on equity with almost no debt for the past 15 years. In addition, JNJ has grown its earnings and dividend at a 14-15% annual rate. We believe that its strong, well diversified product line will continue to grow rapidly, supplemented by acquisitions.

EPS: 2006 $3.78, 2007 $4.10, 2008 $4.45; DVD: $1.62 YLD 2.7%

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

Proctor & Gamble ($67)

Proctor & Gamble makes detergents, toiletries, foods, paper and industrial products which include Tide, Swifter, Cascade, Febreze, Dash, Cheer, Bounce, Pantene, Olay, Head & Shoulders, Herbal Essences, Secret, Prilosec, Sure, Always, Tampax, Pampers, Luvs, Charmin, Bounty, Crest, Iams, Actonel, Pringles and Folgers. The company has an outstanding return on equity ranging between 35-40% over the last fifteen years; though it has utilized more leverage than we like to see-42%. PG has grown its earnings and dividends 10-11% consistently over the last ten years. We believe that it can continue to grow sales, earnings and dividends by adding new products through development or acquisition and leveraging its fixed costs through higher unit sales.

EPS: 2006 $2.64, 2007 $3.02, 2008 $3.45; DVD: $1.41 YLD 2.0%

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

We would also include the caveat that the Dividend Growth Portfolio already owns the stocks of both of the aforementioned companies AND has approximately 10% of its assets in cash. We would not go into next week (FOMC meeting, earnings reports from major financial institutions, triple witching) without at least that much cash.

Finally, as the probability of the risk that the economy is weaker than expected rises, we are stepping up the pace of our normal Quality Discipline review process in particular focusing on companies that are largely domestic durable goods producers. One company that stands at the top of our list of worrisome Holdings and whose stock price has continued decline after it traded below the lower boundary of its Buy Value Range is Polaris (PII-$45). While its stock price is fractionally (less than a point) above its Stop Loss Price, we are again electing discretion over valor; and, accordingly, the Dividend Growth Portfolio is Selling its PII position this morning on the Market open.

Cramer’s take on the credit market freeze up:

http://www.thestreet.com/p/_htmlrmd/rmoney/jimcramerblog/10379337.html

News on Stocks in Our Portfolios

More Cash in Investors’ Hands