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)
Real Growth in Gross Domestic Product (GDP): 1.0-2.0%
Inflation: 1.75-2%
Growth in Corporate Profits: 3-5%
Current Market Forecast
Dow Jones Industrial Average
2008
Current Trend:
Short Term Trading Range 11600-12511
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 1269-1722
Medium Term Trading Range 1062-1527
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 20%
High Yield Portfolio 25%
Aggressive Growth Portfolio 21%
Economics
The economy may still be a positive for Your Money. There was not much economic data released this week; what there was, while not particularly reassuring, was not enough to alter my outlook--a slowing economy with inflation moderating. The bright spot remains employment.
(1) housing stats were pretty lousy: [a] January housing starts rose a modest .5% versus expectations of an increase of 1.4%, [b] January building permits fell 2.9% versus estimates on a decrease of 3.7%, [c] weekly mortgage applications {secondary indicator} plunged 22.6%,
(2) consumer spending continues weak but employment firm: [a] the International Council of Shopping Centers reported weekly sales of major retailers were unchanged and rose 1.9% on a year over year basis; Redbook Research reported month to date retail chain store sales dropped 1.1% versus the comparable period in January while it increased slightly {.7%} versus the similar timeframe in 2007, [b] weekly jobless claims fell 8,000 versus expectations of a 3,000 decline,
(3) the only measure of industrial activity was the release of the February Philadelphia Fed manufacturing index {secondary indicator} which dropped to -24.0 {signifies contraction} versus estimates of -12.0,
(4) finally, there was nothing positive in the macro economic data: [a] the January consumer price index {CPI} was reported up .4% versus expectations of up .3%; the core CPI rose .3% versus estimates of an increase of .2%; year over year, the core rate was up 2.5% versus a 2.4% annualized rate in December {as disappointing as this number may appear, it is about the average rate of inflation for the last 10 years}, [b] January leading economic indicators decreased .1% but that was in line with expectations.
Potentially, the biggest economic news this week was the rumor Friday that Ambac Financial (one of the monoline insurers) will be recapitalized, the effect of which will be to allow it to continue its bond underwriting business. If that occurs, it will be another step toward the ‘clarification of how the sub prime credit problems will be resolved’--a theme that I have harped on from the outset and the importance of which for our (stock Market) purposes is to lessen the risk of the unknown (the unknown being a stock Market killer).
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.
I don’t know about you but I am getting a little tired of hearing about all the things that are wrong with
http://www.realclearpolitics.com/articles/2008/02/ivy_league_populism.html
On the failure to renew the Protect America Act:
http://www.powerlineblog.com/archives2/2008/02/019861.php
The Market
Technical
The DJIA (12381) is in a short term trading range defined by 11622 /11900 (the January intra day low/the January low close) and 12511 (the August 2007 intra day low). With the S&P (1353) I am watching the boundaries of the up trend off the 1982 low (circa 1269-1722) and the 750-1527 2002-present trading range.
I also note that since the January low, stocks have traded through a series of lower highs and higher lows--technically referred to as a ‘wedge’. Technical wisdom holds that once this pattern is broken, the subsequent move in the direction of break will be sizeable.
Fundamental
The DJIA (12381) finished this week about 7.5% below Fair Value (13383) while the S&P closed (1353) around 12.1% undervalued (1540).
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,
(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 have traded into that ‘no man’s land’ between the lower boundary of their
(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
Close this week 12381 1353
Over Valuation vs. 2/29 Close
5% overvalued 13981 1608
10% overvalued 14647 1685
Under Valuation vs. 2/29 Close
5% undervalued 12650 1455
10%undervalued 11984 1378
15%undervalued 11375 1309
The Portfolios and Buy Lists are up to date.
Company Highlight:
T. Rowe Price Group Inc provides investment advisory and administrative services to an assortment of no load funds, sponsored investment products and private accounts. The company has generated a 20%+ return on equity and an 11-15% growth rate in earnings and dividends over the 10 years. TROW will likely continue this performance as a result of (1) the excellent track record of its funds which increases the value of current assets under management as well as attracting new customers, (2) expansion of its retirement planning services as baby boomers near retirement, (3) the introduction of new products such as country funds and (4) niche acquisitions. TROW is rated A+ by Value Line, has no debt and $1.6 billion in cash (circa $6 a share). Its stock yields 1.6%.
http://finance.yahoo.com/q?s=TROW
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.
