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

The Closing Bell

The Closing Bell

9/6/08

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 Downtrend 10126-11518

Medium Term Downtrend 10695-12636

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 Downtrend 1131-1278

Medium Term Downtrend 1161-1381

Long Term Trading Range 750-1527

Long term Up Trend 1317-1797

Year End Fair Value (revised): 1533-1577

2009 Year End Fair Value 1595-1635

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 23%

High Yield Portfolio 20%

Aggressive Growth Portfolio 23%

Economics

The economy is a neutral for Your Money. Following this week’s economic data, our view that the economy is/has been or soon will be in a mild recession remains the most likely scenario. Importantly, there was no follow on to the big-surprise-maybe-there-is-no-recession positives that characterized a couple of last week’s statistics. To be sure, we got some upbeat numbers, coming as they consistently have from the industrial sector. They included July factory orders, second quarter productivity and unit labor costs and the Institute for Supply Management’s August nonmanufacturing index. The rest of the data was basically mixed to negative; the worse coming from July residential construction and the employment numbers. Speaking of the latter, if you believe the past relationship between employment and recession remains in tact, it regrettably appears that now an economic down turn is virtually a lock.

The other part of our economic scenario centers on concern about rising inflation; but if the oil/commodity complex continues to collapse in price, the dollar strengthen, the TIPS spread narrow and the European and Japanese economies weaken, this may be less of a problem.

Here’s a chart of the TIPS spread:

http://mjperry.blogspot.com/2008/09/inflation-expectations-at-five-year-low.html

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

Both the domestic and international political environments are a negative for Your Money.

In case you missed Bill O’Reilly’s interview of Obama (Thursday night’s show only covered foreign policy), here is a summary of His key statements:

http://www.powerlineblog.com/archives2/2008/09/021425.php

The Market-Disciplined Investing

Technical

The DJIA (11220) and S&P (1242) closed Friday in two clearly defined down trends: (1) a very short term trend marked by the May 2008/August 2008 highs whose boundaries are DJIA circa 10126-11518 and the S&P circa 1131-1278 and (2) a medium term down trend extending back to October 2007 whose boundaries are DJIA circa 10695-12636 and S&P circa 1161-1381. Fortunately, there is additional support for both indices above the lower boundaries of these two down trends; it is at their July 2008 intraday lows: DJIA 10809, S&P 1198. Bottom line: I am remain hopeful that the July intraday lows will mark the bottom to this Market cycle; but that notwithstanding, no matter how you look at it, technically more downside seems likely.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (11220) finished this week about 16.9% below Fair Value (13516) while the S&P closed (1242) around 20.1% undervalued (1555).

Bottom line #1

What a difference a week makes. Last week the technical picture was clouded by divergence in performance of the major indices; and on the fundamental side, some positive economic data had investors hoping that the economy would avoid recession. At yesterday’s close, the technical picture has clarity but unfortunately the resolution suggests more price weakness. Indeed late Friday, I talked with a couple of floor traders who were pretty glum in their assessment of Market direction next week; that, of course, could be either good news (stock prices assault the July lows but bounce, thus completing a successful test) or bad news (stock prices blast through the July lows like crap through a goose). Meanwhile, the credit crisis is reasserting itself as the 500 pound gorilla in economic expectations. As you know, Thursday I got more defensive so I think that we are approaching Monday in the correct frame of mind--our primary focus, preserving capital.

Bottom line #2

I wrote both the technical bottom line and the above after the close in trading yesterday and was getting ready to take Mrs. CJS to an early movie. Fat chance. At about 4:30 (CST) the Wall Street Journal reported a rumor that the Treasury was near a plan to back stop Fannie Mae/Freddie Mac. Here are two Saturday morning articles (which gives you latest information I have before publishing this Closing Bell); notice all the ‘accordingly to unnamed sources’ referrals.

http://online.wsj.com/article/SB122064650145404781.html?mod=hpp_us_whats_news

http://www.bloomberg.com/apps/news?pid=20601087&sid=ax0ft0S9hVYk&refer=worldwide

Clearly, at the moment, we don’t know enough to make either an economic or an investment strategy judgment about the consequences of this development--it could be good news, bad news or no news. If bad or no news, then the above technical comments and bottom line #1 hold.

If it is good news, then 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. That would mean (1) fundamentally, a Treasury infusion of cash in Fannie/Freddie will likely lower mortgage rates which should in turn lead to an improvement in the housing market and (2) technically, this week’s plunge will be viewed as a test of the July lows and the rebound in prices will define that test as successful. Indeed, the rebound could be explosive--which gives me the opportunity to look stupid a lot quicker than I would have ever thought, to wit, in discussing the stock sales our Portfolios made Friday, I wrote that ‘I would rather sell a stock and have to buy it back 5% higher and look stupid, than hold on and find it down 40%, 50%, 60%.’ Well, our Portfolios may be buying those stocks back 5% higher.

All this said, the bottom line is that we don’t know enough to make an investment strategy call at this moment. Hopefully we will have clarity before the Market opens Monday. In the meantime, I will be working on both a buy and sell list this weekend so that we are ready whatever happens. Next week could be very interesting.

DJIA S&P

Current 2008 Year End Fair Value 13650 1555

Fair Value as of 9/30//08 13549 1547

Close this week 11220 1242

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:

Suncor Energy is the fifth largest crude oil producer, the tenth largest natural gas producer in Canada and is a primary means of participating in the Canadian oil sands play. The company explores, acquires, develops, produces and markets crude oil and natural gas; it transports and refines crude oil; and it markets petroleum and petrochemical products. SU has grown profits at a 25%+ rate over the past ten years, while raising its dividend at a 10% rate. Earnings growth is likely to slow somewhat in coming years though dividend increases should accelerate. The company earns a 25%+ return on equity. Driving future growth is a very aggressive expansion of capacity ($5 billion) which should double production in the next four years. Suncor is rated A by Value Line, has a 26% debt to equity ratio and its stock pays a .3% yield.

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

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.