10/31/08

Economics

This Week’s Data

Weekly jobless claims were unchanged versus expectations of a 3,000 decline.

I neglected to include the third quarter personal consumption expenditure index (PCE) in yesterday’s GDP report. Third quarter PCE rose 4.2% (annualized rate) in line with estimates; core PCE was up 2.9% versus a 2.2% increase in the second quarter PCE.

There are always adjustments to the initial GDP number. Here is an analysis of likely changes to net exports:

http://econompicdata.blogspot.com/2008/10/gdp-breakdown-not-better-than-expected.html

September personal income rose .2% versus estimates of a .1% increase; on the other hand September personal spending fell .3%, in line with forecasts.

http://www.capitalspectator.com/archives/2008/10/saving_its_the.html

Other

More perspective on the taxes paid by ExxonMobil:

http://mjperry.blogspot.com/2008/10/exxon-taxes-federal-tax-revenue-from-6.html

Politics

Domestic

The candidates on trade:

http://online.wsj.com/article/SB122523957339378291.html

An analysis of Obama’s health care proposals:

http://www.american.com/archive/2008/october-10-08/obamas-plan-to-end-private-health-insurance

International War Against Radical Islam

A view in opposition to last week’s raid on Syria:

http://www.slate.com/id/2203243/

The Market

Technical

The current stock market decline as compared to other major crashes:

http://calculatedrisk.blogspot.com/2008/10/comparing-stock-market-crashes.html

Percentage of stocks trading above their 50 day moving average:

http://bespokeinvest.typepad.com/bespoke/2008/10/percentage-of-stock-above-50-day-moving-averages.html

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Yesterday’s rally changed nothing technically. Both indices (DJIA 9180, S&P 954) remain below over head resistance (DJIA 9707 or 9264, S&P 1062 or 954; you pick’em). The VIX, which traded down, is still at elevated heights (65) and volume was paltry.

Two positives which we get new information on today: the VIX closed right on the lower boundary of an easily identifiable up trend--if it closes below that boundary today that would at least hint that lower levels are possible; and we didn’t get the late day sell off that has become a regular feature of daily trading--that suggests that fund liquidations could be winding down.

On the other hand, maybe it is not winding down:

http://dealbreaker.com/2008/10/bring-out-your-dead.php

Fundamental

Meanwhile, credit conditions continue to improve:

http://bigpicture.typepad.com/comments/2008/10/ted-spread-impr.html

While many think that the economic outlook is getting bleaker:

http://calculatedrisk.blogspot.com/2008/10/feds-yellen-economy-contracting.html

Subscriber Alert

Our Portfolios will continue to lighten up today. They are selling both stocks that seem to have gotten ahead of themselves and those that haven’t participated in the rally. These sales are small and will bring the cash portion of the Dividend Growth Portfolio and Aggressive Growth Portfolio to 25-26% and the High Yield Portfolio to 22-23%.

In the Dividend Growth Portfolio: McDonalds’ (MCD) (ahead of itself); and Johnson Controls (JCI) and Canon (CAJ) (pathetic rally).

In the High Yield Portfolio: Kinder Morgan Energy Partners (KMP) and Pfizer (PFE) (ahead of themselves) and Bank of Nova Scotia (BNS) and RPM (RPM) (pathetic rally)

In the Aggressive Growth Portfolio: Schwab (SCHW), Luxoticca (LUX) and Medtronic (MDT) (pathetic rally).

A number of stocks have traded above the upper boundary of their Buy Value Range and are, therefore, being Removed from their respective Buy Lists. Their Portfolios will continue to Hold all shares.

On the Dividend Growth Buy List, Commerce Bancorp (CBSH), Kimberly Clark (KMB), Home Depot (HD), Nucor (NUE), Boeing (BA) are being Removed.

On the High Yield Buy List, Plains All American PL (PAA) and SanofiAventis (SNY) are being Removed.

On the Aggressive Growth Buy List, Reliance Steel (RS) and Westamerica Bancorp (WABC) are being Removed.

As a final note, Avon Products got whacked hard at the Market open yesterday on a disappointing earnings report. It seemed too late to sell at that point. I want to see how this stock trades in the next couple of days before deciding what to do.

News on Stocks in Our Portfolios

A review of ExxonMobil’s quarter (Dividend Growth Portfolio):

http://www.thestreet.com/p/_htmlrmd/rmoney/oil/10445178.html

More Cash in Investors’ Hands

10/30/08

Economics

This Week’s Data

Weekly mortgage applications rose 8.5%. Lower rates appear to be helping.

September durable goods orders increased .8% versus expectations of a 1.8% decline. Good news from a sector that has been disappointing of late; I should note that the big difference in the actual versus forecast results was a big up tick in aircraft orders--which some disparage as highly erratic.

http://econompicdata.blogspot.com/2008/10/durable-good-shipments-ytd-september.html

http://www.capitalspectator.com/archives/2008/10/a_brief_repriev.html

Third quarter gross domestic product was reported down .3% versus forecasts for a .5% decline.

http://econompicdata.blogspot.com/2008/10/gdp-down-03-world-rejoices.html

http://calculatedrisk.blogspot.com/2008/10/q3-gdp-declines-03.html

I mentioned in yesterday’s Morning Call that the FOMC would meet that afternoon. Following the meeting, the Fed lowered the Fed Funds rate another 50 basis points (from 1.5% to 1.0%); and in its highly watched statement following the meeting, it concluded that the main risk to the economy was weak growth and that inflation was no longer a problem.

The text:

http://www.marketwatch.com/news/story/Text-FOMC-statement/story.aspx?guid=%7B64421AFD%2DC1B2%2D4F5A%2D8788%2D6436A14F69D7%7D

I noted that such a lowering of the Fed Funds rate would have little affect because the current effective Fed lending rate was already around the 1% level. To that I would add that with respect to unfreezing the credit markets, the cost of money isn’t the issue anyway. It is getting the banks to lend the money whatever its cost. In fact the banks have more money than they know what to do with as a result of the massive injections of liquidity the Fed has already made into the financial system. To be sure all of that money has fostered progress, but, as I suggested, the issue is one of confidence and it is going to take time for sufficient confidence to return to a severely chastened banking industry.

http://mjperry.blogspot.com/2008/10/fed-cut-rates-below-1-two-weeks-ago.html

http://paul.kedrosky.com/archives/2008/10/29/bank_bailouts_a_1.html

http://econompicdata.blogspot.com/2008/10/fed-cuts-50-bps-will-it-matter.html

The more important action that the Fed announced was that it is making a $120 billion credit facility available to emerging markets (countries) central banks. That action is another step toward addressing yet another problem of illiquidity in the financial system and that is a positive. (In essence, these emerging country central banks need dollars to provide to say a hedge fund which owned the stock of a company in their country, had to liquidate that stock as a result of margin calls or redemptions and needs to convert the proceeds from the sale of that stock [remember the stock is denominated in that country’s currency] into dollars so it can meet its margin call or pay off its redeeming shareholders.)

http://calculatedrisk.blogspot.com/2008/10/more-swap-lines-from-fed.html

And still more help coming:

http://calculatedrisk.blogspot.com/2008/10/treasury-fdic-considering-plan-to.html

Other

Some humor to start your day:

http://www.brasschecktv.com/page/187.html

Politics

Domestic

More on Obama ‘redistributive’ comments:

http://www.powerlineblog.com/archives/2008/10/021903.php

More on ACORN:

http://townhall.com/columnists/AmandaCarpenter/2008/10/27/acorn_owes_millions_in_taxes

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

International War Against Radical Islam

The Market

Technical

The indices (DJIA 8990, S&P 930) remained within a DJIA 7853--9707; S&P 839--1062 trading range. Not to get too deeply immersed in the minutia of chart watching, but the DJIA traded up to the 9264 level--which it had done on three previous occasions only to trade down--and traded down; the S&P couldn’t even muster that. So yesterday’s pin action showed no follow through and indeed failed to surmount a prior trading high. In addition, sellers once again came in the last hour to drive prices down big. As you know this last hour selling has been attributed to hedge fund and mutual fund liquidations; so it doesn’t appear to be over.

http://bespokeinvest.typepad.com/bespoke/2008/10/joke-of-the-day-the-stock-market.html

On top of that the volatility index rose (negative) and volume shrank (negative). As a result, I just can’t see Tuesday as the launch of a major up move.

Fundamental

An S&P valuation matrix from Bespoke:

http://bespokeinvest.typepad.com/bespoke/2008/10/sp-500-earnings-vs-valuation-matrix.html

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So as of the close of business yesterday, I think that our strategy of selling strength is the right one (which includes selling stocks that have been underperforming as well as those that seem to be ahead of themselves).

As a result at the Market open this morning, our Portfolios are going to lighten up on a couple of stocks that seem to have gotten ahead of themselves in this rally, i.e. they are selling about 10% of the following positions: in the Dividend Growth Portfolio--ExxonMobil (XOM); in the High Yield Portfolio--Sanofi Aventis (SNY).

Company Highlight

Boeing Co. is a leading manufacturer of commercial aircraft, military aircraft as well as variety of command and control and advanced radar systems. The company has grown profits and dividends at a 9%+ annual rate over the past 10 years earning a return on equity in excess of 20%. The major news event for BA in the recent past has been a machinist strike that cost the company $100 million in revenue per day. Assuming that the recently negotiated tentative agreement holds, focus can be shifted to the company’s prospects.

At the end of June, BA had a backlog of commercial aircraft orders alone of $275 billion--almost 4 years of sales. Approximately 90% of this backlog is from foreign carriers many of which benefit from financial backing of their governments.

Boeing is rated A++ by Value Line, has a 45% debt to equity ratio (higher than I normally like) and its stock yields 3.6%.

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

10/08

News on Stocks in Our Portfolios

Positive comments on Dow Chemical (High Yield Portfolio):

http://seekingalpha.com/article/102881-expect-more-buying-as-dow-chemical-insiders-purchase-more-shares?source=front_page_long_ideas

ExxonMobil (Dividend Growth Portfolio) reported third quarter earnings per share of $2.86 versus expectations of $2.38.

More Cash in Investors’ Hands

10/29/08

Economics

This Week’s Data

The International Council of Shopping Centers reported weekly sales of major retailers up .5% versus the prior week and 1.3% on a year over year basis; Redbook Research reported month to date retail chain store sales rose .7% versus the comparable period in 2007.

The Conference Board reported a stunning decline in its October consumer confidence index to 38.0 versus estimates of 52.0 and 59.8 recorded in September; that is the lowest reading in the past 40 years.
http://bigpicture.typepad.com/comments/2008/10/consumer-confid.html

The FOMC meets today and we get an announcement on Fed policy (the Fed Funds rate) this afternoon. For all practical purposes, the Fed has already cut its rate:
http://mjperry.blogspot.com/2008/10/fed-has-already-cut-fed-funds-rate-to-1.html

Other

What’s wrong with capital gains taxes:
http://www.realclearmarkets.com/articles/2008/10/why_obama_gets_capitalgains_ta.html

Update on the Case Shiller index (housing prices):
http://bigpicture.typepad.com/comments/2008/10/home-price-decl.html

More evidence of the ‘unfreezing’ of the credit markets:
http://econompicdata.blogspot.com/2008/10/commercial-paper-release-hounds.html

But not all the news is positive:
http://calculatedrisk.blogspot.com/2008/10/ny-times-lenders-begin-to-curb-credit.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

An interesting perspective on how ‘bad’ things are in the Market:
http://bigpicture.typepad.com/comments/2008/10/how-far-back-ar.html

TraderFeed thinks that yesterday was a breakout:
http://traderfeed.blogspot.com/2008/10/stock-market-breakout-and-other-tuesday.html

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Stocks ripped yesterday (DJIA 9065, S&P 940) though they remain well within a DJIA 7853--9707; S&P 839--1062 trading range. The volatility index was off 16% but is still extraordinarily high (67) and stays above the lower boundary of an easily identifiable up trend off an early September low. All in all, not particularly encouraging. In addition, volume was disappointingly low, suggesting more of an absence of sellers than aggressive buyers.

There were two encouraging things to note: (1) many of our stocks that had traded below their October 10 lows bounced back above those levels and (2) recall I suggested in an earlier post that when stocks went up on bad news that would be a very positive sign that the worst was over. Well yesterday the Conference Board reported its October consumer confidence index which was disastrous (see above)--and stocks rallied big.

Fundamental

As you know, our Portfolios lightened up on some holdings in the last hour of trading yesterday. (Yes, I know; yesterday morning, I said that our Portfolios were going to buy if stocks weakened--but that was 900+ points ago. The way this Market is trading, time is a meaningless concept; it is all about distance.) The focus of those sales was on stocks that had traded below their October 10 lows and hadn’t recovered; and even though stocks closed a couple of hundred points above where our sell orders went in, most of these sell candidates remained below their 10/10 level.

I may live to regret not re-investing the proceeds of those sales; but until stocks prove that they are not in a trading range (DJIA 7853--9707; S&P 839--1062), I think we stick with our current strategy of selling strength and buying weakness within the trading range. Remember, we are likely facing an economic down turn; and because until very recently investors have been apoplectic about the health of the financial system, they are just now starting to focus on the impact that the credit crisis will have on the economy. My guess is there is some backing and filling ahead of us till there is at least a modicum of visibility on the shape of the economy in 2009.

Aggressive Growth Buy List

Company Close 10/28 Buy Value Range

Balchem Corp $21.16 $21-24
Harley Davidson 21.28 21-24
Mastercard 136.01 119-137
Peabody Energy 28.95 24-28
Qualcomm 38.91 35-41
Reliance Steel 21.12 20-23
Styrker 51.43 48-55
TJX Corp 25.38 25-29

Subscriber Alert

Yesterday’s rally pushed the stock price of Westamerica Bancorp (WABC) above the upper boundary of its Buy Value Range. Hence, it is being Removed from the Aggressive Growth Buy List.

News on Stocks in Our Portfolios

BP (High Yield Portfolio) reported third quarter earnings per share of $.43 versus $.23 recorded in the similar period in 2007.

Boeing (Dividend Growth Portfolio) has reached a tentative agreement with the machinist union.
http://www.thestreet.com/story/10444501/1/boeing-union-reach-tentative-accord.html?puc=_htmlbtb

Positive comments on Smith Int’l (Aggressive Growth Portfolio):
http://www.zacks.com/blog/post_detail.html?t=15561

Proctor & Gamble (Dividend Growth Portfolio( reported its first fiscal quarter earnings per share of $1.02 versus expectations of $.99 and $.92 reported in the comparable 2008 fiscal quarter.

More Cash in Investors’ Hands