beachdude's Blog : The news is better than stocks are telling us

Next week is a holiday week. I have to travel 2 days to get my father bring him to our home and take him back. In addition, more family is coming; and I will be doing most of the cooking. I will be staying abreast of the Market; if comments are needed the Morning Calls will be abbreviated and there will be no Closing Bell. As always, if action is required, I will be in touch via a Subscriber Alert.

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 - +1.0%
Inflation: 2-3%
Growth in Corporate Profits: 0-5%

Current Market Forecast

Dow Jones Industrial Average

2008
Current Trend:
Short Term Trading Range 7853-9707
Long Term Trading Range 7100-14203
Year End Fair Value (revised): 13450-13850

2009
Year End Fair Value (revised): 13850-14250

Standard & Poors 500

2008
Current Trend:
Short Term Trading Range 839-1062
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 24%
Aggressive Growth Portfolio 25%

Economics

The economy keeps drifting further into uncharted waters and will be a drag on Your Money until clarity emerges. Unfortunately, despite their best efforts Paulson, Bernanke and Company just cant seem to get the right policy initiatives in place; and our elected representatives continue to prove they all deserve to be summarily dismissed. That is not to say that we wont wake up tomorrow and will find some economic equivalent of Ws surge strategy in place; and frankly, that new strategy could be in taking place right now. Obama is making public His economic team (see below) which surprisingly enough is for the moment improving my outlook for the next four years. Of course, the first policy move has yet to be intimated much less initiated; so until it happens, the gloom is likely to remain palpable.

And, of course, the daily flow of data only reminds us that in the absence of a viable strategy, the economy isnt getting any better. Reading the housing numbers is like hitting yourself over the head with a hammer: weekly mortgage applications fell 12% despite lower rates, October housing starts were reported down 4.5% while building permits plunged 12%. The consumer remains in the pits: retail sales were dismal and jobless claims rose yet again. The industrial sector showed no improvement: October industrial production rose 1.3% but only because the September figure was revised down dramatically, October capacity utilization was down and the two regional (secondary indicators) manufacturing surveys fell again. Finally, the macroeconomic statistics were a mixed blessing: October leading economic indicators fell and more than expected while both price measures (PPI, CPI) fell more than estimated--which ordinarily is good news but in an environment where deflation is becoming the boogeyman, it becomes bad news.

The big economic/political news of the week was the Friday afternoon appointment of Tim Geithner, head on the New York Fed, as Treasury Secretary-designate. His close working relationship with Paulson is viewed by most investors as a positive in that he has a working knowledge of the steps taken to date to address the credit crisis and, therefore, lessens the risk of lack of continuity in the midst of difficult times. Score another one for Obama.
http://kudlowsmoneypolitics.blogspot.com/2008/11/early-thoughts-on-tim-geithner-at.html

Bottom line: I still cant decide if lousy investor sentiment is coloring their view on the economy or the economy is scaring the wits out of investors.

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.

Some thoughts on His presidency:
http://article.nationalreview.com/?q=ODUxNDY1YTBkNDMxYTdkODAxOTI5ZTg1YzNhN2JhODg=

The Market-Disciplined Investing

Technical

This week both indices (DJIA 8046, S&P 800) busted through the 10/10/08 lows of my hypothesized trading range (DJIA 7853--9707; S&P 839--1062). Worse, the S&P traded below its 10/2002 low (766). I quote Fridays Morning Call: The problem is that the S&P (752) which led the DJIA through its 10/10/08 low (839) closed below its 10/2002 low (766) which sets up the same technical dilemma, we were faced with at the Market close on Wednesday, i.e. will the DJIA hold its 10/2002 low and the S&P bounce back or will the DJIA follow the S&P lower? What makes the resolution of this technical divergence particularly scary is that if the S&P proves to be the leading indicator, then the next visible technical support is at the 1994-1995 double bottom (circa DJIA 3554, S&P 446).

I am not trying to lay a doomsday scenario on you; I am simply pointing out that the risk parameter from a technical standpoint has been ratcheted up significantly.

Well, both the DJIA and S&P rallied late Friday and closed above their 10/2002 bottom (DJIA 7146, S&P 766); indeed the DJIA regained its 10/10/08 low (7853). Volume was pretty good though still not what I would like to see as a confirming sign of a reversal and the volatility index remains at historically high levels. To be sure, one days positive performance doesnt mean that the decline is over; although a reversal at a key support level gives some added weight to the proposition. Nevertheless,, given the enormous downside risk mentioned above, caution has to be a primary objective of our investment strategy until we can have some confidence in the viability of the 7146/766 support level.
http://www.ritholtz.com/blog/2008/11/revisiting-the-wyckoff-spring/

What we have to hope happens now from a technical point of view is that stocks (1) successfully test their 10/2002 lows and (2) re-establish a trend/range.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (8046) finished this week about 40.9% below Fair Value (13616) while the S&P closed (800) around 48.4% undervalued (1552).

At this point, our strategy, simple minded as it is, remains as I outlined in Fridays Morning Call: As I see it, there are two basic scenarios (with variants): (1) a bottom is being made [yes, I know, I have said that before; but I mean it this time, I hope] or (2) it isnt.

If stocks are in a bottoming process then either yesterday [Thursday] was the selling climax or it will likely come today [Friday] or on Monday, depending on how option expiration unwinds. If it does occur today [Friday] or Monday, then stocks could be on another roller coaster ride with gut wrenching implications. But in the end, by the Market close on Monday at the latest, stock prices will be higher than they are at the open this morning and the big question will be, does the 10/2002 support level mark the low or will stocks rally sufficiently to reset the 10/10/08 low as the bottom end of a trading range.

For the long term investor (if there are any of those left) that means patience through the next two days; and once we know where the bottom is, we can resume the trading strategy which was so rudely interrupted on Wednesday. For traders, if the sell off continues, you might want to risk putting some cash to work recognizing that scenario (2) above could be the operative model. Today I will likely follow the long term strategy in the Dividend Growth and High Yield Portfolios and trade the Aggressive Growth Portfolio.

At least for today, it looks (luckily) like Thursday was a test of the 10/2002 support level (scenario 1). However, as I suggested in the Technical section above, this is no time to be tip toeing through the tulips. It is probably not a good idea to assume that we have dodged a bullet just yet. So we remain vigilant, hope that stocks will return to some sort of trading range which will allow us to resume the trading strategy we suspended on Wednesday.

Reviewing the steps taken in our Portfolios this week: when stocks rallied on Tuesday, our Portfolios sold a couple that seemed to be ahead of themselves as well as some of our dogs that had traded below their 10/10 lows and were continuing to act sick. Unfortunately, we didnt keep the proceeds in cash but reinvested it in better performing stocks. Then on Thursday as the DJIA broke below its 10/10 low, we pushed out the remaining shares of the aforementioned dogs. With that added cash and the decline in equity prices (as stock prices decline, cash as a percentage of the Portfolio goes up) that put our closing cash positions in the 23-25% area.

For the moment, our investment strategy is caution until stocks prove that the 10//2002 low will hold; or if we were to get really lucky, the S&P just might regain its 10/10 support level but that would have to happen very, very quickly. Volatility will undoubtedly continue next week.

As I noted above while I have Thanksgiving responsibilities, I will be in close contact with the Market and with subscribers if our Portfolios take any action.

As a final note, in the last half hour yesterday, the Aggressive Growth Portfolio added to several holdings (Blackrock, Balchem) as I indicated it might in yesterdays Morning Call.






DJIA S&P
Current 2008 Year End Fair Value* 13650 1555
Fair Value as of 11/30//08 13616 1552
Close this week 8046 800

Over Valuation vs. 11/30 Close
5% overvalued 14297 1630
10% overvalued 14978 1707

Under Valuation vs. 11/30 Close
5% undervalued 12935 1474
10%undervalued 12254 1397
15%undervalued 11574 1319
20%undervalued 10893 1242
25% undervalued 10212 1164
30% undervalued 9531 1086
35% undervalued 8850 1008 40% undervalued 8170 931
45% undervalued 7489 853
50% undervalued 6808 776
55% undervalued 6127 698

* Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term the cyclical influences. The model is now accounting for somewhat below average secular growth for the next 3 to 5 years with somewhat higher inflation.

The Portfolios and Buy Lists are up to date.
Company Highlight:

Genuine Parts distributes automotive replacement parts, industrial replacement parts, business products and electrical and electronic components in North America. The company has grown profits and dividends at a 5% annual rate over the last 10 years, earning an approximate 18% return on equity. However, GPC should increase both its dividend and earnings growth rate as a result of:

(1) product line expansion: in the first half of 2008, GPC acquired four companies,

(2) penetration of new markets,

(3) aggressive cost cutting,

(4) gradual price increases.

Genuine Parts is rated A++ by Value Line, has an 8% debt to equity ratio, has an active ongoing stock buy back program and its stock yields 4.3%.
http://finance.yahoo.com/q?s=GPC
11/08