The Closing Bell-11/15/08
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?

The Closing Bell


  Statistical Summary

   Current Economic Forecast

        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

            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 & Poor’s 500

            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                  21%
    High Yield Portfolio                      21%
    Aggressive Growth Portfolio                  21%


    The economy is a neutral for Your Money.  This week was almost devoid of economic data though what there was, was mostly discouraging. Once again, the only housing stat was weekly mortgage applications which rose 9%--a breather in a lengthy string of lousy numbers. Weekly and monthly retail sales were very poor as was the initial jobless claims number; the University of Michigan preliminary November index of consumer sentiment was mildly positive--57.9--versus estimates of 56.0 and a 57.6 final October reading.  Finally, the only data point from the industrial sector was September business inventories which fell .2% versus forecasts of a .1% decline.  Not bad on the surface; unfortunately, business sales were down 2.0%, resulting in further inventory accumulation.    

    While this week’s numbers added little clarity as to the depth and length of the current slowdown, the accumulated data over the last six weeks is pointing to a very dismal fourth quarter economic performance.  If this downward momentum continues at the same pace through the remainder of the quarter, the first quarter of 2009 will surely be negative as may the second quarter.  My current forecast assumes a negative fourth quarter; but I am still struggling with the shape of the first half of 2009--that dilemma centering on whether the current bear market is dictating a depressing economic outlook or visa versa.  Of course, the more the economic data keeps getting worse, the more manifest the answer becomes.  I am going to wait a couple more weeks before concluding that it is the depressing economic outlook that is driving investor psychology.  

If you don’t feel bad enough already, read this:

    The short term question is how long and deep will this slowdown be; the long term question is can the Fed sop up the enormous amount of liquidity that it has pumped into the system before inflationary pressures are reignited.  Overshadowing both is do stock prices currently reflect the risks of each.  Our Valuation Model suggests that they are discounting an economic decline much worse than my forecast; I am less confident that the risks of future inflation are properly reflected..

 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.)


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

The Market-Disciplined Investing

The indices (DJIA 8497, S&P 873) closed in the lower half of my hypothesized trading range (DJIA 7853--9707; S&P 839--1062); but not low enough to prompt any action.  This week stocks tested the lower boundary of the trading range (in the process  the very short term uptrend off the 10/10 intraday low was eliminated as a possible support level); quite remarkably, this follows a test of the highs last week (how is that for volatility?)

Not surprisingly, the volatility index remains at elevated levels versus historical standards, though it is well off its recent highs.  One of the big positives this week, technically speaking, was the big jump in volume on Thursday when stocks tested the 10/10 low and then reversed to the upside.  I think that this lends strength to 10/10 intraday support levels.

The other technical positive was that this latest test added clarity to the shape to what appears to have emerged as a bottom.  It not only reaffirmed the 10/10 lows as a bottom but provides an additional data point (now three: the 10/10, the 10/27 and the 11/13 lows) on the indices against which we can measure the relative strength of individual stocks.  This should help us in our goal to increase the upside bias of our Portfolios.
   Fundamental-A Dividend Growth Investment Strategy

The DJIA (8497) finished this week about 37.5% below Fair Value (13616) while the S&P closed (873) around 43.7% undervalued (1552).
Our short term strategy remains unchanged: ‘......, the goal of our current investment strategy is to gradually add stability of principal and position our Portfolios for the move up whenever that comes.  On a practical basis, that strategy calls for managing our Portfolios cash position between 15% and 25%, using weakness to buy stocks that have held their 10/10 lows and are making progressively higher lows and strength to sell stocks that either haven’t held their 10/10 lows or can’t make higher lows.’--to which I add, and those stocks that have gotten ahead of themselves on the upside.’

As long as stock prices in general hold their October lows that will continue to be our strategy.  

As stock prices fell this week, our Portfolios Bought stocks taking their cash position from 22.5% to 21% (and unfortunately whiffed on getting to 20% cash).  A return to the DJIA 8100-8200 level would again prompt a move to 17%-20% in cash; any move below 8000 would take cash to the 15% level.  A rally over 9000 will result in Selling to raise cash.  As stated above, sell candidates will be the stocks that failed to hold their 10/10 lows or those that rallied so hard to the upside that they have gotten ahead of themselves. 

As an aside, I recognize that this is a much more trading oriented strategy than our Portfolios have employed in the past.  Indeed, traditionally trading is something that has been eschewed.  However, as investors, we have to play the hand that has been dealt us; and the dominating characteristic of the current Market environment is volatility. If our Portfolios do nothing, they simply gyrate with the Market; by trading within a 10% range of our cash position, it gives us the opportunity to add incremental performance.
In summary, our investment strategy includes:

(a)    manage our cash assets between 15% and 25%; but remain aware that defense is still critically important and will be become more so if I am wrong about the October 10 lows,

(b)    use price weakness as an opportunity to buy the stocks of attractive companies at attractive prices; use price strength to take profits when a stock’s price moves into its Sell Half Range or to move out of those stocks that traded below October 10 lows and can not recover,

(c)    on a longer term basis, recognize that there remain 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*        13650                    1555
Fair Value as of 11/30//08            13616                    1552
Close this week                 8497                    873

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

* 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:

    W.P. Carey & Co. is a global real estate investment firm, investing  in commercial properties, operating several non traded real estate investment trusts, providing asset management services and offering real estate financing solutions.  The company has grown profits at a 15% annual pace over the last five years though it has raised its dividend at more modest 2% rate per year.  Dividend growth is expected to accelerate to a 5-6% rate over the next couple of years; and when coupled with a 7.5% yield on its stock, offers an attractive total return for the High Yield Portfolio.  The pick up in profit growth should come from:

(1)    an increased rate in sale/lease back deals as companies need to raise cash,

(2)    expansion of the company’s international operations,

(3)    growth is assets under management which should rise by 8% this year.

WPC is rated B+ by Value Line, has a debt to equity ratio of only 29% and earns approximately 12-14% return on equity.

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 40 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.

Posted 11-15-2008 9:43 AM by Steve Cook


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