July 2008

“Financial education needs to become a part of our national curriculum and scoring systems so that it’s not just the rich kids that learn
about money… it’s all of us.”

~David Bach

The Professional Opinion

S&P 500 Index: 1280.00

The Short Answer:  
We are hedging this month because of the escalation in energy prices - no one knows when it will stop.

The  Long Version:  
Energy prices are the unknown factor in the economic outlook going forward.  Iran continuing to go nuclear and
Israel making noise about stopping them, have the potential to cause more instability in oil prices (personally,  I think Israel should s**t or get off the pot and stop acting like whiny politicians of a certain political persuasion).  

Consumer spending is one of the drivers of economic growth and high energy prices act as a tax and a strong headwind against further economic recovery.

The timing model is still in favorable territory, helped along with the economic stimulus package and low interest rates.  Real second quarter GDP growth is expected to be very low or slightly negative.

Congress has been making noise about a second economic stimulus check, which would be nice for me.  The first one I did not have much fun with since a new pressure tank for the well had higher priority.  A second economic stimulus check would undoubtedly enjoy strong bi-partisan support because during an election year the primary objective of incumbents is to stay in office.  "Never underestimate the ability of politicians to send money to their constituents during an election year."

Economic Outlook

May industrial production declined .2% which confirms that the economy remains weak.  Capacity utilization is at about 79%, which is at a three year low.  Housing starts remain at recession bottoms - that is 40 year lows.  A bright spot is the 3.8% increase YOY in retail industry sales (excludes Cars, Gas Stations and Restaurants).  Tax rebate checks now hitting people's mail boxes are providing a measure of relief when faced with $4.00 and higher gasoline and weak employment fundamentals.

New jobs are soft and are expected to remain so for the rest of the year.  Employers are likely to wait by the sidelines until they see real signs of economic improvement before doing any more hiring.

The export account continues to remain strong and the soft dollar makes US made products attractive for purchase overseas.  This serves to partially offset economic weakness at home.  Economic growth is expected to remain in a range of 1-2% for the rest of this year and has a possibility for modest improvement in 2009.  Again, much depends on energy prices.

The Fed

The Fed didn't cut rates last time around, leaving the Fed Funds rate at 2%.  Since this is an election year, the fed is not expected to do much more when it comes to rate hikes or cuts for the rest of the year.  Bernake has been flapping his jaws about fighting inflation lately and if anything, a token .25% increase in the rate might be in the cards.  Bob however, sees no reason to raise rates at a time when YOY core inflation is up only 2.1% despite the fact that oil prices have nearly doubled.  He thinks the economy shows astounding resiliency considering all that we have been through.

Equity Valuation

The June 30 closing low of 1280  works out to a PE of 14.7 times the 2008 operating earnings of $87.00.  The market is forward looking and Bob expects investors to value those earnings at a PE of 16.5 - 17 in the second half of the year, which would bring the market back to the mid 1400's range.  Once again,  energy prices are the wild card.


No changes to portfolios.  


Future forecasts are subject to energy prices.  If oil prices stop escalating or stabilize,  low short term interest rates will provide stimulus for further gains into next year.  If energy prices continue to rise,  economic recovery will be delayed.

Just about anything that can go wrong has gone wrong.  High energy prices, sub prime mortgage woes and deteriorating jobs have great impact on consumer spending, which is the engine of the US economy.   The stock market focuses on the future and the price of oil remains key in further economic recovery.

"Given the energy related and geopolitical uncertainties facing investors, we currently prefer a dollar-cost-average approach for the accumulation of new equity positions.

Test Pit Oil Sands
Ever wondered how one searches out tar sands?  Sometimes all you need is a backhoe.  These excavations are called test pits.  
Dig a hole and see what you come up with.  This sample looks reasonably productive.

Meanwhile, while Canada continues to press on with development and exploration,  I see our new 'Energy' bill has some verbiage which states that we may not be able to buy from Canada because Canada is not "Green" enough.  

How much more moronic can congress get?

Lets see if I can answer that.  

The Dems wanting to nationalize our oil companies because the government can run it better. They have got to be kidding.
Conservation and wind farms + other alternative energy solutions will cure all our energy ills. If that doesn't, higher taxes will.
No coherent energy program in over 30+ years.
Ethanol,  unless you like paying those higher food prices which are bound to go even higher after all the Midwest flooding.
The nation's 'no nukes' policy .  France is what, 70% nuclear?  .... and based on a standard design from where?  The U.S.
No offshore drilling, no Alaska drilling, no new Refineries...... it is disgusting.
The 'Real' reason for being a oil dependent nation is that we will no do developing until we suck up the oil from everyone else, putting us in the catbird seat for a change.  People actually believe this.
Congress thinking they can control the truly international commodity that oil is.  Control it with what?  Stump speeches?

Pure Disneyland. 

How's this for a brilliant idea:

We hear all this griping out exporting jobs overseas and that we are losing our manufacturing base.  Why don't we create a new industry for ourselves and become an oil exporting nation.  We have the resources, we have the technology, we certainly have the incentive......why not become one of the worlds leading oil producers?

Personal Portfolio
Ending June 2008 My portfolio trounced Bob's this time around primarily because of my large position in the Hodges fund and the nice run-ups in the small cap stocks.

The energy sector funds shot up faster than I thought they would this last month so I took some profits off the table and used those for the bank stocks.  This puts me into 15% stocks and 85% mutual funds, which will save on future management fees.

Meanwhile, my wife's Fidelity 403B plan is in total shambles which is prompting me to pay a visit to the CFO of Douglas county this afternoon.  New IRS regs caused a change in providers for 403B plans.  Existing providers were required to respond to an information request as to their plans for complying with the new IRS regs.  Apparently, Fidelity and other good, no-load providers did not respond in time and got booted off the list.  

Guess who did?

AIG Valic, American Fidelity, Life Insurance Co of the SW, Security Benefit (all Annuities) and Waddell and Reed (5.75% front end load - not waived in a 403B program).

I would think a CFO would have a fiduciary responsibility to plan members and if not that, at least have a moral one.

Perhaps any feelings of guilt over screwing an entire district were assuaged by a complimentary vacation trip for two to the Caribbean, or a 'Stepping out Package' at the Nugget.

Of course I can't rule out pure ignorance or incompetence either. 

New Additions to the Lineup


I decided to take a 2.5% position in Bank America this month for several reasons.  I like the company, I think the financial sector is bottoming out and the .64 cent dividend is quite attractive.  That dividend translates into a return of somewhere around a 9% return if held the entire year.

There is a downside of course and that is in the dividend getting cut.  If you look at the quarterly revenues  and divided that by the number of shares out, multiplied by .64 cents - the majority of their earnings are going to be paid out as dividends.  That means that unless business picks up, the dividend could get reduced and the stock will probably take another hit as a result.  We will see what happens.

Wells Fargo

Another 2.5% went into Wells Fargo.  Who knows how low these stocks can go, but they look like a bargain to me. Also, I  will have another 5% of the portfolio free of mutual fund management fees which means I will be keeping more of my money.


I also decided to take some profits in SIMG and used the proceeds to supplement the buys of BAC and WFC,  as well as an increase in my only food stock:


I think this stock is a good place to be for a while.  Its dividend is yielding about 8%, which is not bad considering the current climate.

ITW DRIP Registration - Part III

Here we are one month later and guess what - the paperwork for registration never showed up.  Why doesn't that surprise me.  I got on the phone and once again expressed my displeasure with establishing DRIP plans, and why is this so hard?

The lady on the other end checked her records and said the package was sent out to me six days after my original phone call.  She said she would resend the paperwork or.....I could do all this on line.  Not believing that, I asked here to show me.  She did and I got registered - apparently.  I can apparently have automatic deductions made to the DRIP account on line as well.  

I then asked the helpful lady how this is possible when I hadn't yet taken the forms down to the local bank where they can be stamped so I can prove I am me and I am not going to use my three shares of ITW to finance terrorist activities (Masco Drip).  She said she couldn't answer to that but as far as she knew nothing else was required.

We shall see.


Now would be a good time to double-check those fund / stock allocations and ensure you are adequately diversified. I decided to start taking the energy sector funds and paring them back to 5%, using those proceeds to buy up some of the really cheap blue-chips. Me, I chose Bank of America, Wells Fargo and some more BGS Foods.

About those DRIP plans - I may have this wrong, but apparently Computer Share lets you start new DRIP plans with just the touch of a button, once you have an account with them.  I will experiment with this a bit once I know the ITW Drip account is in fact up and working.  It might be worth checking out if you feel so inclined.

Oh, and before I forget.......Check out this Cool Site of the Day



This site is loaded with useful information.  Say I want to find out what is going on with Silicon Imaging (SIMG):


What about Hodges (HDPMX) - what are they holding and and how are they doing?:


Or how about the US market at large?:

Markets and Funds

It's a great site and it's free!