October 2007 Market Timing Update

"Money is better than poverty, if only for financial reasons."

-Woody Allen  

The Official View

The market remains solidly in bullish territory and is expected to remain so well into 2008.  Low inflation and benign interest rates will continue to fuel significant stock market progress.

Key Indicators

Economic Outlook

Real GDP is estimated to average withing a range of 1.5 - 2.5 percent.  Weak housing fundamentals are a major factor in the forecast.  Lower  home prices put  the brakes on consumers using equity in their homes as a source of cash flow.  Housing will continue to be a drag on the economy.  Construction and Building permits are at the lowest level since 1995. The Natl Association of  Realtors is forecasting  at 24% decline in new home sales, over and above last years 18% decline.

High gasoline prices continue to put a strain on consumer spending.  The peak season for gulf coast hurricanes has passed, which is a good thing.

Real GDP growth is slow and new jobs are expected to decline.  This will hopefully cause the fed to further reduce short term rates.

Equity Valuation

The S&P operating earnings estimate for 2007 is $93.90.  2008 Forward Operating earnings  are expected at around $99.50, which means the S&P 500 index may rise to the mid 1600's next year.

Investors should continue to mark-up stock prices in 2008 as corporate earnings continue to grow against a backdrop of monetary accommodation.

Investor Sentiment

The 60 day put/call ratio is at historic highs, which means the doom and gloom crowd think the market is in for a crash.  They fail to take into account increasing corporate earnings and that monetary policy is accommodative and valuation is still reasonable.  

In summary, Bob is happy.

No changes to any portfolios.

Remain fully invested and  take advantage of this superb investing climate.

The Yukon
One might have a look at investing in companies doing business in the Northern Territories.  
Tar Sands (or Oil Sands to be more politically correct) is the new frontier.
Something Worth Mentioning

Being stuck up in the Yukon, again, must have some advantages.  The one and only reason I can come up with is getting educated as to what might be worth investing a few $$ in. I would have to say that not looking at companies doing business in oil production is probably a mistake.

In 2006 I was at a 'Show and Tell' luncheon in Calgary where we were getting educated on the two methods of oil shale extraction - Digging it out of the ground and SAGD (Steam Assisted Gravity Drainage).

Current best guesses are that Canada has over 25 years worth of producible fields.   

At the time in order to be financially feasible, best guesses were that oil would have to stay at or above the $40-$45 range.

One year later, technology has advanced sufficiently to move that dollar range to  $30-$35.  
Look at the PPB for oil now - hovering around $80.00.

If this interests you, my advice would be the following:  

Invest in companies who own these fields.
Invest in equipment or service providers.
Invest in manufacturers.  

I would not invest in constructors or building contractors.

Personal Portfolio

Other than substituting FDGFX for FDVSX,  I am staying in a holding pattern.  I think the market will continue to do well, with the usual hiccups along the way.

That half point rate cut was the right thing to do.  To bad the Fed didn't start lowering rates a year ago.
Better late than never, I suppose.

Lately, I have been hearing a lot of blather about getting out of  foreign markets and commodities because they supposedly have run their course, and US markets are a much safer alternative.

Pardon me CNN, CNBC and the rest of the BC's, if I do not agree.

Granted last year when I was 60 percent international, that may have been a bit excessive,but maybe not so much wnen you consider the Fed seemed bent on stiffling the economy by fighting phantom inflation gremlins - to the detriment of US investors.
The returns were worth it and risk was mitigated by avoiding narrow sectors.

I think 70% US and 30% foreign will provide a nice return going forward.

This is the latest breakdown:


Fidelity Low Priced Stock (FLPSX) might be on the chopping block next year.  Returns have been lousy and the fund is bloated.  The fund does surprise, though.

I can't believe GE's stock price actually moved in the upward direction.  About 10% gain since the beginning of the year.

Owens Corning -  still holding.  I'd be buying right now, if I needed more.  I think the  stock price is being unduly impacted by the sub prime problem.  Ditto Masco.

PRMTX and FSTCX (Telecom) are providing very nice returns again.  I think this is a sector worth investing in.  I am showing returns of @ 20% ytd.

I still like PSPFX (US Global Resources) for commodities.  It has returned @ 24% ytd.

I took a substantial position in the Hodges Fund (HDPMX) because they have a substantial position in transportation and energy:

Hodges Fund  

They say one mistake people often make is not looking at available investments in their own back yard.

I like the fact that a number of these stocks are headquartered in Texas where the fund managers who are also based in Texas, have ready access these companies.

A word of Caution about some of the above mentioned funds.

Most of the funds mentioned here are in tax privileged accounts, which means I am not worried about having to pay taxes on dividends and capital gains distributions come April 15.  

I learned this lesson back in the late 90's the hard way.

Tax Efficient funds for taxable accounts and Tax Hell funds for non-taxable accounts.

If you are considering making a fund switch,  it is often the better idea to make such a switch after  the
fund pays out distributions.  Not much fun paying taxes on massive capital gains in funds you have only held a short while.

This is also a great reason to max out non-taxable accounts ASAP, and every year.  The miracle of compound interest compounded with tax free gains, is truly a miracle.