Tuesday, July 06, 2010

July 5, 2010 Takin’ a break does a portfolio good.


July 5, 2010 Takin’ a break does a portfolio good.

There have been no posts for a week. Why? We, the Cronin’s were gathering dogs and belongings for the summer migration to Utah. I took a couple of days off and listening to the carnage on Wall Street did not excite me enough to go and do homework.

Tomorrow it is back to normalcy and the crazy market ahead of us. Earnings season start again on the 12th with Alcoa. Before we get into the week ahead, let’s check my score card for how we did last week.

My guess for the unemployment number moving up was off as I was thinking it would be 9.8% and we ended the week with 9.5%. Even though that number was below the consensus, the private employment number disappointed even though it improved. Friday was not a good day for my handicapping as factory orders which I expected to be up about a point came in at a minus 1.4%. Those two items made the light volume on all the exchanges trade down about a half a point.

And even though we helped Devin’s mom with a car, that number on Thursday disappointed. 8.5 million annual rate versus the projected 8.9. I was out there with an optimistic 9.0 million unit rate.

Enough gloom and doom. To sum it up I don’t think I got much right in last weeks guesses. Since I was in Utah for the last 5 days, I did not get to touch and feel my Barron’s Magazine. (They don’t sell the thing in Utah. I looked everywhere.) I was able to visit the subscription on line and it was, for the most part, depressing. Alan Abelson highlighted all the bad news from factory orders, car sales, employment and housing. It made me want to drink really cheap scotch. Fortunately I don’t have much cheap scotch. (Instead I enjoyed a 15 year old Nordura Glenlivet.)

So let’s talk money. The DOW was down about 4.5% last week and the broader market (S & P 500) was down similarly. The whole market is down about 12 % in the second quarter. So what will this next quarter bring?

I ask you to go back to the blog on Jan 3 2010 and I said “I am looking for a year end S & P 500 of 1335, almost a 20% increase. This will take two critical elements that must happen. Consumer need to start spending be it frivolous or value purchases. And we need to see a bottom in real estate. If both happen by mid year, the 19 % improvement in the S & P 500 is real. If not it will be difficult if not impossible. You could extrapolate a DOW around 12,500 based upon that guess, but I wouldn’t bet me life on it.

Needless to say we have not seen spending by consumers and the real estate market has not stabilized. From recent indicators, we will see small and slow improvements in employment, which will help consumer spending, but there seems to be no significant improvement in real estate. Housing inventories are still floating around 8 months (Depending what part of the country you are talking about.), and there is still mortgage toxicity to deal with among regional banks, which means we could see more inventory. Everyone is talking about how much cash all of Corporate America has, but they are not spending it on jobs. My guess is they are afraid to hire and make huge capital expenditures because they do not know what is going to happen in the political arena. The current administration has proven to be very anti-business, anti-profit, pro tax anything that has money. There is a good chance that many corporations are waiting till November to see if we get a congress with no majority. This would be good for business. The economy seems to do well with a some what dysfunctional legislative branch.

Keeping all of that in mind, here is my game plan for the next few months. Keep my 40% in bonds, keep about 10% in Gold, and keep the balance in equities in a balanced portfolio looking for opportunities to buy quality on the dips. It really is that easy.

Thursday we were stopped out of BAC despite averaging down out stop orders. It was a 13.1% loss at 13.50 a share. Despite congress witch hunt for bankers, I like the balance of WFC, C and BAC, so I will ease my way back into BAC in small little morsels.

In looking at the Salve Lucrum Portfolio, we did get a nice dividend from KO. It is carrying a nice 3.5% yield right now. I am inclined to pick more up at these levels. We’ll try and get a small chunk at 50. We are also inclined to add more AAPL at 247. Come on that is almost a 15 P/E Ratio based upon 2011 estimated earnings. Remember let’s look for small bites. There are some great bargains out there.

Andrew Bary did a great piece this week in Barron’s about Tempting 10s. These are world class performing companies trading at or near a 10 P/E ratio. I really want to cut and paste the article but won’t. Here are the names he is telling us about. Exxon Mobil XOM, Microsoft MSFT, Intel INTC , Merck MRK, IBM IBM and Hewlett-Packard HPQ, Oracle ORCL, Wal-Mart Stores WMT, Johnson & Johnson JNJ, General Electric GE and Cisco Systems CSCO. You really have to do homework on these, but historically these are at or near record lows. These names normally trade at or above the index average P/E which is currently about 14. In other words, bargains, BUT do you homework and ease into them.

What will this short week bring. Tomorrow we will see the ISM non Manufacturer Index which as a survey based index means anything above 50 is growth anything below is non growth. The consensus is 55. I am thinking that it will be short, say 53 which will be a disappointment to the market. However the market is now returning from a long weekend (and if you look at Friday’s volume, it was probably a longer weekend than we think) and people will be rested and in good spirits and say Exxon near a 10 P/E and IBM at 10, gotta get some of that. Look for a positive day tomorrow. And let me go out on a limb and suggest we will get 2-3% back this week form this crazy market.

Many of you sue Morningstar to do your analysis. It is a great tool. We would suggest you take a look at their market valuation graph. It shows the overall market (1700 companies) being undervalued by about 5%. That is good news for a slowly get back in the market type of approach.

Salve Lucrum


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