Of Special Interest ...examining a significantly timely topic

If a manager has the freedom to buy bonds, there does not seem to be much reason to buy interest sensitive equities as a strategy unless there are other positive factors. Tables in this section demonstrate why. However, if you can’t buy bonds the next best thing is buying high yield top quality utilities with minimal nuclear exposure, as close to a bond proxy as you can get.

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Each January we present for the preceding year what would have been, from a group standpoint, the perfect portfolios (Institutional and Aggressive). In 1983 the dream Institutional portfolio was up 56%, the Aggressive up 70%. The worst possible portfolio for 1983 was down 18%. Take a look and see where you should have and shouldn’t have been.

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This appears regularly in a companion publication, but it has been a long time since we have explained how and why we do this exercise. It may be the most precise and carefully maintained model found in an institutional portfolio strategy publication. Models are not the same as actual portfolio management, but this comes close. All current holdings are detailed, classified by our current conceptual structure.

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If you believe drug stocks are really a play on future weakness in the dollar, you better read this study. We like the drugs, but not for this reason. Drug stocks at one time were sensitive to dollar fluctuations but over the last four years this has not been the case.

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The one-year diffusion index of 90 commodities is indicating a resurgence of inflation may be right around the corner. We think it is wrong. Our other tools don’t confirm. However, the past record of this tool cannot be ignored.

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The High-Tech Thirty index was introduced last month and fostered considerable interest. We have done additional work, providing more back history, and drawn a new chart. “Let’s Get Competitive” was introduced in a special feature last month however, because of timing considerations, we have not yet started building a major portfolio holding in this area. But maybe we should stop trying to get so cute and get on with it.

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An index has been constructed out of 30 of 1983’s favorite high-tech stocks. Through August 8, the index is down 19% from the June 24 peak, following a 63% 1983 advance. The decline is right in line with expectations and the “bloodbath” may be less than half over.

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The May issue of this publication featured a month-by-month comparison of all bull markets in this century. Per reader request, we’ve updated the comparison.

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An updated graphic and statistical comparison of the current bull market with bull markets of the past. It still appears the current inflation complacency will be upset in coming months. The public is clearly stampeding back into the equity arena, to a large degree via mutual funds.

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Others are also beginning to think 1983 inflation could surprise on the upside. From the market’s standpoint, the fear may be as significant as the fact. This could be the “reason” for a stiff stock market correction.

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An examination of the technology sector, concluding supply has caught up with demand and sharp intermediate down-draft coming. However, the High-Tech game is far from over. This may be only “half time.”

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The P/E for this most popular market measure is incredibly distorted by a handful of component stock. When will Dow Jones bite the bullet and improve this index? 

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If your stock group analysis was flawless, a 1982 gain of 85% was possible, even beating Phil Hempleman. If it was hopeless, a loss of 41% was possible. This annual feature had some weird twists this time.

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The screens employed in one of our conceptual equity screens seem to have outlived their usefulness. Modifications have been made and a new list of undervalued growth stocks produced.

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The move has been massive and a lot of “smart” money checked out early, awaiting the correction that to date has not developed. Clearly this market is something different, but in the past, it has been wise to heed the message of the Early Warning Index. Maybe this time will be different, but I suspect that even a mega bull must take a rest sometime.

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Once a quarter, sometimes more, a variety of stock selection screens are run. Some of these screens are important factors in the current equity portfolio structure. Here are some highlights from three of these screens.

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Many consumer stocks are no longer especially cheap, even when 1983 earnings are considered. Nor has the increase in consumer demand most were expecting materialized. While consumer stocks rallied strongly with the strong August market and did not flounder in the September consolidation, they are certainly no longer the mighty market leaders they were earlier in the year. These factors combine, creating a vague uneasiness concerning consumer stocks.

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Did the individual investor buy more stock in the August up blast than most think? Based on a close monthly examination of the equity oriented mutual fund statistics, it looks like it.

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The two most out of favor segments of the market are the natural resource areas (including oils) and the big, bad cyclicals. These stocks should provide great profit potential in coining months, but not yet. In this issue, a new 47 stock index is introduced to aid in timing this potential tactical move.

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The DJIA certainly has its problems as an analytical tool. Sometimes a close examination of this relatively small sample of stocks can be enlightening.

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