A Mildly Upward Bias

It was a mixed week for both the market and our portfolio, with a mildly upward bias. Let’s take a day-by-day look back.

The market was subdued as investors waited for the Fed’s rate hike and policy statement on Tuesday. OPEC decided to maintain production at its 25-year high, a slight positive.

To nobody’s surprise, the Fed raised the funds rate by 1/4% for the 13th time in a row. It now stands at 4.25%. The attached policy directive included language that said the Fed would watch economic stats to determine future actions. Again, not surprising (what else would the Fed watch, football scores?) and hardly cause to pop the champagne, but it does provide a glimmer of hope that rate hikes will end if there are no signs of inflation. So all eyes turned toward Thursday’s report on the core consumer price index (CPI), and the hand-wringing began as the hours counted down.

Our footwear maker fell again and was down nearly 5% in two days. The call to get out sounded across the internet, mostly with reference to having come too far too fast. The stock gained 25% last week, after all. Better lock in those profits fast! We passed on that idea. Was it the right call? Keep reading.

Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free., our long-motionless big pharma holding and this year’s Dow 1 portfolio component, raised a stiff arm from the stretcher and asked not to be toe-tagged just yet. The stock jumped 6.5% on Tuesday after the company raised its dividend 26% from $0.19 a quarter to $0.26. This was a reminder to those who read more than news headlines that corporate America’s balance sheets are in tip top condition. Expect more dividend boosts next year.

All the talk Wednesday in America was about the Fed’s policy statement. What did it really mean? Not much to me. The Fed changed its wording to show that it’s not sure if further rate increases are needed. It depends on inflation, and we don’t yet have the data to make a call. An absence of data enables gurus of every stripe to begin their favorite activity: prognosticating the future. I prefer to just wait. I didn’t know on Wednesday what core CPI for November would be, but I’d know on Thursday.

Overall, regardless of the CPI, we should expect another rate hike on January 31. That way, if it doesn’t happen, we’ll be pleasantly surprised…and so will everybody else.

While the endless Fed discussion was tons of fun, the bigger news for us was that October’s trade deficit grew to a record $68.9 billion, much worse than expected. The U.S. markets paid little attention. However, the dollar weakened against the yen. That lowers the profit of Japanese exporters because when they translate sales in America back to Japan, they get fewer yen per dollar. The Nikkei index sold off sharply in response and our Japan market investment fell 6.6%.

Our footwear maker, though, got back on track. It rose exactly the same amount that it fell the day before.

At last, the November core CPI! It increased 0.2%, right on target. That’s the second month in a row of a 0.2% increase, following five months of 0.1% increases. Are we settling into a stairstep pattern of inflationary pressure? Hard to say yet, so keep wringing those hands. The outcome in either direction couldn’t be simpler to digest. If monthly rates stay at this level in first quarter 2006, the Fed will probably continue raising rates until June. If we get one or two 0.1% reports and the average is right at 2% or less, the Fed will probably stop raising rates sooner.

Now you know what to watch. The Fed’s mission is to control inflation. It keeps tabs on core CPI to determine the threat of inflation. If you want to know as much as any commentator, watch the CPI. Mention this to your loudmouth brother-in-law at the family Christmas gathering when he tells everybody in earshot that rates are headed back up. Take a sip of your eggnog, look him in the eye, and say, “Maybe. Depends on the core CPI.”

You might also mention to him and any others interested that the economy is looking great. The New York Empire State survey of manufacturers came in at a strong 28.7, hinting that manufacturing growth is continuing. New claims for unemployment for the week ended December 10 were the same as they were a week before at 329,000.

The dollar continued weakening against the yen, the Nikkei dropped 1.4%, and our Japan market investment fell 3.1%.

Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. said Thursday it plans to cut 40 employees, or 5 percent of the company’s work force, as part of a realignment of its technology and operations sectors. The job cuts could save the company up to $11 million annually. Shares fell $4.09 to close at $90.81. This is of interest to us as we’re watching for the stock to get below $90 as a potential buy candidate. Remember, this is the same stock we sold on Halloween at $109 for a 1% profit. Buying again at a 17% discount is appealing.

Japan crawled back on track. Our Japanese bank finally poked into positive territory for us. It’s now up 1.2% since we bought.

Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. let us down Friday when it said it would not meet its fiscal 2005 target of $2.14 to $2.24 per share, which it just revised in its third-quarter earnings report. The reason given was weaker than expected sales of wireless devices, batteries, and related accessories. The stock dropped 6.5% and is now down 11% for us. This is disappointing. I thought the store was ready for a big holiday season and expected it to be in the midst of a strong recovery by now. It’s a good company, though, and we’ll hold. For instance, they have free cash flow in the $80 to $100 million range and they now sell Apple’s hot iPod. Things should improve.

President David Edmondson said, “We have made significant progress in executing our improvement initiatives this year, yet it’s clear that we need to move much faster, more aggressively and with more urgency to enhance company performance.” That’s right, it’s time to crack the whip in Fort Worth (where the company is based).

By the time Friday’s bell was rung, we came out all right. We generally do around here. We’re a little down on a few positions, but nothing disastrous. We’re a little up on a few more. We’re strongly up on a few more than that. That’s almost always how it looks.

Our permanent portfolios had a good week. The Dow 1, which is the aforementioned big pharma company this year, gained 9.6% thanks to the dividend boost. It’s still down 16% this year, though.

Double The Dow gained 1.8% and is up precisely 0.0% this year. I do mean precisely. It closed last year at a value of $15,906 and closed this week at a value of $15,906. I’ve never seen that before. I’ve seen the values get close, but never to the dollar equal. That means that whatever happens in the next nine trading days determines the portfolio’s result for the entire year. Interesting.

Maximum Midcap slipped 0.8% this week, but is up 20.2% this year so we’ll cut it some slack.

If you have time and haven’t already done so, you might want to take a look at the article I wrote on market timing published last Tuesday by CXO Advisory Group.

I hope your holiday preparations are going well. You don’t have to worry about the stock market. Ignore the n
aysayers, everything is fine.

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