Monday, February 28, 2005

3/1/2005 Flogged by the Blog

Yesterday's sell off came on que. The S&P500 failed at Friday's 1210 level twice, now three times before. What will be interesting to see is whether or not the rest of the week will be bought up like the previous sell offs or finally given up on. It is hard to say. The fact that the market bounced off its intra day lows is a good sign. If anything has come from the sell-off/buy-back gyrations of last month its the development of a higher trend channel. In the short term I would expect to see investors support the market by buying in the low 1190's and selling the 1220 level, in step with the RTC. That said I am still sticking to my 1217/1180 levels for major resistance and support respectfully. I am sure that the consensus is thinking that the market will move higher on the first day of the month almost guaranteeing its demise. Yet, I am staying the course and going with my targets that are listed on my home page www.thesmartmoneyinvestor.com in the Focus13 table.

Three sectors hitting new low this year are Autos, Trucks and Newspapers. Autos and Trucks always do badly in a rising interest rate environment but Newspapers? Media has been changing for sometime now but recently it seems like Newspapers dropped another notch lower. The missteps of the Wall Street Journal have been well publicized. I cancelled my New York and LA Times subscriptions long ago, too late and too boring.

The Journalists want to blame their fall on bloggers. Personally, I think that view is short sited. All the good journalists are blogging too, bypassing their old bosses and gaining in some popularity on their own. Newspapers are quickly becoming modern day buggy whips. Their classified adds are parsed out to Monster.com and Ebay. Their advertising goes to Yahoo, Google and MSN. Their publishing is going to bloggers and e-zines. I am sure that slow moving magazines are next.

As always I am looking to see what energy is generated from this paradigm shift. Obviously Monster, Ebay, Yahoo, Google and MSN were the low hanging fruit. I am going to take a hard look at Macromedia, Adobe and Sonic as possible beneficiaries of the new publishing order. As blogging grows and newspapers fragment and morph it will be interesting to see if opportunities exist in the software publishers. Below I give a few thoughts about Macromedia.

  • MACR - Macromedia is a software developer of web based publishing tools. The company is best know for Flash, an affordable multimedia software tool. The company expects 2006 earnings growth of 27%, the same as 2005. I calculated intrinsic value at about $40/share, so at $34 its not really a buy for the Focus13 as it does not meet the IV=2x more than market price criteria. However, large investors are speculating that earnings can exceed expectations. The stock has run up from $26 in mid January on higher volume. I am keeping my eyes on MACR as the new media develops. I did really well with the stock in the 1990's, maybe its time has come again.
  • CTGI - Capital Title Group (totally switching gears) is a holding company whose subsidiaries provide appraisals, title insurance and other related services to the mortgage industry. At first glance it seems like this company is on the wrong side of the business cycle. However IV=$21/share and its market price is about $6. The company has shown that they can grow through acquisitions, buying national competitors. The company pays a small dividend of $0.02/shr. Lately the company's stock has been under accumulation and has started to break out. I am watching CTGI as it meets fundamental and technical criteria. It may be a good 20-30% gainer or it might be the next version of Kaufman and Broad. It may also be dragged down with the rest of the sector.

Sunday, February 27, 2005

2/28/2005 Does That Old Dog Still Hunt

If you are a regular viewer or just searching through click on www.thesmartmoneyinvestor.com/Getthemost.html to learn how to best use this blog. The page informs viewers about the strategies, tools and research I use to generate the 40% plus returns chronicled in this site. The page pulls together the bigger picture of my approach.

Friday marked the 3rd time in eight trading sessions that the S&P500 reached the 1210 level. The prior two times were eventually sold off. That said, a higher trend maybe forming in the S&P500. Large investors have consistently placed a bid under S&P500 and DOW stocks, but have not done the same with the nasdaq composite. Every time the stock market sold off in the last few weeks investors have stepped in to bid it up again. This is a very healthy sign from a technical perspective. I have noticed a bit more volatility in the market lately. The VIX did see the 14 level earlier last week, but has since pulled back signaling a fearless investor. I still am waiting for a move above 1217 or below 1180 on the S&P500 as a catalyst point defining the future direction of capital markets.

It is interesting to see Carl Icahn moving his cash into the healthcare sector. You may know that last year the LBO specialist started a $3 Billion hedge fund. It is hard to argue with the strength in the demographics for the healthcare industry, certainly a path of least resistance exists. The question will be one of timing. With Icahn making moves one has to ask is the time right, or does that old dog still hunt? My Focus13 has several healthcare stocks. It was reported today that Icahn successfully thwarted Mylan Lab's bid for King Pharmaceuticals. Icahn is Mylan's largest shareholder.

  • AMHC - American Healthways has risen to its RTCh of about $34. The stock has been vacillating in a channel recently. I do not know what to think about the technical characteristics, as they are somewhat wonky; but fundamentals look quite strong. I am staying with my current targets.
  • MATR - Matria Healthcare reported earnings last week in line with estimates. The stock dropped hard on the open, losing almost 15%; however by the close the stock was up almost 1%. Large investors want to own the stock. Currently the stock is holding its own. I like the fundamental characteristics, although technically it has trended lower since its stock split. The stock is nearing its 50 dma. I recently dropped my targets for the stock as I think its a good buy, that said if I am stopped out I may have to wait for another day.

Thursday, February 24, 2005

2/25/2005 Trendless

Trendless defines the direction of the S&P500 this year. Although the year started in retrograde it has since bounced back to a neutral state. It is critical to identify the trend as almost all stocks will follow the direction of the general market over time. However, looking at only the general market can be mis-leading when speculating ahead of the mainstream. Several sectors of the index have broken out to new highs and others to new lows. Although the net effect has been near zero it is obvious that capital markets are trembling underneath it all. There is a 44% delta between this year's best and worst performing sectors, Oil and Gas +22% vs. Fiber Optic Equipment -22%. That said, as of today 39% of all sectors are positive on the year compared with only 9% at the end of January. I have been studying which sectors are seeing fresh capital and making investments into the leaders of those groups that are receiving fresh money and meet my investment criteria. Check out my website www.thesmartmoneyinvestor.com to see where I am placing my capital and to learn more about me and my strategy.
  • RIO - Comp Vale Do Rio shot above $37 in after hours trading today as the market is finally waking up to the benefits of owning raw material during this business cycle. I originally bought the stock at $23. The company has been under heavy accumulation this week as its peers have reported record growth and earnings. As Asia continues to build itself out RIO will be a prime supplier of raw material and I believe will continue to see growing investment.
  • NIKU - Niku reported earnings today and jumped over 5% in after hours. This is another stock that has done well for me as it nears my target of $24. I bought the shares in November for $15. Niku is an example of why it pays to be a good stock picker. Even though the nasdaq is under performing the S&P500 at this time NIKU is performing ahead of the market. I am staying with my current investment plan for NIKU.

I rely on identifying market trends ahead of the large investors to be successful. I also have several other strategies that use the trend channel in helping me to identify buy and sell points. I post what I call the RTC (recent trend channel) on my website for each stock that I own in my Focus13, shown on my home page. I have not updated this portion of the website lately because of the lack of a trend in the general market. Watch my site as I will be posting new RTC information for each stock. The general market may be trendless but the underlying issues are in rotation and soon or later a trend will develop. Perhaps today's GDP report will give global and nasdaq stocks a kick in the right direction.

Wednesday, February 23, 2005

2/24/2005 Boing

The capital equity markets bounced yesterday on lower volume after Tuesday's fall. The S&P500 closed just below its 50 day moving average, which suggests that resistance now exists and it will take a heavy volume push to move the indice higher. I maintain my stance that a move above 1217 or below 1180 on the S&P500 will likely define the stock markets' intermediate trend. I am staying on plan. See my website www.thesmartmoneyinvestor.com to see my positions, which include my entry targets, sell targets and stop loss points.

A word about Matria Healthcare (MATR) and my basic strategy: MATR reported earnings on Tuesday after the bell. Numbers came in line with analyst estimates and the company reiterated its eps growth for 2005 (30%+). The stock dropped in price below my stop loss level and I missed the sell. I rarely if ever ignore my stop losses as it is a sure way to loose money. In general my strategy is to use my investments to make 20%-40% gains then move on to something else; I do have controls in place that allow me to gain more provided certain benchmarks are met. Likewise, I sell an investment the moment it looses 5-10% depending on my risk research. In the case of MATR I missed the stop loss trigger and was given a scare today. Without getting too verbose I did not properly update my company's internal software and the trades were not initiated. If you watched MATR today you would see it was one of the markets worst performers early on dropping almost 15% on higher volume. My experience tells me to do some situation analysis rather than panic and sell shares at the low. I knew the company's earnings are what large investors are looking for. Further, the sector is in a sweet spot were investors are putting new cash to work; I decided to hold onto the shares. At the end of the day MATR went from a heavy loss in the morning to a small gain on much higher volume by the close. The bid under the shares strengthens my resolve that MATR is a good investment. I have modified my stop loss and feel that my upside targets can be met. See my website www.thesmartmoneyinvestor.com for the specific numbers.

Tuesday, February 22, 2005

2/23/2005 Be Afraid, Be Very Afraid

The machinations of the global macro economic machinery decisively moved beyond speculation. Investors showed their cards yesterday as fear got the best of them forcing stock and bond sales as global currency markets twisted their arms. The paths of least resistance that I have been writing about and investing in are now firmly in place. Large investors will have to more quickly move cash from investments that will no longer lead into investments on the fall line. Although today's move was not below the 1180 support level on the S&P it was decisive enough on high enough volume to warrant attention. A few days below the current level of 1184, especially on higher volume, signal a downside trend. The tone of the market was one of fear for the first time in a while.

Volatility returned as all major indices sold off. In a sadistic way I was glad to see the VIX shoot up almost two points pushing above 13. I have sensed a shift in sediment for a while, but today I felt it. Over the past few months I have been positioning my investments to reflect the changing economy. Overall they have held up well closing positive for a day that was down significantly. The nasdaq and S&P may sag in the near to intermediate term, however, global growth unlike any before it in history is unfolding. Subscribe to this blog today and watch me invest ahead of the mainstream.

  • RIO - Comphania Vale Do Rio was up sharply today as it announce further price increases for Japanese steel manufacturers. Further the falling dollar added support to a stock that is positioned well for a global expansion. I am staying the course as outlined on my website www.thesmartmoneyinvestor.com. I calculated IV at $90/shr and have a near term sell at $40. I bought RIO at $23/shr.
  • MATR - Matria Healthcare reported earnings today, and it seemed that no one cared http://phx.corporate-ir.net/phoenix.zhtml?c=84029&p=irol-newsArticle&ID=677746&highlight=. The stock beat estimates. It will be interesting to see how the market reacts tomorrow. No matter what happens I believe that MATR is part of a sector that is positioned for long term growth. The company supplies customers with quality healthcare below previous costs and realizes higher margins.

Monday, February 21, 2005

2/21/2005 Will Favor Fall with the Unfavorable

The market is shifting gears, something the circulation of this blog has known since last November. Suddenly, commodities are where its at (I bought RIO last year now up over 25%) and energy is hot and getting hotter (I bought and sold VLCCF last year for a 200% profit). Investors are bullish in the short term and I am nervous. I am holding back investment, with some exception, as I wait for a true trend to develop. 1180 and 1217 on the S&P500 are important levels. A break either way on high volume will likely set up the intermediate/longer term direction of the market; in my opinion these levels are that influential. Options expiration was last Saturday, which usually sets up a flat period in the week ahead; and it happened on que. I think that we will see higher volatility this week as cash rotates (within all assets including bonds).


Unquestionably the economy is strong and growing. There is liquidity in financial systems and companies are stepping up their investments. Global market trends are pointing up, in concert with my prediction that global growth will out pace the growth seen in the 2000 tech boom. However, the smart money has already been in many of today's popular sectors and will likely look for fresh profit centers. I am not saying that I am going to abandon my current investments, although I may take some near term profits. But as the rotation continues I anticipate that there will be corrections* while signals of new opportunities are coming in. Some say it is best to be in the market between October and February and out from March to September. Last year I made a good portion of my profits in the latter period, I just need to be in the right places ahead of the curve. Tune into my website www.thesmartmoneyinvestor.com for a look at my actual positions and their entry/exit points.

  • VLCCF - Knightsbridge Tankers became a buy again last week, although I am less sanguine about its future. I am carefully accumulating shares below $38, however, I am not likely to build a large position. The company will go ex-dividend on February 23th reflecting the $1.75/shr dividend, perhaps this will be a buying opportunity as the dividend will go to share holders of record on February 25th. Earnings growth going forward can be a limiting factor for VLCCF, however, if anticipated dividends continue coming in well above the inflation rate the stock should hold its value.
  • ZHNE - Zhone Technologies is a manufacturer of telecom equipment from the network edge to the core. This company is run by the former CEO and CTO of Ascend Communication, which was sold to Lucent for $24B in 1999. The company survived the tech melt down and is just now becoming profitable. Recently, there has been large investor interest in the company as shares have started to rise and volumes have picked up (LIBM is trending higher). The telecom equipment sector has been on its butt for a long time and this year it has been among the worst. However, I do see a need for networks to expand as demand has finally caught up with current capacity. VoIP and HDTV are some of the drivers. I do not expect to see the stellar profit growth realized in the late 90's as the sector has become somewhat of a commodity business. However, ZHNE sports some of the latest in innovation and is much more responsive and nimble than many of its competitors. I also have noticed that a few of its competitors, like Redback (RBAK) have broken out doubling in value. I have started to accumulate some shares below $3/shr. I am being cautious though as this is a risky investment albeit with a high reward if I am right.



    *Already, we have seen such names as Ebay (EBAY), Research in Motion (RIMM) and Symantec (SYMC) correct. Many times stocks will correct at the height of their profit cycles as large investors want out while someone else is there to sell to.

Wednesday, February 16, 2005

2/16/2005 If Bill Gates told you to jump off a cliff, would you? Probably

Why Bill Gates is shorting the dollar.

In my experience most people are sheep. They find it easier to be told what to do than to create an opportunity for themselves and others. Since the beginning of civilization there have been leaders and followers. In general it has been a symbiotic relationship where leaders promote a vision and followers buy it then go with it. Sometimes the followers, who are in the majority, get edgy, disgruntled and may even revolt. What then? In many cases the leaders do what Caesar did, they distract them with gladiators or entertainment. What does this all have to do with Bill Gates? Read on and you be the judge.

Bill Gates is the full package, a modern day John D. Rockefeller. Of all the digerati who shaped the earth in the 1990's no one was more than Bill Gates; not Jobs, not McNeally, not Ellison, not anyone. Gates basically picked these guys clean and let them eat when he was done. Sure, they are all worth billions, but Bill is worth hundreds of billions; and there is a big difference.

Bill did surgery on everyone he wanted to. With razor precision he built Microsoft. When Bill's prey saw him coming it was too late. Bill is an engineer and a ruthless businessman, a unique combination able to deal with the rational and irrational equally well. The people I know that have dealt with him say what my mom use to tell me about trouble, "if you see Bill coming go the other way". Bill is not known for telling the public what his plans are. In fact, the only time a good CEO lets the public know their plans is when it suits them.

Knowing what I know about Bill Gates makes me wonder why he went on national television and announce his plans to short the US dollar. Even more interesting is the timing of his announcement. Within a month or so of agreeing to serve on the board of Berkshire Hathaway, Warren Buffet's company, Bill let everyone know what he was doing with the dollar. Perhaps even more interesting than that is the fact Warren Buffet let the world know that he was shorting the dollar a year or so ago. And you know what is even more weird than that, the dollar went down. Warren published this didy for stock market investors http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html a while back. From an elementary level it seems sincere, insightful and logical. The only problem is that I cannot help but think back to what I know about Bill Gates. All this transparency does not add up. I could be wrong, but something seems out of place.

I asked myself the question: If I were Bill Gates why would I announce that I am shorting the dollar? To answer the question first consider that Bill Gates' wealth exceeds that of many nations. Bill is smart and unlike some nations Bill distributes his wealth across different currencies. The same is true for Warren Buffet. If I knew I could drop the value of the dollar beyond its already low levels and I held wealth in other currencies...well to put it simply "Land Grab". A low dollar (relative to other currencies) puts all US goods, services and ASSETS on sale including US companies. What if you could buy the company of your dreams at a 30% discount or more. Hell you could probably fund a number of great buys given the price of funds or you could sell off one of your assets, say Gillette or maybe give yourself a shot in the arm with a $3/shr dividend. If I am correct, I am sure Bill and Warren's motive is not to grab whatever they can, especially given that they have teamed up. If I were them I would have a strategy like taking control of the media to guide public opinion and place investments in the way of that opinion. Recent 13G filings with the SEC show that Bershire Hathaway has made large investments in cable and communications companies (Of side interest is that George Soros has followed suit).

I think you get my point. When there is a monumental change in currency values you can bet there will be a power struggle between global power brokers. The force of monetary change and the momentum in money flow will make for opportunity. Stay tuned as I will expose some of these opportunities in future postings and place investments in front of them that profit.

Tuesday, February 15, 2005

2/15/2005 Catalyst?

Yesterday was the slowest trading day of the year. Periods of notable high or low volume are generally significant in the short term for the market. I believe the market has taken pause as it waits for Allan Greenspan's testimony to the Senate Budget Committee tomorrow and Thursday, which is speculated to be positive. It is also possible that the rise in the S&P500 over the last two weeks is running out of steam and investors are lightening their buying as they speculate a global recession will come sooner rather than later. In either case one can argue that near term a catalyst exists to move the market in a meaningful way. I am staying the course until the S&P500 breaks either the 1217 or 1180 levels. Moves either way will define the market trend.

Conventional thinking is that a slow down in Europe and Japan project trouble for global growth, I argue that is not exactly true. True, lost growth from major economies increases resistance to US growth. But times have changed as communication technologies are globally adapted and ideas are quickly exchanged by more people than ever before. The third world is now becoming the second and perhaps is moving to be the first. China is picking up some of the slack lost by Europe and Japan, but what about India, Pakistan and many other third world countries. Have these economies been taken into account by the stock market http://www.ecommercetimes.com/rsstory/40418.html (this story in Ecommerce Times sites one example). I think that growth in the third world may be under estimated by the market. It is possible third world growth will out pace the ground given up by the larger economies and will benefit US companies. These countries tend to have currency values closely related to the US dollar and are giving the US a one up in bi-laterally trading with them.

I believe that the trend for global growth is up and will be good for the stock market long term. In fact, the globe is growing faster and bigger than anytime in history. Business is cyclical and moves straight up and down rarely occur, there will be fits and starts. Tomorrow's testimony by Greenspan may profoundly affect the market, but ultimately business is going to grow around the world. Stay tuned and watch were I move my capital. Check out my website www.thesmartmoneyinvestor.com to see the specific details.

  • RIO - Comp Vale Do Rio has continued to move higher amid some researchers' down grades. Some argue that commodity prices for copper and steel have topped. I see more growth for many of the reasons I site in my discourse above. I continue to accumulate shares based on my targets.
  • VLCCF - Knightsbridge Tankers has moved to a technically strong position. I am investigating the situation and am considering putting new capital to work with the company. A move to the 50 dma in the short term would likely be a buy. Stay tuned as I present my ideas in this forum.

Saturday, February 12, 2005

2/14/2005 Catywompus Signals

Trading patterns that generally occur during market reversals seem to have been randomly generated the last two weeks causing several false starts. I am not sure if it is because large investors are rotating investments at a faster than normal rate or if big buying is being met with big selling as a bear bull tug-of-war is under way. I am finding it hard to make larger investments and am likely to stay the course until a more defined trend develops, namely a solid move above 1217 or below 1180 on the S&P500.


  • APOL - I was quickly stopped out of APOL last week faster than ever before. Fundamentally the stock is strong with an intrinsic value of more than 2x its market value. EPS growth rates are above my minimum 25% for 2006 and new markets for the company are under development. The stock did break down technically (in classic fashion) 6-8 months ago as its peers went through allegations they violated SEC and Department of Education laws. In January the SEC exonerated Corinthian Colleges of the charges and more than lightened the groups over hang placed on it by the stock market (see: http://biz.yahoo.com/fool/050125/1106669520_1.html). The stock built a base and technically staged a buy signal. I started to accumulate shares around $77 with a stop at $75, which was just below solid support. If you follow my blog you know that I was stopped out in only two days, only to have the stock bounce back to the buy point. I am a bit nervous about getting back in. APOL was a favorite of day traders a year or so ago. Perhaps I was a victim of market makers clearing out the fast money or just got in the way of large investor selling. In any case the move was atypical. Although I like the stock I am apprehensive about investing in it until a more defined trend develops.
  • FRBK - First Republic Bancorp moved higher last week on increasing volume. The successful spin off of its Delaware division and the announcement of a new strategy have increased the combined value to over $18.60 (20% return). I started to accumulate shares at $15. The increased interest in both FRBK and its spin-off FBOD give me some confidence that others think the bank made a good move as well. FBOD is using Delaware's favorable banking laws to expand its Payday loan program, which allows the company to charge annual interest rates above 440%. The bank has a fresh marketing approach to selling its payday loan products. Recently other companies like EZcorp, a pawn broker gone payday loans lender that operates in 11 states has seen much buying. EZ corps P/E is at 24 whereas FRBK and FBOD are around 12. Regional banking is currently attractive as it is on the path of economic least resistance as well as a candidate for consolidation.

The trend is your friend and the stock market's recent tight trading range have made it difficult to get investment traction. I am still worried about the lack of fear in this market. Currently, I am working on the state of China's banking system and the value of the dollar. Stay tuned as I will be posting my opinions shortly, perhaps we should be scared.

Thursday, February 10, 2005

2/11/2005 The Trend is Your Friend

The general trend of the market has a profound effect on its individual components. There is a tight correlation between the trend in stock prices and the trend of its indice. The earlier I identify a trend the faster I can make a profitable buy or sell. This premise is why I spend a fair amount of time studying the major indices and also why I almost always start my posts with a technical view of the S&P500 and nasdaq.

Comparing the S&P500 and nasdaq composite since the beginning of 2005 reveals an obvious divergence between the two. A short term view of this divergence is striking as the nasdaq is 4% below that of the S&P500. However, I think that it is interesting to analyze the whole journey, in this case the period from January 2004 to the present and then beyond.

To build a perspective I first looked back between January of 2004 and July of the same year. During that time the S&P500 and nasdaq moved closely together with a tight correlation between their percentage moves. Starting on July 12, 2004 the nasdaq broke step with the S&P500 and experienced an accelerated divergence falling 13% for the calendar year verses about a 7% drop for the S&P500. On August 12, 2004, both indices bottomed in lock step with the nasdaq several percentage points below that of the S&P. The VIX closed at 19.97 and fear and uncertainty about the up coming elections was at a high. On August 13, something changed. Investors started to speculate that the election would be beneficial for the market and all would be right with the world. From the August low to the end of the year the S&P500 rose about 12% while the nasdaq rose about 24%. Even before the year ended I noticed sector rotations as large investors started their stealthy switch to fresh investments. Fund managers were able to keep index prices high as the market topped year end on declining trade (disguised as holiday volume). The journey from the 2004 lows through the end of the year summarizes the technical moves of one market cycle. Thinking back the market was fixated and driven by a political tug-of-war and speculation as to its out come. It makes sense that the next business cycle will, in part, be defined by the execution of the new adminstration's goals.

With the election behind them large investors started to speculate about the next business cycle, one that was driven in part by conservative politics and the President's agenda. Investors got what they wanted out of the 2004 election and the market moved higher. However, on the first day of 2005 investors woke up to the realization that their investments were likely to be affected by the President's agenda and his ability to execute on it. Through January the market corrected as investors took profits and positioned themselves for the next business phase. Fear did not rise, as measured by the VIX, but the S&P500 and nasdaq diverged once again with the Nasdaq falling about 5% while the S&P500 was down only 2%, hinting that a transition was underway. Confidence in the President began to build when the Iraqi elections were held as expected, job growth continued and earnings remained high. Investors, started to buy stocks again on a broad basis and the market recovered some of January's losses. Whether or not you agree with this administration's goals I believe the market respects the President and his ability to get things done and are investing by giving him the benefit of the doubt.

So, where is the market trending and how will I position capital to get the best return? Clearly, politics are a driver and how the President's agenda is executed will steer the economy. The economic realities of increased government spending, a falling dollar, high energy prices, terrorism and rising interest rates effects of this administration's platform. Each of those economic realities has their balance. For example, increased government spending means more debt for the country to pay off; however, the money is invested and has a return. When businesses borrow they do so in the hope that they will have a return greater than the cost of the funds, believe it or not it is the same for government. President Reagan increased government spending on the military and brought us an end to the cold war, the internet and advances in technology to numerous to list here. Further, a falling dollar does devalue American assets relative to the rest of the world, however, it makes US businesses more competitive with lower cost labor societies and facilitates paying off our debt to creditor nations at effectively a lower rate.

One place large investors are placing investments is where government spending affects are felt the most. Also, large investors will move cash to areas of the economy that will inflate due to the change in the value of the dollar. Below is a list of this years top 5 performing sectors. It is obvious that fresh money has been put to work in these areas. Notice that commodities are well represented, a usual beneficiary of a low dollar environment. Also, healthcare is high on the list, however, not making the top five today. My Focus13 universe, the 13 stocks that I currently follow, represent many of these sectors. In January of this year my return was +5.5% verses a fall in the market. I am adapting my investments to grow as a result of the government spending that continues to reverberate through the economy. These investments include stocks that are in sectors which are complementary to the mainstream government spending beneficiaries.

  1. Oil and Gas +15%
  2. Home builders +11%
  3. Steel/Alloys +10.5%
  4. Commercial Printing +10%
  5. Flour and Grain +10%

I believe that the general market will trend higher this year. It will be driven by many factors including goverment spending and global growth. However, the leaders of the past will change as a new business cycle begins. I do not expect the market to move straight up nor do I expect all stocks to have the same move; certain sectors will out perform as is always the case. The economy has its challenges and will be subject to volatility. One of my biggest fears is that this is no fear. If this complacenty persists I fear for the market. Perhaps that says something about the trend.

Wednesday, February 09, 2005

2/9/2005 Should I Stay or Should I Go

The recent bounce from January's fall has brought us to yet another inflection point. Did the market experience a correction to the year end rally of 2004 or are we in beginning of a new bear market? Market action like today's is tricky and always messy. On one hand it is normal in the course of a bounce for a pull back to occur before the market moves higher. On the other, if this is a failed bounce the market will move to new lows south of 1160 on the S&P. I maintain that a move above 1217 or below 1180 on higher volume for the S&P will define the future direction of the market. I do not expect this to happen in one day and will be filled with fits and starts. I will say this, with a grain of salt, I am optimistic about the technicals of the S&P500 as it does not appear a classic head-and-shoulders pattern has materialized. That said, contrary to popular opinion chart reading is not an exact science.

Long term technical characteristics and near term fundamentals are positive for the S&P500. However, it is the action of large investors that drive the market. The investors view of future earnings growth drives them and earnings growth will slow this year as compared to 2004's easy year over year comparisons. Where the market goes from here is simple if we can answer the question: By how much will earnings growth change this year? It is my belief that large investors started to rotate capital out of the rally's recent leaders and into other sectors of the economy late last year. Knowing that the market cycle has changed these large investors are placing investments in areas positioned to benefit from the cycle. My universe reflects that rotation and has many new names. See my website www.thesmartmoneyinvestor.com for the details.

I have been concerned that the level of fear and short interest associated with the rally have been absent. The VIX has been at low levels and short interest has been shrinking. I am cautiously optimistic and staying the course. I am looking for buying and short sale opportunities as I have maintained a high level of cash. I am also, staying with my narrow targets and quicker stop loss levels. Stay tuned and watch me as I adapt to the change.

Tuesday, February 08, 2005

2/8/2005 Education of an Investor

Market technical characteristics have firmed in recent days. I am becoming more sanguine that January's decline was a correction and not the beginning of a new bear market. That said, confirmation that the rally continues will come when the S&P500 breaks and stays above the 1217 level. The problem is if I wait until then to increase investments I am likely to miss out on a spike of percentage points in capital growth. I have started to put new capital to work. It is obvious that there is a new cycle of leadership on the horizon. I am rotating capital into new sectors. Tune into my website www.thesmartmoneyinvestor.com to see my investments and their targets. I am still mindful that a move below 1180 on higher volume for the S&P500 changes everything, but so does a move above 1217.

  • NIKU - Niku corporation was unaffected by January's decline. The stock held steadily above $19 throughout the month building a solid base. NIKU is now breaking out hitting $23 at least once today. I bought NIKU around $15/shr with a target of $24. I have just started to lighten my position taking profits above 30% made over the last 60 days or so. Large investors are carefully moving cash into the sector as Niku's customers invest to make their businesses more efficient and comply to Sarbanes-Oxley requirements. NIKU's multiples are in line with others in the sector, however, NIKU's eps growth is better. I am considering moving my targets for NIKU, however, I would have to see a strong S&P500 rally and continued up trend in LIBM numbers.
  • APOL - Apollo group is in the continuing education business. As you should know by now it is vital for all of us to reinvent ourselves in order to maintain our value to those who pay us. The company owns brands like, "The University of phoenix", "Institute for Professional Development" and "College for Financial Planning". The company offers classes online and spreading its wings. I speculate that it is only a matter of time before the company offers K-12 classes. I am an avid surfer and have noticed the impact of home schooling. It use to be that I could catch waves free from "groms" (kids) during the week. Now each day is filled with school age surfers that show up after their home schooling lessons. APOL could offer a better education to many school age kids and reduce the cost to governments strapped with growing education budgets. From a technical perspective APOL is showing strong characteristics. The stock has based over the last few months after a fall due to allegations its competitors falsely reported earnings and falsified documents for some of their students. I have calculated an intrinsic value (IV) of $168 as fundamentals and earnings growth are strong. I am starting to accumulate the shares below $79.5 with a short term target $90. I have a stop loss at $75. Challenges exist for the stock but if the market continues to rally I would expect APOL to go above $100.
  • EBAY - Ebay has finally started to bounce today on higher volume. I closed my short today at $77. I short sold these shares above $86 and have locked in a profit of over 11%. Short selling is tricky business and I have found that it is best to take early profits as false rallies squeeze out fresh herds of shorts.

I use many different terms in my blog. See my website www.thesmartmoneyinvestor.com for a glossary.


Sunday, February 06, 2005

2/7/2005 Techno Change-o

Over the last two weeks the market has steadily climbed through resistance created by January's decline. The S&P500 based between 1163 and 1195 since the beginning of 2005, bouncing twice off the 1195 high point of the correction. Friday's close of 1203 on decent volume signals a positive technical point for the market completing the base and setting the index up for a rally. A move higher from here would confirm my analysis that stocks, from a technical standpoint, are a long term buy and will continue to rally, possibly making more multi-year highs. A pull back, which often happens after the breakout of a correction base, could serve to strengthen my position or continue to fall and signal a bearish stand. It will be critical that the market stay above 1180 on any short term pull back. A fall below that level, especially on high volume, would be bearish for the overall market and prompt me to reduce my holdings. A move higher from here will be positive, especially if the S&P500 makes new highs. If that occurs I will put new money to work. To make it simple if the index moves below 1180 I will become bearish, if it moves above 1217 I am a buyer; both moves will need to come on higher volume.


  • FRBK - Republic First Bancorp completed its spin-off of its Delaware branches into a new corporation named "First Bank of Delaware (FBOD), which is now traded OTC. I received 1 share of FDOB for every share of FRBK that I owned. I began accumulating FRBK at $15/shr and on Friday FRBK and FBOD closed at $13.95 and $4.75 respectfully for a combined 18.70/shr, an almost 20% gain. In a previous post I mentioned that FRBK traded at a discount as its P/E of 17 was below the 24 given to its peers. The spin-off makes sense to me as the bank's management looked to position FBOD in new markets and sought to take advantage of Delaware's favorable banking laws. FBOD is entering the payday loan market where it is legal to charge interest rates as high as 440%/year. The bank plans to operate on both coasts and expand operations, while maintaining headquarters in Delaware. Payday loans are gaining in popularity. As people find it more difficult to refinance real estate they will have to rely on other ways to obtain cash, especially in an emergency. In addition, certain sectors of the economy have grown to rely on payday loans for quick cash. If management executes properly FBOD stands a great chance of growing with this up and coming market. A shrinking unemployment rate and strong overall credit worthiness for the US consumer is also a plus. New money is flowing into the spin-off as evidenced by the rising stock price and increase in volume.

See my website www.thesmartmoneyinvestor.com for my targets and details. Stay tuned as I adapt to this changing market.


Thursday, February 03, 2005

2/3/2005 Financial Healthcare

Recent rate increases by the Fed have served to move the market down in the days following their announcement. Although rates remain relatively low, 4.16% on the 10yr, their steady climb increasingly weighs on stocks. The S&P500 hit resistance yesterday at 1195 and was unable to break through it. Today, the market pulled back pausing the recent bounce. The nasdaq fell proportionately more than the overall market just like its decline in January. There is evidence that large investors are steering money away from head winded sectors to one's with a tail wind.

One sector to receive investment recently has been managed healthcare. Two stocks in my Focus13 universe, American Healthways (AMHC) and Matria Healthcare (MATR) project 2006 eps growth rates in excess of 25%. Both companies use a technically efficient infrastructure to help insurers cut their managed care costs. The technical competency of these companies has reduced their costs while increasing their margins. The companies give more service at a price lower than previously offered, thus helping insurers reduce costs and extend benefits. See my website www.thesmartmoneyinvestor.com and click on the company in the Focus13 table for more information.

I believe that more investment will come into the managed healthcare sector. First, there is a higher than normal level of short interest (SI) there. I believe this SI is left over from pre-election fear built up by politicians. I am not discounting the fact that there is a national movement to reduce healthcare costs. Initially, the movement was shot gunned at all healthcare companies, however, most recently it seems that the blasts have been quieted with critics most focused on the drug companies. That said, AMHC and MATR are companies that are helping to reduce costs and help to relieve the national situation. At first I suspected the SI was structural in nature; but after some research I feel the level of SI is more technical and speculative. AMHC SI is 10x daily volume (4.1x for MATR) far above the 1x daily volume avgerage of most stocks. Although a high level of short interest does not guarantee a higher future share price, research shows that a high level of SI acts to support market value. Also, stocks that trade less than 1M shares a day are more likely to have short squeezes as market makers or large investors rush to buy the shares during positive market events.

The healthcare sector has lost 8.8% over the last three years. I believe that investors are currently under exposed to this sector. The large HMOs have started to increase in value with many of them near 52 wk highs. This sector has unquestionably solid demographics. As the population ages these companies will accelerate in growth making them attractive for long term investors. With a value proposition like that it is not hard to see why fundamentals are so good. Given the current eps growth estimates, I have calculated an intrinsic value (IV) of $86 for AMHC and $121 for MATR. From a technical perspective AMHC is basing in the $32/shr range with solid support around $29.6. My near term target for AMHC is $50/shr. Technically speaking MATR has already started to break out. My buy target was below $41 with a near term target of $45 already being met, however, given the fundamental strength I am raising my target to $50 and may move my buy point to $45. Visit my website often and you can see the changes that I make.

The stock market is in flux as large investors rotate investments to benefit from structural changes to the economy. I believe the healthcare sector, specifically the managed healthcare industry, offer me an above average opportunity to generate superior profits. AMHC and MATR both meet my requirements for fundamental and technical strength. Stay tuned as I manage these investments for capital growth.

Tuesday, February 01, 2005

2/2/2005 Financial Paths of Least Resistance

Prior to the recent correction the market was technically poised to move much higher. Santa showed up on que and rewarded all the good boys and girls of Wall Street. Suddenly, in classic rally killer fashion volume dried up as the S&P500 and nasdaq moved higher, presumably because of holiday trading. At the stroke of midnight the ball fell and the selling began. First it was profit taking but the selling continued and it grew into a correction. Large investors, who had already started to rotate investments in late December, sold shares hard and tech shares harder. Good news was bad and bad news was worse as earnings reports and the layered levels of uncertainty dampened investors appetites for equities. We are about half way through earnings seasons and the markets attitude has turned. Good news on earnings is now being touted as a positive counting as one layer of uncertainty now clear. The bounce began five days ago, will it now turn into a rally? To answer that question I find it helpful to look at where were, where we are, then using the insight to determine where we are going. I just explained where the stock market was.

Where we are: Today the S&P500 presses up against its 50 dma as the Fed is scheduled to release its decision on interest rates. The nasdaq is still substantially below its 50 dma line but it too is flat ahead of the Fed decision. The results of the FOMC meeting today will serve to erase one measure of uncertainty and drive the market in the near term.

Where does the market go from here? First, the technically bullish condition present at the end of last year, although challenged, still exists. I feel that market wants to go up, however, the stocks that moved the indices to this point are not likely to be the same that take it higher. Secondly, fear is still absent in the market. The VIX is now below 12, low by rally mode standards. The VIX is a measure of OEX option activity, thus the low level of fear may not speak to the market as a whole. That said, the short interest (SI) for stocks in my universe (Focus13) has declined substantially for many issues. For example EBAY's stock price is down 34% from its 52 wk high, in lock step with a reduction in SI. Click on this link to see a graph of SI trend for ebay, http://www.thesmartmoneyinvestor.com/data/4C/ebay%20si.pdf. Finally, interest rates, the value of the dollar and oil prices continue to be bring change to the market. We know interest rates are going to rise, the dollar is likely to fall and oil is palatable at $50/barrel. It is my sense that investors are at grips with these issues and willing to put capital to work on the financial paths of least resistance. In conclusion, I believe the market will ultimately go higher, probably at a measured pace. If all boats go up in a rising tide, I think that some boats will go higher depending on their sector. I am carefully adding to my positions and lining up new ones that will benefit from the new tide. That said, the rally was challenged and careful investing is warranted. I am still reigning in my stop loss points and will likely be quicker to take profits. Below I have included the best and worst performing sectors for January 2005. I think that the rotation will continue.

Best
1. Oil and Gas...+6%
2. Grain...+5%
3. Metal miners...+5%
4. Home builders...+4%
5. Consumer staples...+3.5%

Worst
1. Airlines...-18%
2. Fiber optic equip....-17%
3. Semiconductor equip....-14%
4. Semiconductor mfg....-14%
5. E-commerce...-13%

I managed a return of +5.5% in January. Stay tuned as I find profitable investments and rotate them into my universe. You can see my positions and what I am doing by going to www.thesmartmoneyinvestor.com.