Thursday, March 31, 2005

3/31/2005 Caution

Thus far the S&P500 found support at the 1163 level. Yesterday's sharp rise comes in contrast to the preceding days relatively sharp decline. Is this a correction or something worse? Only time will tell but as I mentioned before a shorter term move in the S&P500 above 1212 is a must if this market's technicals are to strengthen. Also, the VIX is still a little low for a traditionally good rally. I would like to see it go above 16, however, investors bounced the market when the index got to the 14.5 level, which may be too low to get a good rally going.

I am cautious at this time. If you follow my website www.thesmartmoneyinvestor.com you see that I have taken profits in several positions. I have also added some new positions, WebMD (HLTH) and Great Atlantic & Pacific Tea Co. (GAP). Higher interest rates, higher oil and inflation are picking on corporate earnings. The question is by how much and will the capital markets react. Since earnings growth is one of my key buy/sell factors the stocks that I chose typically have 25% annual growth projections. GAP is one exception. The company has been loosing money, albeit at a slower pace than before. However, GAP has a huge real estate portfolio that is undervalued by the market. I believe investors are just starting to realize its potential, especially given the inflationary environment. See my website (link above) for my targets.

The Focus13 held up pretty well during the recent market decline. I am not sure if it will eek out a gain for the month but it remains positive for the year. I have started to add third phase stocks to the table as the second phase stocks (energy and commodities) show signs of weakness. That said, I may add some tech/cyclicals or energy commodities if the market tells me I am premature in my assessment. Energy stocks are staying buoyant. I am not sure that oil is going above $100/barrel given the growth in Asia (does that sound like a cliche or what?) anything is possible. Stay tuned to see my zig and zag in this changing stock market environment.

Please note: I am not sure if it is me or blogspot but I apologize for any format problems that you may have when viewing the blog. It seems that some views have the problem and others do not. Large text, different format and weird characters are some of the symptoms. If the problem persists I may have to make a change.

Monday, March 28, 2005

3/29/2005 Phase Out...The New Market Ahead: Part II

Part II Profiting from the Situation

If you have not read part one of this article please see my previous post. Although it is not necessary to read before hand you may find it helpful in understanding the bigger capital markets picture.

No one really knows what the neutral/natural interest rate is for sure. But, whatever the number it is important to note that when interest rates are above the neutral/natural rate consumers save more; consequently, when interest rates are below the neutral/natural rate consumers invest more. If I am correct about the future of inflation then the natural interest rate is lower than previously thought. Money managers' estimates are calling somewhere between 4.75% and 5.5% on the 10yr Treasury as equilibrium for rates. If that is the case the Treasury is nearing the low side of the range (4.62%) with a Fed moving full steam ahead, based on its more hawkish remarks made in its last meeting. It may turn out that the fed miss reads the current situation and unknowingly sends us into recession (Greenspan did this in 1999).

Of course if Americans saved more the Fed could be less aggressive about raising interest rates, right. The mainstream media has hyped a low savings rate of late as one reason that interest rates will be vulnerable to substantial increases. I argued that the huge cash balances in the coffers of Corporate America are in effect a form of savings. The unwillingness of corporations to invest means that rates may already be above the neutral rate. The effects of the first fed rate hike, seven months ago, are just now being felt as it takes 6-12 months for the increase to reverberate through the economy. Seasonally adjusted and looking at the first two months of CPI in 2005 verses the first two months of 2004, 2005 numbers are below 20% below 2004 figures. I feel that rates are near or above their neutral/natural level now.

Earnings dictate the direction of the market. Earnings growth will slow for most sectors as comparisons with last year's growth are going to be tougher. First quarter earnings warnings are somewhat higher than average as the effects of rising rates and commodity prices hold back gains for many companies. Former market leaders like tech and the financials are already down. Now there is evidence that the current leaders, energy and commodities, have hit late cycle highs as their technical picture shows signs of weakness. Excessive bullishness in these sectors and a fall from recent climax highs has late money earning negative returns. Earnings announcements are coming in and first quarter reports are due to start in early April. I expect capital markets to be volatile in the weeks ahead as economic data and earnings releases butt heads forcing capital to be repositioned.

Correctly speculating on the macro economic picture 6-12 months in advance is important, but it is paramount to be ahead of rotating cash if you are going to gain big profits in the market. Knowing what the economy is doing and what sectors investors are putting capital to work in assures investment success. Therefore, after you have an idea what the economy looks like you need to find a way to see where investors are going with it. One way I stay ahead of the mainstream is to track capital flow from sector to sector. I do this by statistically monitoring sector performance for given periods. For example, below is a list of the five best and worst performing sectors between February 25 and March 25, the period when the market fell from its 3 year high to its current level.

BEST PERFORMERS – Feb 25, 2005-March 25, 2005

Department Stores +14%
Drug Stores +13%
Construction Machinery +10.5%
Discount Stores +9.4%
Aerospace/Defense +8.5%

8. Medical Hospitals +7.2%

WORST PERFORMERS – Feb 25, 2005-March 25, 2005
Newspapers -12%
Gems -11.5%
Internet Content Providers -8.7%
Advertising Services -8.5%
Biomedical – 8.2%

Notice the leaders, probably not what you would have expected. Contrast the above sectors with those below from January 29, 2005 to February 15, 2005, the period when the market first bounced off its January 2005 lows and headed to its first level of resistance, the 1217 level on the S&P500.

BEST PERFORMERS – January 29, 2005 – February 15, 2005

Basic Chemicals +14.3%
Commercial Printing +13.9%
Electronic Parts Distr +11%
Leisure Hotels +10.9%
Steel Alloys +10.8%
Oil and Gas +10.5%

WORST PERFORMERS – January 29, 2005 – February 15, 2005

Computer Peripherals -6.4%
Internet Content Provider -3.4%
Auto Tires -3%
Mortgage Finance -3.5%
Paint and Blding Products -2.2%

I find it interesting that oil and energy are not in the top 5 performers for the most recent period ending March 25, 2005. Just about all money managers are bullish on oil and energy yet share price growth has slowed in relation to other sectors. I am not saying that opportunities in the sector are nonexistent rather that they have slowed and new money has become rare.

Smart money has been quietly entering retail stores. This is one reason I have started to accumulate shares in Great Atlantic and Pacific Tea Company (GAP). Investors see the opportunities in the sector from both a fundamental and technical stand point. It could be that the undervalued nature of the real estate is also a contributor to interest in the sector. Mainly though it is area that benefits from a strong economy. The retail food chain sector has been hit hard of late and is recovering from labor and competition problems.

Selective healthcare sectors are also starting to see more money flow. Investor interest in Medical Hospitals has increased. The sector moved from number 50 to number 8 in the last two months. What makes healthcare interesting is that it has under performed the market the last three years and investors see the sector as a pariah. To a certain extent under valued real estate assets will help hospital stocks, but solid fundamental and technical characteristics will ultimately be the driver. Intrinsic values for the group are more than 2 times market values with short interest well above normal levels. I have invested in two 25% plus annual eps growers, American Healthways and Matria Healthcare. Earnings for both companies are consistent and growing above trend. No one can argue with the demographics, especially if you have watched the movie, "Super Size Me". Given the state of the aging population there seems to be no shortage of medical customers. 2004 CPI for the healthcare sector was at 4.3%, 1.3% above the overall number. Healthcare costs are high, not because of greedy medical companies; rather unhealthy consumers are driving up demand. This trend is likely to continue to fuel growth in the sector.

In summary I believe interest rates are nearing their natural rate. Inflation reports are lagging indicators and in the near term the Fed will have reason to slow or reverse its current tightening of monetary policy. Earnings comparisons for early stage cyclical companies like tech and financials are going to be tough forcing investors to look elsewhere for profit growth. The current market drivers, namely energy and commodities show signs of topping out. They may run further but productivity and higher rates are going to mute prices taking out the legs from underneath their rally. Strong economy retail and consumer staples may take up the leadership role in the next phase of a reinvented market; however, it is healthcare whose inelastic nature will ultimately find investors' money especially when they look for earnings growth.

  • HLTH – WebMD has been under accumulation lately by large investors. I am adding the company to the Focus13. HLTH’s IV=18.92 while its current market price is below $9/shr. I am starting to accumulate shares below $9 with a stop at $7.5. My short term target is $12 with a longer term target of $15.

Thursday, March 24, 2005

3/24/2005 Phased Out...The New Market Ahead

First Part of a Two Part Series - Situation Analysis

A series of lower highs and lower lows has plagued the NASDAQ over the last couple of months. Leadership from the index has dried up as the smart money bought into the lower dollar plays, which tend to be concentrated in the S&P and DOW. Today the NASDAQ composite clings to its 200 day moving average (dma) as the next phase of sector rotation stands ready to play out. What does all this mean for the capital markets?

The S&P500 broke sharply to the down side recently breaching staunch support levels. The index stands in no man’s land, somewhere below support and above resistance (1184 and 1150 respectfully), not an enviable position given the state of the NASDAQ and now the divergence in the S&P600 between price and volume. Given the number of high volume sell offs in these averages recently it is obvious that capital markets are in transition. However, recent market machinations have caused fear to be woven in the actions of investors. The VIX has closed above 14 for the first time in a while. Although not historically high enough to kick off a meaningful bounce it is getting close. The rally that came late last January bounced when the VIX was at 16.5. Similarly, the October bounce started on a VIX of 16 and the rally that started in August 2004 was initiated on a VIX of 20. Whenever a bounce comes it must get the S&P500 above the 1212 level or, technically, this market will have trouble.

Higher interest rates and thus a rising a dollar is going to force this market to reinvent itself. In this scenario energy and commodity prices are likely to become muted as the competition for money slows the thirst for oil and ore. The question becomes one of how much and what kind of inflation are we faced with. Remember it was only a year or so ago the market was freaked out about deflation; in fact some countries like Japan are still dealing with it to a certain extent. Also, the emerging markets, whose economies are more volatile and more inflationary, have not led with run away inflation at all. They have become more mature and competitive keeping inflation in check. I believe that the world has become more competitive and technologically advanced to the point where productivity will be raised to counter the challenges of commodity shortages. In other words, shortages in energy and materials will be filled by the invention of new more efficient energy forms (eg hybrid or hydrogen cars, http://www.wired.com/wired/archive/13.04/china.html) and composite or recycled materials. Necessity, the mother of all invention, will keep inflation low and although productivity solutions may not happen over night, they will happen ever faster, perhaps surprisingly so.

  • NIKU - I reduced my position in NIKU to zero taking profits on my remaining position. The recent sell off has technically weakened NIKU and I feel there are better risks in other stocks.
  • RIO - Comp Vale Do Rio sold off yesterday. I reduced my position as higher interest rates and technologies are going to hold down commodity prices in the long run.
  • RIMM - I am shorting Research in Motion as it has come off its recent bounce. IV=$100 based on 2006 numbers, which is less than the 2 times greater than the market price and large investors have been selling the stock. Competition has caught up with RIMM and its eps growth will narrow. I am shorting above $77 with a stop at $80. My first target is $72 with a longer term aim at $60.
  • GAP - Great Atlantic & Pacific Tea Company is an east coast grocery chain. Although the chain has been loosing money for the last few years, a victim of the Walmart phenomenon, things have started to turn around. The company owns 649 stores many of which they hold title to. Much like the recent move in Kmart the value of GAP’s real estate may move the price of its stock higher. Further, short interest (SI) is more than 15 days above daily volume, a high level which is likely to support the share's price. I started to accumulate shares below $12.5 and have built a very small position. Today the company was upgraded and the shares are up sharply. I am going to add to positions on pull backs below the $14 level. I have owned the preferred shares for a long time in another fund and they have paid an annual return above 10% while the shares have appreciated.

    Stay tuned for Part Two - "Profiting from the Situation". I will give my take on the market’s next phase and how I intend to profit from it.

Tuesday, March 22, 2005

3/22/2005 Warning: 1180 Breached

Remember at the beginning of the year I warned about the 1180 level on the S&P500; well it was met yesterday luckily on lower volume. Still the essence of the move was registered if not yet fully felt as the index closed at its lowest level since January. The market has been down seven of the last ten days driving a wedge between investor’s conviction and reason. Fear has seeped back into this market if only through the cracks. And a big move is promised today, I just can’t say which way, as Alan Greenspan scribbles his message on the capital markets.

Large investors have been selling with vigor all month telegraphing their longer term intentions; yet the S&P500 and S&P600 have held up pretty well considering. Foreign investors have done more than their part as it has been they whom have been kindling the fire. But, now it looks as if the distant are becoming the distant few.

Ultimately, the economy is in good shape and in all likelihood I will look back on these days as a time for buying. I am cautiously accumulating shares that meet my current targets albeit at a measured pace. Although interest rates are rising they are still below the natural/neutral rate, prompting investing at the expense of savings. However, the affect of higher crude prices is climbing up the social economic latter as gas prices start to ding the low end. Hotel and leisure companies have lead to the down side recently and high flyer Electronic Arts revised eps estimates to the downside fairly sharply. 18-34 year old males are EA's biggest demographic and many of those constituents are still on the lower end of the wealth scale. Perhaps it is that group who is to blame for ERTS's plight.

If the Fed's comments are taken positively then the market will rally and I would expect a solid bounce off the current over sold condition of the market. Before I become a more aggressive buyer I want to see the S&P500 close above the 1212 level. If the Fed’s comments are taken negatively by the market I expect that we will quickly test the 1150-1160 level.

Sunday, March 20, 2005

3/21/05 The Easy Money

What the hell is, “the easy money”? It seems anytime I turn on business news some talking head is touting how, “the easy money” has already been made. What does that mean, “the easy money has already been made”? When I make money on an investment it comes from hard work, research, diligence, reading between the lines and speculation. For example, in January of 2004 I invested in Knightsbridge Tankers (vlccf) below $13/share. I learned about vlccf through research I had been doing on an on going basis for the previous four years. The company paid a dividend of over 15% and had a return on equity above 25%. In addition, the company’s directors where on the board of Frontline, the world’s largest petro-shipping company, and at the time the US dollar was falling, an impetus for higher oil prices. There were more factors but everything lined up to a point where speculation was worth the risk. I continued to buy shares on the dips. To make a long story short I sold about a year later for an over 200% return when adding dividends and growth. Recently, the media has said that the, “easy money has been made” in tanker companies. Again, what does that mean: Are tanker companies a buy, or sell; or can money be made trading the channel (RTC)? My point is that “easy money” is a fantasy, something unknowing investors use to describe a capital market move that they missed. If you are going to make real money investing you are going to have to do your work, its as “easy” as that and perhaps that is what they really mean when they say “the easy money has already been made”.

Technically the S&P500 has found support at its current level (1184). However, this week investors will be subjected to a wave of news worthy events, least of which will be the Feds decision on interest rates…bla bla bla…on what that means. Oil prices and interest rate speculation have a firm grip on this market and until clarity about either one’s apex is known I suspect stocks will continue to evolve around the current pattern. I expect that sector rotation will continue out of cyclical stocks and into more defensive or “path of least resistance” plays.

I see more money going into certain healthcare sectors as the group’s inelastic quality tends to support earnings during most economic conditions. I have done several studies and have found related stocks with intrinsic values (IV) more than 2 times their current market price, which denotes a fundamentally undervalued company. Further, short interest (SI) within the group shows stocks with short sales more than 10 times the daily volume, an occurance that is not unusal. Genentech (dna) was an example of how share prices can be affected by short covering on a surprise news story. The stock was up over 11 points or 20%+ on positive Avastin news. Could this sector be the next “easy money” story? Only time will tell. Stay tuned and find out or go to the website www.thesmartmoneyinvestor.com to see where I am investing in healthcare. Look at the Focus13 table on the home page; it is a good vantage point to watch me from.

Wednesday, March 16, 2005

3/17/2005 Macro Picture Grows Horns

Selling ensued in earnest today as the macro picture grows horns. Oil reached a record high and fear of accelerated interest rate hikes had large investors looking for the “easy” button. Technically speaking the stock market is breaking down. The RTC of 1196 to 1230 has been broken as the S&P500 closed at 1188. If the index doesn’t break the 1213 level on a near term correction this market is likely to move lower. Right now the market is thinking $60/barrel oil and 5% on the 10 yr Treasury before year end. Numbers like that are going to pressure stocks as both will reduce company profits and interest rate returns will compete with equity returns.

The market has been challenging this month. Buying is met with selling and visa versa. The smart money is leaving with profits and building cash. It is my experience that when a market behaves this way it tends to reverse. That said, I believe the lower dollar is making US assets attractive to foreign investors as returns in their countries are not as safe. US investors are buying and selling US assets at par, however, foreigners are getting a 10-30% discount. It will be interesting to see how much support foreigners are giving to this market as February inflows were at a record level. It may be the case that the global investor says, look the stock market in my country comes woven with corruption; Europe and Japan are not growing, the US is growing and transparent I need to put some money there. Or, they may say, the dollar is pretty low; if I buy now while it’s depressed maybe I will get a good return on the currency as well as the asset. Whatever the reason foreign buying of US assets is likely to continue a head of US investors.

I continued to reduce some of my positions today; however, I am staying with my core assets. I added protective puts to cover my shares of AMHC as the company will report earnings on Thursday. I am doing the same for RIO as they report later this month. See my website www.thesmartmoneyinvestor.com for a table of my complete Focus13 group of positions. Also, you can get a glossary of terms that I use in my blog.

3/16/2005 Tipping Point

I am at my island home this week to take care of some business and catch a few waves. My trip has been like the market, the business is fine but the climate well...let say, unfavorable. 10-15 foot waves, but the wind is so bad it makes them unsurfable; further, it is the coldest it has been all winter. Likewise, the global economy is growing and business in the US is good, but the stock market is moving against the wind while investors are left in the cold for returns as buyers’ interests in capital markets cool. Monday's higher close came on less than thrilling volume. Consequently, the S&P500 was taken back to its tipping point yesterday. The RTC* for the index is 1196 and 1230, it closed at 1197 a fraction above its 50 dma. Technically speaking if we do not make it above 1212 in the next few days the market will likely give up and move lower, at least in the short term.

My Perspective

Earnings were stronger than expected in the fourth quarter, and although comparisons are getting tougher earnings growth is respectable. Oil and commodity prices have risen, but those gains have thus far been swallowed and digested by stock market investors. Other factors are now up for consideration, interest rates and 1st qtr earnings. By the way, the VIX has trended higher recently closing above 13 yesterday.

What is holding this market back?

For one, there has been a notable change in interest rates. The yield on the 10yr Treasury recently spiked and is holding above 4.5%. When rates are notably changed smart money plugs the information into their intrinsic value machines and crunches fresh numbers. Usually, higher rates mean stocks must compete with bonds for rates of return and the costs of funds for business are going to be higher, thus they become a drag on earnings. Lower projected earnings mean a lower intrinsic value (IV). Also, first quarter earnings are coming up. Investors are posturing for the next wave of earnings reports.

  • FRBK – I took profits in Republic First Bancorp this week as interest rates rise I am reducing my exposure to banks. I sold an equal amount of FBOD as to capture the full $18.30 per combined FRBK and FBOD shares. My original cost was $14.5. I closed out the partial position for a 20% profit.
  • RIO – I took profits in Comp Vale Do Rio. I reduce my position in RIO taking profits locking in gains of over 36%. I wanted to lock in gains as interest rates rise, thus reducing my risk.

* See my website www.thesmartmoneyinvestor.com for a glossary of terms I use

Sunday, March 13, 2005

3/14/2005 The Ides of March

Beware the Ides of March. Julius Caesar ignored that warning and look what happened to him.

This old Martin Zwieg commercial keeps playing in the back of my mind, "be mostly be in stocks when rates are falling and out when rates rise". As the S&P500 broke above its resistance level last week so did interest rates, the timing could not have been worse. Since then the market has sold off and now rests at a technical tipping point. The S&P500's recent trend channel (RTC, see my website www.thesmartmoneyinvestor.com for a glossary of the terms I use) sits at 1197 for the RTCl and 1230 for the RTCh. The index closed at 1200 on Friday, down for the week and right through the 1210 support level (remember that number?) and near its 50 dma. Adding to the drama the index is resting on its 20 month channel line when viewed from a monthly chart. Is this a buying opportunity or is the stock market breaking down, investors have some hard choices to make. Failed technical rallies are bad voodoo.

In concert with my previous plan I started accumulating shares when the market broke out last week above the 1217 level. I was quickly stopped out of those positions as the market reversed course and left with me where I started. I am staying the course for now, however, I am evaluating the change in 10yr Treasury rates. Higher rates tax most of the market including energy and commodity companies. I shorted Valero Energy (VLO) above $75 as the technical outlook for oil looked top heavy and the rise in rates fundamentally hurts the sector; I posted the targets on the website if you are interested. I am also looking at short positions for some of the utilities like TXU.

By now you are no doubt familiar with Alan Greenspan's "conundrum" speech regarding the sticky nature of long bond rates (5 and 10 year US Treasuries). In short, in case you missed it, Greenspan said (paraphrasing) that it was a conundrum that while short rates were rising long rates dropped. It is widely believed the reason for this "conundrum" is foreign banks that wish to peg their currencies to the US dollar continue to buy the long bonds keeping rates low. Last week bond investors took Greenspan's comments to heart and sharply sold bonds driving rates above 4.5%. Shortly thereafter stocks sold off as the capital markets were roiled.

Rates landed at 4.56% for the week, but the die was cast when rates first broke out. I smell fear coming back into this market, a component that has been missed. Obviously current interest rates have been below the neutral/natural rate as commodity prices soared and the savings rate went south. If rates are going to have their comeuppance it is going to change the capital markets as investors weigh the risks to the rewards. The higher rates will compete with energy, utility, reit, banks and other stocks for returns on investment. The banks are to the macro economy, as semis are to technology. Bank stocks, like Bank of America and Wells Fargo, are trending lower, is this foretelling of the direction of stocks? Maybe, but further situation analysis is necessary to get a grip on what is happening and where to go from here.

First, it appears that Asian countries have started to diversify their assets in order to let their currencies float more freely in open currency markets. Korea announced its plans to do so a couple of weeks ago; capital markets did not like it then either. It is widely reported that China has also started to do some diversification as well. However, as Asia has been pulling away from the dollar oil producing countries have bought more. Saudi Arabia, Bahrain, Qatar and others have put excess capital to work in US Treasuries. In addition to Asia and the middle east third world countries are buying our debt too. There is an interesting article in, "The Philadelphia Inquirer". It outlines the real situation pretty well, check it out http://www.philly.com/mld/philly/news/11120221.htm. Secondly, productivity has been on the rise. The latest government report had it up 3.7% revised for the fourth quarter (http://www.bls.gov/news.release/prod2.nr0.htm). A more productive use of assets works to contain inflation, which has been the case thus far. If inflation stays low interest rates are likely to do the same. Lastly, the price of oil has acted to in some measure to slow the US economy. Higher rates are one way the Fed uses to maintain price stability, however, higher commodity prices have the same effect. As long as prices are market prices they will tend to equilibrium.

Although rates are on the rise I do not think that they are going to jump up too high too quickly longer term. The recent rise in interest rates is to be expected as the Fed raised short rates and capital markets will correct as each move is made. That said, I am watching the action of the stock market as we are at a critical junction. It is the action of large investors that move the market and if they go so will I. The Ides of March are upon us...it is best not to catch a falling knife.

Wednesday, March 09, 2005

3/9/2005 No Pain No Gain

I said it was going to be painful...it is. The S&P has retreated from its early week surge that took it above 1225. Confronted by rising interest rates, a droping dollar and near record high oil, the index is under pressure. I have been stopped out some of my new positions as the pull back has been enough to quickly reverse the direction of some of my new buys. The fact that the index closed at its intraday low (1208) on higher volume is a bad sign. Further, the close below the 1210 resistance level adds additional weight to the stock market.

I am staying the course with my original investments and their targets. I have reduced several positions as the sell-off has been meaningfull, however, I am staying with my path of least resistance stocks (commodity, energy and healthcare). Technically, several energy sectors are weak, however, investors are still buying many energy sector stocks indiscriminately. I will likely short VLO or others in the sector.

I am travelling over the next couple of days. I will try to make posts but it may be tough to be comprehensive. I should be back in full force over the weekend.

Monday, March 07, 2005

3/8/2005 See the Airplane, Watch out for the Submarine

This week is key as investors wait for a follow through on last week's surge. On the positive side the S&P500 rocketed through the stubborn 1217 resistance level last week to close at 1222 on Friday. What was most significant about this move was the fact that it closed above the 1220 RTCh* level. Yesterday's close at 1225 on the S&P500 was just above the rising RTCh*, a positive sign giving hope to investors that a sustainable follow through has begun. However, the index was up higher in the day and its pull back to a more or less flattish level at the close can be construed as a negative sign. As I expected the nasdaq composite was the leader as it works to catch up with the other indices. I spotted positive technical signs last week and the week before that should serve to push the index more in line with the rest of the market.

In my estimation the market will climb higher, although the move is likely to be somewhat painful. Investors are at a stage where they are taking profits, rotating investments and possibly building cash as natural rates and interest rates move toward equilibrium. I am cautious at this point making sure that I am in the right stocks and out of shares that are going to get tossed. I have started to add new positions and am considering reducing old ones as the next phase of the stock market begins. See my website www.thesmartmoneyinvestor.com to gain open access to my positions in the Focus13 table.

The energy stocks look like they are topping out to me. Gas and Oil drillers have risen about 30% this year alone and many have had triple digit growth rates in 2004. It is not the rise itself that signals danger rather the steepness of the rise (remember the 85% increase in the nasdaq in 1999/2000). I believe that large investors who did not participate in the sector in 2004 rushed in so as not to be left behind. Further, stock markets in the Middle East all have similar moves signaling that they are full of investors and possibly lacking more buyers. The consensus is positive on the sector and investors feel pretty good that they are going to make more money. But, if rising energy costs act as a tax on our economy, rising interest rates act as a tax on energy markets. Equity investors look six to eighteen months ahead when investing today. The price of oil may not move lower but the stocks will if investors find equity intrinsic values less than their market prices. Subscribe to my blog, "The Smart Money Investor" or add it to your favorites list to keep up on what stocks I choose.


  • EBAY - Ebay has developed a favorable technical pattern in recent weeks after its punishing fall. I am adding new positions in the company. Intrinsic values are still above $100/share and earnings growth rates meet my buy criteria. I feel that the nasdaq composite will catch up in the near term. I am adding positions below $42 and have a near term target of $46 with a longer term price of $50. My stop loss is tight at $40/share. Although there is competition Ebay is not going away. Further, Paypal, the company's payment system is being used at a record pace with many of Ebay's competitors using the system.

* For a glossary of terms please go to www.thesmartmoneyinvestor.com and click on the Glossary page on the left panel.

Saturday, March 05, 2005

3/6/2005 Tea Leaves, Crystals and the Stock Market

My Focus13 was up 7.3% in February, 12.8% in the first two months of the 2005.

February's performance exceeded January's as the fund was up 7.3% for the month. That brings it up 12.8% for the year and 76.8% on an annualized basis. Compare that to the 2.2% gain in the S&P500 and a 0.5% loss in the nasdaq composite for the same period. The fund continues to out perform the general market and mutual funds nicely. I published the February performance figures for the Focus13 on the website, www.thesmartmoneyinvestor.com.

The S&P500 closed at 1222 on high volume Friday, a scenario that technically signals a continuance of the rally. The fact that the move higher came off a stubborn base is all the better. I am likely to carefully add to positions now. That said, Friday's move was centered in the "path of least resistance" stocks. Stocks that benefit in an inflationary, low dollar environment like commodities and energy. The nasdaq composite was up Friday, however, it lacks the follow through of the S&P. Its future is uncertain as the index continues to base at a bottom, although there are signs that it is up trending. Looking at the technical big picture of the nasdaq I see the impetus for a rally. I will examine the fundamentals of the future below to help me sort out where to place fresh capital.

Tea leaves, crystals and the stock market all serve to forecast the future. All one needs to see the outlook for business six to twelve months in advance is to light some incense, stretch a little, breath a little, drink some green tea then look into their computer monitors and chant..."I do believe, I do believe, I do, I do". Miraculously, the numeric results of the collective mind of investors will jump out at you in the pages of your watch lists and stock screens signaling the year ahead.

Right now investors are telling me that this time next year energy and commodity companies will be generating growing profits. The fact that other sectors did not follow through says to me that investors are uncertain about the growth in those sectors. Who can blame them, rising interest rates and energy costs under scored by a weakening dollar are ,rightfully, factors that dampen growth for most businesses. Yet some are going to do well, perhaps exceptionally well since there is plenty of activity and liquidity being generated globally. Remember, Asia is having an unprecedented growth spurt. Also, technologies like HDTV, VoIP (and I don't just mean the voice), and the adapting of a growing number of mobile applications are going to drive the need for bandwidth and networking solutions. Biometrics, RFid and enhanced computer security are all infant industries cutting their teeth in this year. Not to mention all the new medicines and treatments available to those aging baby boomers who need them and, more importantly for us and the stock market, those who are going to need them.

Yes we have higher rates and energy costs but they are the result of real economic growth. Business is going to continue to follow through, it may not be straight up, but business is growing. In the short term interest rates are still below their natural rate (natural rate is a hypothetical number where interates rates are said to be in equilibrium). The rule says that when interest rates are below their natural rate investment out paces savings. Does this sound familiar: the mainstream media has written lately about how Americans are not saving enough; no SH** we are all investing! Americans will save more when the interest rates exceed the natural rate, at least that is what the rule says. Until that happens we are unlikely to have a recession, unless something catastrophic happens, which is always a possibility.

There is so much going on and much more to tell. I am saving it for future posts. If I look out a year from now, baring anything catastrophic, I see real growth. That said, some industries are going to grow better than others and some will even shrink (like newspapers). The key is going to be able to discern before everyone else what is growing the most and when does it start to grow. Right now I believe that the nasdaq has some catch up to do. If the S&P500 moves higher it is likely to drag the nasdaq with it. Also, healthcare will be one area investors will put fresh capital to work. My finger is on the pulse of the market and I am ready to move either way. Stay tuned as I will be making changes to the Focus13 in the near term to take advantage of this next phase in the market.

Wednesday, March 02, 2005

3/3/2005 Nasdaq Wants to Touch Bases and Score

The S&P500 sits squarely on an inflection point. Yesterday was the fifth time in the last 2 1/2 weeks the indice settled on the 1210 level. Although all major averages were up early on they all closed flat to marginally lower remaining at the sticky point. The nasdaq composite has lagged the S&P500 and dow this year and is currently trending lower in a divergence from the other indices. However, today I took a closer look at the big picture for the nasdaq and found the index is setting it self up well for a good rally. A base is building after January's correction with downward wedging volume. From a technical perspective capital markets look like they want to rally higher. Only time will tell and I am sticking to the near term channel on the S&P500 between 1190 and 1220. I do maintain that a drop below 1180 is trouble for the indice long term, but a close on higher volume above 1217 would be positive for the market. As for the nasdaq composite a close on higher volume above 2090 could signal a sustained breakout; on the other hand a high volume move below 2010 is a call for trouble.

As much as there is a change in the portfolio's of large investors, a revision away from tech; there are changes in tech companies, a revision away from the norm. What I mean by that is large investors are pulling cash away from the more mature tech, companies like Cisco, Intel and MSFT and placing fresh cash into investments that will benefit from the state of the current macroeconomic evironment. But, new tech phenomeons like blogging, podcasting, nano-tech, new advances in search and RFid are shaping our future and off the screens of mainstream investors. Sustainable business models for these infant industries are in various stages of their gestation with most of them bound to die in the womb. You can bet that the strong will survive and will soon be finding their way up the investment food chain.

As I mentioned in the first paragraph of this post it is possible that the nasdaq composite will move higher to get in step with the other major indices. Part of that advance will be fueled by new leaders. I am not saying the bloggers and podcasters will come out of nowhere to lead the nasdaq higher. Rather I believe that if the nasdaq does move higher short term it will be driven by some new companies and the nascent technologies will start to find fresh cash as early cycle investors recognize the opportunities. Keep posted as I am doing some digging to unearth these new leaders and get in ahead of the mainstream.

  • AMHC - American Healthways moved higher on volume yesterday and is testing its 52 wk high. AMHC has based between $29 and $35 since November 2004. A break out above the $35.5 level could signal a move higher. IV for AMHC is above $86/shr. and earnings growth exceeds 30% for the next two years according to analyst estimates. Both numbers are above my investment criteria making AMHC a good investment in my eyes. AMHC is a member of my Focus13, see my website www.thesmartmoneyinvestor.com for specific details about my position.

Tuesday, March 01, 2005

3/2/2005 Fear Factor Revisited

Capital markets bounced back yesterday. The S&P500 climbed back to the sticky 1210 level as the nasdaq and dow both forged ahead. Yesterdays close (on the S&P) marked the fourth time the index stopped at that level of stuborn resistance. The basing in this range can be a strong positive for the market. Technical characteristics for the both the S&P500 and dow are shaping up in classic fashion, that said a failure from this point would be a negative for a near term rally. I mentioned yesterday that although the market has been hopping up and down near term a slightly higher trend is developing in the S&P500. An RTC between 1190 and 1220 has formed. Look for investors to buy the low end and sell the high end of that range.

I am making some changes to the website www.thesmartmoneyinvestor.com. I just added the latest in short interest (SI) for the stocks of the Focus13. I am building SI trend charts and am calculating performance figures for February. I hope to have them posted shortly. I added a new page titled "How to Get the Most" (www.thesmartmoneyinvestor.com/Getthemost.html. This page gives viewers insights into how I use the information on the site and the other pages you can look at, which many viewers are not aware even exist. I am committed to expanding this site and will be evolving its content as the media revolution plays out.

January's SI trends for the Focus13 showed a drop of about 3% over December's numbers. February's SI change was interesting as there was a wider range of fluctuations than in the January period. I believe that this suggests a more aggressive rotation out of nasdaq composite stocks and into S&P500 stocks. That said, S&P600 small cap stocks continue to out perform all, suggesting a rotation out of the nasdaq large caps and into selective "path of least resistance" type stocks. The nasdaq composite has trended lower while the S&P500, S&P600 and Dow have trended higher. February's SI trend increased 15% over January's number for the Focus13. I believe the market is telling that fear is present but it is spead out into certain sectors and stocks rather than draped over the market as a whole. February's increase in SI is healthy for the stocks of the Focus13.

  • MATR - Matria Healthcare continues to surprise me. A low volume sell off in the morning was met by a higher volume buy up by large investors. When business cycles flatten or move lower inelastic industries tend to do better as investors look for more stable growing profits.