Friday, May 27, 2005

6/1/2005 Smart Money Investors Look at Currencies

Technical

The S&P500 holds between its now support level of 1191 and resistance at 1212. It appears that the index is building a base near the 1191 level before it makes its next move. Technically speaking the index has recovered from its April 20th lows to form a bullish pattern going forward. The key will be that the S&P500 stay above the 1182 near term. If the market behaves in the fashion I describe above the next move will likely be to the 1212 level, otherwise the market may move sideways to lower. I am staying true to the fund's game plan buying on dips and selling at targets. The fund continues to significantly out perform the market. To learn about the fund's current positions you can click on www.thesmartmoneyinvestor.com.


My Long Term Currency View Plays Out

About a year ago I wrote that China's Yuan peg to the US Dollar was beneficial to the US and very painful to Europe. My view continues to play out as the US and Chinese currencies values have served to largely shout out Europe from participating in China's growth. Now European growth, which has been slow, is in danger of slowing further being weighed down by the inertia of socialism and a highly priced currency. As interest rates rise in the US the dollar should strengthen against the Euro thus helping Europe compete a bit better in Asia. Provided that China continues to grow this should also help the European economy grow thus enabling it to buy more goods and services from the US. The Asian currency pegs have helped the US more than than hurt us in my view. Yes we are loosing manufacturing jobs and ultimately we will loose other more professional jobs as we have to compete against fierce competition. However, US unemployment remains relatively low at about 5.2% and I would expect that with the US entrepreneurial spirit as strong as ever business will not only find ways to compete but to thrive keeping job loses to a minimum.

Political rhetoric only serves to confuse the public. As long as a trade war with tariffs and protectionism remains rhetorical the US will continue to grow. In the end it will be China that is hurt by its currency peg. If there is a revaluation of the Yuan upward or if tariffs become a reality the market will most likely fall as a near term recession will ensue. I am hopeful that China will stay on its current path of removing its political controls and working toward a more flexible currency. The smart money is ready to act if a change makes it necessary.

Tuesday, May 24, 2005

5/24/2005 Markets Brace For New Data

Technical

Yesterday the S&P500 broke and closed above the 1191 level, an area of major resistance. As I mentioned in my 5/23/2005 post the markets will be tested this week, and they are about to be. Many stocks have exhibited solid technical characteristics this week, but have yet to be challenged by the latest wave of economic data. Provided that smart money investors continue to buy leading issues through the release of the data this week I believe the market will move higher. The key will be when the S&P500 breaks and holds above the 1212 level. If the 1212 scenario occurs I am likely to broaden my sector choices and buy more heavily.

I continue to add healthcare issues and certain story stocks. I am keeping the fund on course, adding to positions when buy targets are met. I am adding American Pharmaceuticals to the fund as it bases at its current level. See the website www.thesmartmoneyinvestor.com to get a full listing of the fund's current positions and the targets for APPX.

  • APPX - American Pharmaceuticals has begun a basing pattern after its recent 25%+ decline after the quarterly earnings release reveled a revenue shortfall. Gross profit margins continue to grow and are above 50% while net profits, which are expected to grow 125% in 2005, are still on track. The company's CEO says that they are positioned to release eight to ten new drugs each year. In my opinion this generic drug manufacturer will benefit from the country's aging demographics and drive for lower costs.

Sunday, May 22, 2005

5/23/2005 Markets Will Be Tested This Week

Recap

Capital markets reached a crescendo on Friday as earnings season came to an end and the indices rose to the next level of resistance. In general, second quarter earnings season was successful as eps growth for the S&P500 grew about 12% vs. the consensus estimate of about 8%. Last week's late stage rally pulled most indices above their 50 day moving averages but left them below levels where the market had failed before. Friday's options expiration was a non-event and ended, as usual, flat.

The Test

The real test for the market starts this week. Fed minutes on Tuesday and GDP revisions on Thursday are the main events. An economic soft patch and strong earnings growth produced the best of both worlds for investors over the last couple of weeks. Now that earnings are out of the way investors' actions will likely be driven by economic data and mergers. I expect more volatility as the smart money takes profits and repositions itself over the coming months.

Tech led this latest rally as astute investors bought low RSI bargains when no else wanted them. I am not convinced tech is going to come back with the fever pitch investors would like, however the second quarter seems to have gusto. The sector CEO's that I have talked to say that their businesses have improved but are not blockbuster. I am more concerned about the third quarter, which is by far the worst quarter for technology and the one investors are likely to discount near term. If a slow patch takes hold and dampened growth, tech will pull back hard. On the other hand if tech can maneuver its way from improved to sustained growth then the stocks will be worth owning. Stay tuned as I am keeping a close watch. You can always see my positions at the homepage www.thesmartmoneyinvestor.com.

Watch Out: Revalue the Chinese Yuan

Becareful what you ask for. I believe a revaluation of the yuan will severally hurt global capital markets in the short term. If the cost of the yuan increases so will the price of about every imported manufactured good. Profits will drop and a recession will likely ensue unless the process is done with kit gloves. Large unions have been lobbying Congress to put pressure on the Chinese to let their currency float. If China does not give in Congress and the EU may put a 25%+ tariff on all imported goods from the region. In case you haven't noticed a vast majority of failing business in the United States are the ones that have large labor unions (e.g. Auto makers and Airlines). Union labor has dropped from about 20% of the population 10 years ago to about 7% now. Yet these unions attempt to speak for 93% of all workers, most of whom have benefited from the increased global competition and trade. The scary thing for the unions is that if China's banking system is exposed during this process and found to be less than solvent the yuan will fall and everything will be cheaper putting more pressure on union labor. The Chinese stock market has fall to multi-year lows for a good reason: their state owned businesses are a mess and loaded with debt. At the end of the day all we can hope for is that all political rhetoric is exactly that, rhetoric. China seems to be doing a decent job of slowly revaluing their currency. I do not see a reason to step in at this time. You can be sure news related to the revaluation of the Chinese Yuan will add heaps of volatility to the market, be prepared.

  • APPX - I was stopped out of my original investment in American Pharmaceuticals. The stock has fallen further as some investors are taking profits. I continue to study the situation and may make an investment in the near term. The company's fundamentals are very good with some hicupps behind them for the most part. IV=$86/share and the company's pipeline is solid. Healthcare is still performing well and is likely to do so as the economic cycle is right and demographics are improving for the group.
  • GAP - Great Atlantic and Pacific Tea Company continues to rise. Last month 50% of the outstanding share were sold short. This month 40%+ are still sold short and the stock has risen 30% since then. The company is in the process of right sizing itself and selling off some businesses. Many of the attributes that made the Sears/Kmart deal so good can be found in GAP. I am likely to move my buy target up to $21 although I am considering buying more here. Most my position was bought in the $12-$14 range.

Wednesday, May 18, 2005

5/19/2005 Higher Ground

Technical

Yesterday the S&P500 broke from its rock and hard spot, namely the 50 and 2oo day moving averages to log solid gains on higher volume. This move has significance beyond just breaking the 50 day moving average. First, it was a continuance and confirmation of the up trend I wrote about on May 7, in my post, "Smart Money Investors Shop for Storied Stocks". The Smart Money started to buy stocks at bargin prices then, now the rest of the market is catching up. Second, the 1163 level on the S&P500 was an area of overhead resistance dating back to August of 2004. When the stock market had its mid April 2005 fall the S&P 500 broke a rising trend that started back in that August (2004). Since the April 2005 low the market had trended higher, hugging the August 2004 trend line. Yesterday's move marked a break out from that trend, the first on higher volume and certainly the most convincing. Finally, the index now sits above several layers of resistance and is positioned to move higher. That said, this market corrected when the S&P500 failed to get above 1212 around April 7th of this year. It is my belief the S&P500 must break the 1212 level if it is to mount a serious rally. I would look at 1191 and 1212 to be areas of major resistance that could spoil the fun, at least in the short term.

I am staying the course as I added to my good positions at bargain rates, although I have taken profits in some issues and was stopped out of others. My fund did well in April, even though it was the toughest month of the year. I am looking to add to my gains in May. However, I do have concerns thus I am insuring my profits with protective puts in some cases.

Concerns

I have noticed heavy money flows into the 10 year treasury. There is a fair amount of cash moving to higher ground. Issues regarding the revaluation of the Chinese yuan and careless hedge funds are percolating. I am not going to go into detail here, but I am concerned. Stay tuned as I will write a bit about my findings in a future post.

  • AMHC - American Healthways continues to move higher closing above $41 yesterday. The company announced a pilot plan with Cigna. Adding another insurer like Cigna to the company's customer base is likely to boost profits significantly. I have not yet been able to get the numbers, however, an additional 10-50% profit growth is not out of the question and is being built into the stock price.

Tuesday, May 17, 2005

5/17/2005 The Goal of this Blog

The goal of this blog and its associated website is to provide me with an overview of my thoughts, positions and targets for a private fund that I manage. I use this information as a baseline to keep me in line with the fund's goals. This fund looks to make investments that will return 20-50% (or more) in a six to twelve month period and turn those investments as many times as possible. If I do my job correctly my fund should yield 20-60% annually. Last year the fund returned over 40% and this year we are ahead of that. I cut the losses quick and constantly look for new assets to invest in. You are welcome to follow along, I hope that you find its contents insightful.

I the past I published the blog everyday, however, I found that in doing so it became redundant and short sited. Now I publish only when there are fresh developments that signal a change in the direction of capital markets or individual stocks. I publish my latest ideas as soon as they become evident. Quality insights are the value proposition I offer my clients.

If you follow this blog regularly you will find that I am significantly ahead of the consensus. Click on one of the chicklets to the right and subscribe to this blog. You will then be notified each time I update "The Smart Money Investor". Also, you will want to bookmark the website www.thesmartmoneyinvestor.com as the timely position and target changes I make there are not necessarily made in this blog. Check it as often as you like.

Thursday, May 12, 2005

5/13/2005 Between a Rock and a Hard Place

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Technical - Between a Rock and a Hard Place

Markets sold off yesterday with the S&P500 falling to the 1159 level. The decline came on below average volume although price declines were extended, the index lost 1%. Volatility widened as the VIX increased to 16.12 signifying that fear is higher than normal. In the last several days the S&P500 rallied from yearly lows, crossing its 200 day moving average (dma) then touching its 50 day moving average, only to fall back to its 200 dma level. Is the index caught between a rock and a hard place? Not tough enough to break the 50 dma yet strong enough to hold the 200 dma. Only time will tell, but investors have viewed the 200 dma as a buying opportunity recently, stepping in to buy especially when volatility was high. As the distance narrows between the 50 and 200 dma pressure will be put on the market to move one way or another.

I did take some profits today as the technical characteristics of certain holdings weakened considerably. See the homepage at www.thesmartmoneyinvestor.com for the details. For the most part I am staying with my game plan, buying at targets. I did purchase some protective puts as insurance in case there is a market melt down.

Semiconductor Effect

In the market's steep decline I think it is worth noting that the semiconductor index (SOX) was up yesterday. Many large investors look to semiconductors as a leading indicator for the rest of the market. My colleagues in the hardware business tell me that business is better than last year, although, it is not 1999 again. They like the prospects. Semiconductors have seemed to bottom, the question will be whether they can hold and grow or not.

Financial Fears

Recent news about failing hedge funds shook capital markets this week. The fact that some funds are in trouble cannot not be denied. General Motors' stock and debt has sharply declined and oil prices have pulled back catching many investors long. These stresses may force large investors to sell positions and could be one reason for the increase in market volatility lately. That said, the is smart money on the other side of these positions and will profit from the change. There is plenty of money on the side lines that will enter the market to buy bargains. Lower oil prices, increasing retail sales, a strong housing market, positive activity in semiconductors and lower interest rates can be catalysts to move the market higher.

Tuesday, May 10, 2005

5/11/2005 Danger Equals Opportunity

Performance

Even though capital markets were down sharply yesterday our fund moved higher. The fund gained over 8% in April; compared to the S&P500, which was down about 2% in the same period. Visit the Focus13 Performance report for April 2005 on the home page of the Smart Money Investor website (www.thesmartmoneyinvestor.com) to see where we are investing and how we performed.

Technical

Yesterday's decline did not surprise the smart money. Though the fall was blamed on rumors of financial stress caused by hedge funds, I believe, plain and simple, the market turned lower after the S&P500 was unable to break through its 50 day moving average. The 1% drop came on lower than average volume signaling that for now large investors are holding onto their shares. I am continuing to execute the fund's game plan. It is likely that the market will be volatile short term as it goes through its normal tests of various support/resistance levels. I continue to accumulate shares when they reach bargain rates and my prescribed targets.

Failing Hedge Funds

Rumors about the troubled hedge funds served as a catalyst that helped to move the market yesterday. I believe that there are a number risks related to the financial structure of the global economy, however, failed hedge funds is not a major one. Once considered the smart money, the growth in number and breath of hedge funds has diluted the effect a single fund has on the overall market. Since hedge funds are able to take multiply sides of any trade it can be argued that the decreasing market volatility over the last several years is, at least partly, attributable to the increase in the number of hedge funds. It is my stance that the growth in the number of these funds adds to financial liquidity and the stability of the financial system. Market declines based solely on failed hedge fund rumors indicate a buying opportunity.

Saturday, May 07, 2005

5/8/2005 Smart Money Investors Shop for Storied Stocks


Technical

Over the last two weeks the S&P500 bounced off its 2005 low and began trending higher. In my post, "The Smart Money Investors Reach for Their Silver Bullets" I wrote about the then bottoming process and barely visible up trend. Since that post the index rallied, breaking several levels of resistance to close the week just below its 200 day moving average. Last week's rally happened in classic form with rises greater than 1% on heavy volume and down turns that came on minor declines under low volume. From a technical perspective capital markets are poised to move higher. That said, I am a bit concerned as many of last weeks gains came from stocks that were most beaten during the recent correction. To put it in perspective, many stocks that rose 4-10 percent last week were the same ones that fell 10-30% or more during the correction. This may signal that investors who panic sold at the market low bought back positions so as not to miss the bounce. With few new leaders coming from the ashes of the March/April wreck I feel the rally must still prove itself. Before the smart money feels sanguine about this market again the S&P500 needs to break out of two very tough levels of resistance, the 200 and 50 day moving averages.

Storied Stocks and Big Bounces

Until the stock market breaks it 50 day moving average I feel that good gains will come from story stocks and beaten down opportunities. Stocks that buck the trend and ultimately give leadership to the rest of the market or ones that have fallen below their true market values are likely to be the best performers. The fact that the major indices have been below major trend lines for some time tells me that it may be a while before sustained price appreciation is realized. Until then investors are likely to buy new leaders and value stocks.

I am staying the course by holding positions and adding to them once prices meet my buy targets. To see my fund's positions click on www.thesmartmoneyinvestor.com. Currently, I am adding shares and am looking to add some new prospects.


  • APPX - American Pharmaceuticals fell almost 20% last week making it an interesting prospect. The company increased profit margins and net income, but fell slightly short of revenue estimates. I calculated IV at $96.82 based on 2005 numbers, which are conservative. Technically the stock is sick and warrants caution, however, a longer term review of the chart reveals some positive patterns. I like the generic drug manufacturers as law makers seem to be making it easier for these companies to break certain patents and overall health cost pressures favor the group.
  • GAP - Great Atlantic and Pacific Tea Company rose on higher volume last week. The stock gained as much as 10% as smart money investors lapped up shares. About 50% of the stock's float is sold short, a positive sign for the price of shares especially since investors are coming to the realization that the company's real estate is under valued. GAP has many of the dynamics that made Sears and Kmart two of the years best performers.

Wednesday, May 04, 2005

5/4/2005 Brave Newer World

Dramatic changes to the global economy continue to unfold at an increasingly rapid pace. Technological advances have increased productivity to record levels. Globalization has changed rural agrarian civilizations into manufacturing societies and industrial complexes into knowledge based clusters. In general, global money flows with less friction than ever before helping to keep inflation in check. On the other hand, structural changes levied by governments and certain facts of life take the opposite side of the equation and are additive to financial friction. Although the formulas remain the same the variables have changed. Tred carefully as previously unseen factors may visibly affect our future.

Stagflation is not an issue at this time. Widespread use of technologies such as ERP, CRM, IT and others help companies get more from each hour of labor. The next step toward reducing labor costs will be the use of bots, programs that perform tedious IT functions previously done by humans. Some examples of early bots are viruses and/or spyware. Programs that move from machine to machine gathering information about their hosts and relaying it back to their creators. These bots are exponentially more efficient than any human, performing a function in hours, that which previously took humans months. New technologies, such as bots will keep pressure on wages thus keeping inflation down.

Populations are shifting in location and complexion further helping to reduce inflation, however, these changes are not without some fluctuations. Hundreds of millions of Chinese are moving from the mountains to the cities to better their lives. These new urbanites are filling manufacturing jobs previously performed in other countries. A more educated global population finds IT, engineering and medical jobs growing in India, Pakistan and Eastern Europe. All these changes in the way global populations live and work are having a vacuumous effect on jobs in Europe, Japan and the United States keeping wages low. Wage inflation should stay low in these latter countries to the extent that their governments promote free trade. However, protective measures tend to creep into laws of job loosing countries that tip economies out of balance. These measures provide temporary political relief, yet in the long term do much economic harm. There is always a price to pay for such reforms. Further, aging populations with shrinking birth and immigration rates are poised to suffer the most. In the future younger workers will have to fund social programs designed for the aging, thus adding to financial friction. Societies with shrinking populations are likely to also have shrinking economies. Going forward globalization will spur economic growth while keeping inflation low. As long as governments provide a freer trade environment businesses will thrive; if they do not some will pay a price while others will benefit, however, in the long run most will lose. That is a fact of economics.

In the long term there are great opportunities in the stock market and the smart money knows it. Inflation and interest rates are poised to stay low for the foreseeable future. Commodity prices will fluctuate, however, substitutes and conservation efforts will be quickly invented when prices get out of hand. I am sure there are going to be many set backs, however, for every step backward society will take two forward. There is a brave newer world for those who endeavor to benefit. Like anything else nothing ventured nothing gained.

Sunday, May 01, 2005

5/2/2005 Smart Money Investors Reach For Their Silver Bullets

The inertia caused by rising interest rates and higher oil prices has finally pulled economic growth back as shown in last week's advance GDP report. Annualized growth was reported at 3.1%, the slowest in two years. Bearish sediment is at a recent high as the stock market boogey men of fear and uncertainty have scared investors into larger cash positions. Although the S&P500 moved sharply lower, on the release of the GDP data, it ended the week slightly higher. This was somewhat surprising as I expected a much sharper market decline given the number's deviation from the consensus number of 3.5%. In my last posting I reported that even though the S&P500 declined in previous weeks the index trended slightly higher the last two, a trend that continued on Friday. This upward trend was also backed up by higher volume leaving room for the argument that the smart money has stepped in to buy from panic sellers thus forming a bottom for the index. Has the market priced in the effects of the current slow down? Are investors ready to exercise current market demons and move forward, or do they need more time? The smart money knows that there are no silver bullets, only hard work, the ability to see first that which is standing in front of them in the dark and having the fortitude to act before it is clear for all to see.

I am staying the course although I have added puts to protect profits in some positions. My fund is over weight healthcare and I am still accumulating shares within my targets. That said, I have taken profits in some recent shorts. Click on www.thesmartmoneyinvestor.com to view the fund's current positions. Also, I have recently posted short interest trends for the stocks in the Focus13. There has been significant changes is short interest trends with some surprises. You can view my short interest trend charts by clicking on the company names on The Smart Money Investor home page (www.thesmartmoneyinvestor.com). Subscribe to or bookmark this page as I update it often. In future posts I will publish my views on stagflation, the Chinese banking crisis and my money making investments.