Sunday, July 31, 2005

8/1/2005 Which Way Will We Go?

As I predicted the market has remained in a basing pattern as investors took profits and rotated positions last week. Both the S&P500 and Nasdaq composite stayed in their near term range of 1215-1235 and 2171-2191 respectfully. I consider this type of behavior to be very healthy for the long term, however, short term it signals greater risk as a new leg of the trend defines itself. Often times corrections happen during this process. A breakout below the aforementioned levels should be considered a danger sign, and a signal to the smart money that opportunity is near.

I am concerned about the bullishness of the market right now. Earnings were very healthy last quarter coming in ahead of estimates, perhaps even in double digits. Many analysts see only blue skies and are very bullish on the market. Please note that we are heading into the third quarter, which is often the slowest of the year for many sectors especially tech. It is possible that we will see a heightened level of warnings or at least some conservative posturing by management in the coming weeks as comps will be comparatively difficult. The VIX is below 11 and not many breakouts occur near that level. I have also noticed that many leaders have come off their 52 week highs, perhaps experiencing profit taking, while a new set of leaders has been slow to evolve. That said, I am cautiously optimistic at this time. Momentum is with the bulls and if fresh money comes in during the first days of the month a breakout may ensue. Yes, I would like to see more fear, however, asset allocations may just favor stocks. A bid comes into the market whenever it pulls back, perhaps the result of falling bond prices. Only time will tell, but I am not likely to bet the farm either way at this time, rather I will wait for my price and get it when I can.

Recently, the fund was stopped out of some new investments quickly, often this is a sign of a correction. I am continuing to be cautious, keeping an eye on some recent investments looking to buy back at better levels.

  • APPX - American Pharmaceutical Partners has recently broken to the up side from its support level basing pattern at $39. The fund was stopped out of the stock about a month ago on technical weakness. I love the fundamentals of the company, however, it may be too highly valued for many investors, thus my concern on the technical breakdown. I continue to hold it in our longer term funds but for the focus13 I was forced out early. The sector is ripe for consolation as bigger companies look to increase earnings. I added some shares at $42 and would look to add more in another pull back. Now the stock exhibits technical strength as it currently rests at the $45 level resistance. LIBM is trending higher rising from 4 to 10 in a couple of weeks. I will consider buying more shares if the stock bases or pulls back slightly. Watch the website to watch what we do.

In coming posts I am going to discuss the resurgence of broadband (I wrote about this about this coming new wave last year) and the effects of globalization. New trends are emerging and that means new leaders. There will be opportunities for those who are smart, so stay tuned. Visit our website to see our fund in action. You can learn about all the fund's investments and their buy and sell targets.

Tuesday, July 26, 2005

7/26/05 New Insights

New Insights

History says that July is an awful month for stocks. However, as the month (and earnings season) comes to an end investors can breath a sigh of relief. The S&P500 and nasdaq composite have held up very well even reaching a multi-year high. Can this reversal in trend continue through the generally rough months of August, September and October? True, this is the time of the year when the market has historically under performed, however, it is also the time when the smart money has picked up bargains to sell to end of the year investors and line their pockets with profits. What will happen this year is yet to be determined, however, it was a decade ago this month when an unusual July closed at its high and helped to fuel one of the greatest bull markets of all time.

Now the smart money turns its sights to the future. Profits are to be taken and the next six months to one year are to be speculated on. This scenario is currently being played out as the S&P500 continues to base around its recent highs. As I mentioned in past posts I expect the index to fluctuate between 1215 and 1235 in the near term, breaking out one way or the other depending on investors' intermediate term vision. It is clear that cash is rotating from previous leaders into new ones. For example, for the period of July 1st through July 26 the bottom and top performing groups show a distinct change from the beginning of the year.

July's Bottom Performing Groups

Data Storage -14.25%
Hospitals -8.9%
HMOs -6.4%
Online Schools -2.8%
Generic Drugs -2%

July's Top Performing Groups

Steel Producers +12.3%
Oil and Gas Equipment +11.3%
Semiconductor Equipment +11.3%
Semiconductor Mfgrs +11.2%
Energy +11.1%

July's top performers are indicative of a growing economy especial in with the addition of the semiconductor group. The mainstream media has widely reported the growth in tech and has also noted the absence of leadership from financial stocks. However, the media has failed to fully report that financial stocks are not laggards, rather they are steady as a group up around 3% for the above stated period, which is not too bad. Yes some of the large financial stocks are underperforming, however, changes in leadership for the group would not surprise me.

My sense is that the economy is growing and the environment is fertile for more growth. M&A activity in the tech sector is growing and is fueled by a perception that business opportunities exist for growing profits. If I were to say how it feels to me I would describe the current market like the real estate market of 1994. Stocks attractiveness is not great but I need to own them because I need the room, I hope that you catch my drift. My CEO friends are all encourage about the future and are investing. That is a change from the beginning of the year when the same people where cautious to concerned about the future. Most of these executives are from the tech sector.

The fund has been rotating positions over the last couple of months and the process continues. Recently, we have been taking good profits and have been stopped out of some new investments. Activity like this is indicative of the changes going on in the market. Stay tuned as I will be making more changes to the fund. You can view all the fund's positions along with their targets at I wish that I could say that the stock market is going to drive higher from here, but I cannot. What I can tell you is that you can follow this blog and watch us as we maneuver our investments profitably for our clients.

Thursday, July 21, 2005

7/22/2005 Structural Surprises


The S&P500 pulled back sharply yesterday as surprise news events dominated the day. The index fell to 1227, an 8 pt decline, on higher a volume. Large investors sold off positions during the session mostly to take profits, but also due to perceived structural changes in the economy. The nasdaq performed in concert with the S&P, pulling back away from its 52 wk high.

Hopefully, the market is in the process of basing at this level. I would expect the S&P500 to oscillate between 1215 and 1235 for several sessions before moving one way or another. A deviation from those levels especially on higher volume would lend credibility to the prevailing move (up or down).

Structural Surprises

China surprisingly revalued its currency today, apparently 2.1% higher. Although this move is being reported as mostly symbolic by the mainstream press the smart money sees more. In the past I mentioned that I believe a yuan revaluation to the upside is a short to intermediate negative for US stocks and longer term positive. No doubt investors will begin discounting this change now.

The first effect of the change in yuan value will be an increase in long term rates. Alan Greenspan's "conundrum" is likely to be solved and yields on the 10yr treasury will rise. This may not be so bad for stocks. As I mentioned in my last post bond investors will be pressured short term to reduce bond holding and probably increase equity holdings. This scenario is likely but not certain.

Higher rates are also likely to affect the housing market and consumer spending to a certain extent. Credit will finally tighten to cut off many new home buyers and accommodative cash will dry up. My fear is that real rates are already at neutral and a further increase may dampen GDP growth more than expected. I am keeping a close watch on rates, carefully buying/shorting the right stocks as things settle out. See the website to view our fund's current investments and their buy and sell targets.

The re-value of the yuan also makes Chinese products more expensive, 2% in this case. It is likely that Chinese companies will have their margins reduced as most lack pricing power and will absorb the yuan increase. However, if costs are passed on to consumers, which could happen for a variety of reasons, manufacturers outside of China will find that their profits are pressured since many of the items they produce are made from Chinese parts. Higher costs will mean less profits as US manufacturers also lack pricing power. The flip side of this of course is that products that the US sells to China just got a 2% reduction in price. Since this reduction is across the board investors might find that the Chinese will put additional capital to work in US assets, especially if the dollar remains strong.

Commodities and Chinese stocks are likely to be beneficiaries of the yuan's new found value. Chinese purchasing power for food and energy just went up. I would expect to see some rise in commodity prices, however, the rise may be tempered by climbing interest rates. Chinese assets also just went up by 2%. Many of the Chinese ADR's were up around 2% yesterday. A wise trader will be looking for the inefficiencies.

I am keeping an ear to the ground. Changes as big as we saw yesterday often yield opportunities in surprising places. Stay tuned and visit our websites often as I will report on our movements through out this interesting time.

Wednesday, July 20, 2005

7/20/2005 Asset Allocation and Sector Rotation


In my previous post I wrote that the 1230 level on the S&P500 must be broken through with "gusto" if the overall market is to move meaningfully higher. Yesterday the index closed at 1229, a few cents above its previous 52 wk high. My expectation is that the market will start to form a basing pattern in the near term. I would consider price action between 1215 and 1235 healthy and normal during this period. Ideally I would like to see a flat pattern continue for a number of days on falling volume. At some point, in this process, the market will be stimulated and the ultimate move higher or lower will prevail.

Asset Allocation and Sector Rotation

Large investors have begun to shift cash from one investment to another, partly due to a change in interest rates but also to changes in business, both on a cyclical and structural basis.

The valuation of bonds has become high relative to stocks. Bond investors are finding it increasingly difficult to generate sufficient returns in their bond investments, therefore, they are forced to seek alternatives. Stocks are one of the main alternatives that institutional investors look to. They are vastly more liquid than other investments and at this time the stronger economy, which is a natural result of lower interest rates, makes the environment for profits enticing. In other words, stocks are likely to benefit from large investors looking for more profitable alternatives to fixed income investments.

In the beginning of 2005 investors perceived a slow down in the economy as interest rates and oil prices were on the rise. Investors first assumption was that these increases would be a "tax on", as the economists supported by the media termed it, "a fragile economy". Often what is reported in the media affect investors in such a way as to direct the, "dumb money" or the consensus money. The beauty of this, of course, is that it offers the smart money the opportunity to take advantage of inequities caused by the mis-communication. Today, investors are starting to view increases in interest rates and oil a result of strong global economic growth and not as a tax on the economy. As this perception takes hold investors will migrate from previously defensive equity positions, namely healthcare and consumer staples, into more cyclical growth oriented investments, namely tech, biotech, transportation and retail. We have begun to make this shift in our funds. See the website to view the fund's position table and to learn about the fund's investment philosophy.

Lastly, I believe that a fundamental and structural change is occurring in the drug sector. For a long time large pharma has maintained its large market cap and remained the a sector favorite of institutional investors. Companies such as Merck, Pfizer and Roche, which are traditionally chemical companies, are now losing their old chemical drug businesses to generic drug companies while new innovative biotech companies bring products to market with fresh patents. Mutal and pension fund investors are rotating dollars out of big pharma and into big biotech. Although this process has already begun I believe that another major step is underway and it is only a matter of time before companies like Amgen and Genentech trade market cap size with that of Pfizer.

Entering new positions here must be made with care. Follow our website, listed above, to watch what we are doing on a daily basis as we navigate this tricky time.

  • CELG - Celgene is a young biotech company engaged in the development of novel oncology drugs. The company has several drugs in production and has an impressive record of growing earnings. I have calculated intrinsic value, based on 2005 numbers, to be $111/share. Currently the stock trades around $48. I am considering adding CELG to the Focus13.

Sunday, July 17, 2005

7/18/2005 A Pivotal Point for Investors

Friday was an options expiration day (Saturday marks the official expiration). In general the day ends flat and stocks close at a level where the largest amount of options expire worthless. Last Friday was no exception as most the movement happened earlier in the week and was more pronounced than the major averages may have revealed.

The S&P500 index closed the week at 1227, which was a multi-year high. However, if the index is to move meaningfully higher from here it must drive through the 1230 level on higher volume without collapsing back into its trading range.

Will the market lift off from here? There are causes lining up on both sides of the equation making now a pivotal point for investors. As I mentioned in a recent post, investors' sediment has changed on oil and interest rates from a tax on the economy to a symptom that results from a strong economy. A stronger dollar is helping to drive investment from abroad and inflation remains low. That said, we are in July, typically a bad month for the stock market as earnings are front an center and investors retreat for summer holidays. This earnings' season may show market weakness overall even though the 2nd quarter numbers, expected to rise 7.8% for the S&P, are likely to beat that estimate.

Near term the stock market is likely to experience overall a southern slant, mostly due to the technical reasons I mentioned above. As investors rotate cash into newer positions former leaders' will flatten or fall as new ones will accelerate and rise. It will be important to be in the right stocks at the right time in order to make the best profits. Our fund has started this rotation as I have made several changes already with more likely to follow. To see the fund's current positions and learn about its strategy go to On the home page you will find a table containing all the stocks in the fund and their target buy and sell points. In other pages are commentary about individual stocks and information about the fund's current philosophy.

Globalization is picking up steam offering opportunity for more companies than ever. This increase in global trade will continue to drive economic activity through the end of the year (and beyond). Bookmark or subscribe to this blog to see how we best, not only beat the market, but beat the best fund managers in the business for returns on capital. The fund on our homepage is up over 39% in the first 6 months of the year while the market is flat.

Wednesday, July 13, 2005

7/13/2005 Paradigm in Flux

The S&P500 is compressing at the top of its trading range closing at 1222 yesterday. The challenge for the index is to break out above 1230 with gusto, not just limping past the number only to fall back to the status quo.

One sign the market is ready to rocket higher is the recent action in the nasdaq composite. Although not yet at a new 52 wk high the index has climbed out of a six month trough. The smart money has begun to rotate some cash from defensive positions into more aggressive growth oriented issues; a sign that the consensus paradigm is in flux.

On the year the market is flat at best. However, looking at the economy you need to question the stock market's value. Economic activity is strong, perhaps stronger than last year. Up until now the market has looked at rising oil prices and interest rates as a tax on growth. Now the thinking is changing as more and more investors view business activity as the driver of oil and interest rate growth. Further, other positive signs namely low inflation, a strengthened dollar and a stock market whose PE is low relative to the PE of the 10yr treasury look poised to tip investors in the favor of equity investments.

Rarely do markets make meaningful movements when the picture is clear (eg. buy on the rumor sell on the fact). Speculative smart money has already started to shift cash, and although I do not expect all sectors to move straight up I do expect certain sectors to move higher. I have noticed technical tops being made in several market leaders from healthcare and consumer staples (matr and wfmi come to mind) signaling the change is underway. Large investors do not move cash in a day, in general fund managers and institutional traders employ several strategies in order to rotate investments, thus increasing volatility, thus improving opportunity.

For the first time in a while I have begun to change my fund's course. I have started to reduce my healthcare positions locking in good profits and preparing for a shift in investment. I recently added Google and Aeropostale to the Focus13. I am also likely to add some short positions as opportunities arise from a shift in market philosophy. I do not expect that the market will move straight up, in fact it may move lower, but longer term I expect to be in tomorrow's leaders today. See my website to find out all the positions of my Focus13 fund and to learn more about this unique approach.

Bookmark and/or subscribe to this link to stay in touch with what the smart money is doing. Also, I have updated the LIBM trend figures on the "Fundamental and Technical" page of the website.

Sunday, July 10, 2005

7/10/2005 Are Indices on the Brink of Breaking Out?

Last week ended with two days of solid price and volume gains. During the period the S&P500 flirted with both ends of its near term spectrum, bouncing from 1191 to 1212. These levels have become familiar resistance and support points defining an increasingly aging range, often a sign that something different has to happen.

The nasdaq composite finally broke and held the 2100 level (2112) last week on better volume, a notably positive technical sign given the index's stubbornness to break that level in the recent past. Many new leaders that have broken out in the last few weeks have come from the nasdaq composite; another positive sign for its members.

Can a list of new leaders and indices on the brink of breaking out mean new life for the current rally? Only time will tell, but the signs are there. The US economy is growing, perhaps better than expected as my CEO friends like what they see. Most executives that I am in contact with are making new investments especially those in the tech sector. Investors are anticipating that interest rate hikes are coming to an end and with the less than expected damage caused by Hurricane David oil prices will be under pressure this week. Still earnings are set to be reported over the next month and fickle traders can turn around on the wrong news. My fund is staying the course looking to add shares to current positions. I have been upping targets in certain instances while lowering others. To see all the fund's current positions go to I am entering new positions with caution, nonetheless the smart money is buying.

  • GOOG - I have finally decided to buy a few shares of Google for the fund. I have always loved the fundamentals of the company, however, the stock was not optimally priced; I have owned it in my other funds. The market targeting advantage that Google gives its customers is in its infancy and if the advantage can be successfully layered on top of conventional and new media Google will bust out in a big way. Media is changing quickly. Just look at the increase in video games popularity and the reductions at the box office and newspapers. Google's opportunities are many and if bought right the same is true for its investors.

Thursday, July 07, 2005

7/7/2005 Stocks and London Terror Attacks: What I Am Doing

As you no doubt know by now London, England was attacked by terrorists today. This is a tragic event and the losses are horrible. In the end life goes on and we must forge forward. This moving forward shall not lessen the terror event or the events' losses, rather it will strengthen our resolve to make the world a better place. As part of that resolve we must continue to perform our work and intelligently proceed with our efforts.


The markets broke down technically today as the S&P500 dropped below the 1191 support level on higher volume. The index has been testing this level over the past few days and was finally forced lower by the attacks. Recent days have shown the most institutional selling of the recent rally, a sign that a correction is underway. In lock step with the selling we saw the VIX (volatility index) fall to a level conducive of selling. Recently, however the VIX has shown signs of rising with the index moving sharply higher due in part to the events of the day.


My recent fundamental market analysis has shown me that many stock valuations have compressed as intrinsic values are higher relative to market values. This means that companies with solid earnings growth projections are trading lower relative to their expected growth, a catalyst for a higher stock price. Interest rates, namely the long term treasuries, are at levels that stimulate investment. Further, the smart money that has been in real estate may find its way into the stock market as higher real estate prices prompt prudent investors to sell properties and put money to work elsewhere.

Buying and Selling Today, How to Take Advantage

There were some good buys as the stock market opened today. I bought Valero (VLO) as it moved to the $81 range and bought back some American Healthways (AMHC) when the stock dropped to $41 at the open.

Taking advantage of the market here means taking additional risk. First, there are economic head winds like higher oil and rising rates that have weighed on stocks. Now there will be an additional terror premium levied as investors will fear future attacks and their magnitude. That said, the US economy is very strong, thus far supporting higher oil prices and interest rates; in fact the rise in both is due in good part to this strength. Further, mergers and acquisition activity is strong and signals faith that the future is bright. I believe that this strength is going to continue. As I wrote before the peg of the Chinese currency to our dollar will help our economy and hurt others like Europe and Japan. This scenario has played out exactly as I predicted over a year and a half ago (Search this site for my posts on the subject). Knowing all this I continue to buy the stocks that I have in my fund's plan. When targets are met for companies I own or want to own I am a buyer. To learn about my targets and to see my fund's positions see my website

Today's terror events are tragic, however, to succumb to the tragedy is a greater ill.

Monday, July 04, 2005

7/5/2005 Three Ideas for Mid-Year

The 33,000 foot perspective for both the S&P500 and the nasdaq composite show a basing pattern since 2003 (e.g. a trading range). In general this type of market behavior precedes a future rally. Of course that's good news, so when? I do not know, but I do know that global investment has been focused on real estate and energy related properties not stocks per se during this cycle. Sooner or later though there will be a paradigm shift in thinking and a new class of investment will rise up to out perform the others. I am diligently working on identifying the next "big thing". Until then I am sticking with what will work given this phase of the current business cycle.

Healthcare - Right now is a good time for investment in the healthcare sector. The general market's earnings cycle is such that quarter on quarter comparisons are becoming tighter and company's' earnings growth has begun to decelerate. Fund managers demand reliable growth and it is this phase of the cycle when the demand for healthcare stocks increases.

Further, one of the greatest demographic opportunities of all times is set to begin for healthcare starting sometime between 2007 and 2012. This is when the baby boom generation will start to retire and physically deteriorate needing more and more healthcare as time goes by. The same generation that is pumping up the current housing boom now will transfer some of its energy (and money) to maintaining their health. These boomers will not only increase demand for medical care but also for complimentary products and services like retirement planning, better nutrition and assisted living. Investments into healthcare today, if done right, can be held for a long period of time for returns many time more than their initial investment.

  • DNA - Genentech is my long term pick for healthcare. The stock must be bought right, below $75. With a market cap of about $85B I am certain that its management has what it takes to pass up Pfizer in value, whose market cap is about $201B.

Retail - Unusually low interest rates have stimulated business as well as the consumer. The cost of money has a profound effect on an economy. Consumers are flush with a sense of wealth brought on by an increase in their net worth. Rising real estate prices and low interest rates (also meaning low inflation) have given the consumer all they need to fore go savings and spend on homes and all the trimmings. The liquidity created by all this investment has fueled a discretionary spending boom not seen in a while, if ever. I believe that the cycle for retail will remain high so long as interest rates stay low and provide plenty of opportunities for profit. That said, meaningful jumps in the price of energy will be cause for bumps along the way.

The retail sector always has something to offer investors as styles change and fads come and go. Something is always hot and hotter; couple that with an affluent consumer and opportunity for the smart money exists. This time of the year is a good time to invest in retail as the back to school season starts and the Christmas line up is being produced. I have had much success in my other funds with Abercrombie and Fitch, recently selling the retailer for an almost 200% profit. That said, for every success story there is a failure. Hot Topic was once a high flier but styles have begun to change and the gothic retail is working to adapt. The jury is still out on HOTT, perhaps its management can re-ignite the magic and put the stagnate retailer on the hot list again.

  • ARO - Aeropostale's stock is poised to jam. Its current p/e is 22, which when compared to 25 for Abercrombie and Fitch ARO looks under valued. What's more ARO has begun a new adaptive marketing approach. The program seems to be working as a visit to the stores shows me that ARO is bring in new customers.

Technology - Much like retail tech always offers something for the growth investor. There is always room for creativity and by its nature tech provides innovation. The opportunity to solve some of societies most pressing problems and to better the lives of all is one of tech's great promises. In the past computer, software and internet companies have turned the wheels of progress and bettered the lives of citizens and investors alike. However, many of the technologies that initially drove the growth of the internet have matured. Telecom and other computer companies, although still growing, have grown into growth rates not consistent with high multiple investments. Quarterly earnings comparisons for tech have become tough of late and the business cycle for the sector has swung low. Like I said there are always opportunities in tech no matter what the business cycle looks like. Somewhere out there is the next Microsoft.

During the burst of the tech bubble wireless companies like Qualcomm and Research in Motion provided relief for growth investors as other technology investments lost big money. Wireless technology offered a value proposition above all else in 2002. Today however, these companies have reached a point in the cycle where competition from vendors and legal parasites are gnawing at their markets and pocket books. Growth in the general wireless sector has slowed pushing investors to find new opportunities. Search has come to fill in the gap. Recently, Google surpassed Time Warner as the largest media company by market cap. Ebay and bloggers have changed the newspaper business forever and Yahoo has made its mark. Cybernetic robots now automatically scour networks for scare bits of information bringing attention to this fledging business.

  • GOOG - Google has positioned itself as the search leader. The company continues to innovate adding new products and services. With annual earnings in excess of $1.5B and growing, the company is strong. I calculate the stock's intrinsic value at $427. The stock price is high and it would be a better buy below $270, however, goog has the opportunity to grow surprisingly fast as their new businesses gain acceptance across the internet.

To see all my fund's postitions go to