Tuesday, September 27, 2005

Two Steps Forward and One Step Back


What does 1214, 1215, 1215 and 1215 have in common? They were the closing numbers of the S&P50o for the last four days. Tight closes like this usually signal a meaningful change in market direction is coming. The nasdaq looks similar, although its formation is not as tight. A break out to the upside on solid volume, in either index, would complete a very positive technical pattern and could initiate a market move much higher. Unfortunately, a meaningful move lower would probably mean more to the downside.

Key Market Factors

If you are new to this blog our Key Market Factors are market driving parameters we use to help determine the health and direction of the current market. The actual numbers do little to influence the market rather it's the speculation on the future direction of each that does the driving. These factors have been identified as parameters that are top of mind awareness for the smart money. From time to time we update our ratings and give commentary on each...it is time.

Oil NYMEX (negative) - $65/barrel - The US energy situation is in flux thus we have moved our energy factor from negative plus (+) back down to negative. That said, much of the volatility is due to the uncertainty caused by refinery damage from the recent hurricanes. Although the media is echoing refineries will be down for months it turns out that only a few will be down that long with the majority of gasoline production coming on line by the end of next week. I would expect more volatility in heating oil, gasoline and oil until the hurricane damage has been made clear. If energy markets can stabilize, especially at lower levels, look for the head winds caused by the commodity to be lifted and the stock market to act favorably.

10yr Treasury (positive) - 4.30% - Interest rates remain accommodative in our view. That said, Alan Greenspan was talking down markets on Tuesday as he warned of asset bubbles and how euphoric conditions precede a fall in the value of those assets. It is obvious that the fed wants to cool inflationary pressures specifically in housing and energy, therefore, we expect rates to rise further. That said, there is strong resistance at 4.50% and we are likely to remain positive until that level is breached. If the 4.50% level is broken we may not become completely negative on the stock market because we believe money will come out of bonds and go into stocks.

3rd Quarter Earnings (positive) - 16% - We remain positive on 3rd quarter earnings as global growth is strong and the economy continues to grow according to such groups as the IMF. Most world economies are at or near full employment and inflation although rising is contained and signaling healthy growth. Of all the companies in the S&P500 216 have made pre-announcements with 56% of them making negative comments and 28% being positive. In contrast to last quarter where 53% pre-announced negatively and 27% were positive, staying mostly in line with the previous period. That said, costs are rising and will affect certain sectors more than others. We believe the market will continue to reward those that pick the right stocks.

Two out of Three of the Key Market Factors are positive. If we give equal weight to each the market should take two steps forward for every one step back. We are cautiously optimistic about stocks at this time. We continue to believe it is a stock pickers market and strict attention to near term fundamental details coupled with technical awareness will continue to yield good profits.
  • BIDU - Baidu.com broke down technically falling below its $71 support level. This bodes negatively for the stock. Although we believe that bidu has a valuation near $3b based on its peers values we are apprehensive about making an investment at this moment. First, Baidu.com is an up and comer and earnings, although growing faster than its peers, are not at peer levels. We are not likely to fight the tape at this point since negative opinions from several brokers have been made on bidu. Further, there has been some near term selling in the group. Stay tuned as we continue to monitor the technical situtation and attempt to identify a new entry point for adding the stock to our Focus13 fund.
  • NTES - In contrast to bidu Netease continues to maintain its technical strength. Fundamentally, ntes has a higher level of earnings than bidu. In addition, we also like the quality of ntes earnings. We calculate intrinsic value for the stock at $270/share based on 2006 numbers. At this moment we are more likely to invest in ntes than in bidu.

Saturday, September 24, 2005

The World Continues to Grow


On a weekly basis the S&P500 is screaming weakness. Over the last two weeks 173 million shares have been traded on the down side, more than any two week period during the last several years. In my experience events like this tend to precede long hard falls.

The nasdaq composite acted in similar fashion to the S&P500. Although the last two weeks for the nasdaq were down on higher volume, it is not the weakest two weeks of the year. The first two weeks of 2005 served up more intensity to the down side, and incidently preceded a long hard fall.

Amazingly the market has held up well given the today's situations, a signal that investors are sanguine on stocks. Technically speaking both indices did break through support last week only to end the period on a positive note, albeit on lower volume. The S&P500 did manage to climb back above its previous support level. However, the nasdaq remains well below its support level of 2144 causing concern among technicians. The infliction of fear drove the VIX steadily higher most of the week driving it above 14, but by midday Thursday the volatility index turned lower ending Friday at 12.96 as the market found support. Thus far a VIX above 14 has meant support for the stock market.

We are cautious at time. However, so much has been thrown at this market, two major natural disasters, spiking energy prices and rising interest rates, yet the market continues to hold up. The fact that the S&P500 recently rallied to 2143, a level below the year high of 1245 but above the previous high of 1229 tells us that there are signs of technical strength. Only time will tell for sure but a high level of down volume over the last two weeks may be due to uncertainty about the natural disasters rather than pending economic disasters; that said we are not going to fight the tape. Visit our website www.thesmartmoneyinvestor.com to watch what we are investing in and how we navigate these stormy times.

The World Continues to Grow

The IMF projects the world economy to grow 4.3% in both 2005 and 2006. In the same report they project US growth at 3.5% in 2005 and 3.3% in 2006. In addition, the report says China is to grow 9% in 05 and 8.5% in 06 and India is expect to grow above 4% in both years with Europe showing growth above 1% for both periods. The bottom line is the world is doing new business and that means new opportunities. The smart money is banking on this growth and whether or not the stock market pulls back now there are going to be profitable opportunities in the future.

Growing concerns about inflation are perhaps another culprit for downward pressure on the market at this time. It is obvious that the Fed wants to keep prices stable and it has been clear, as clear as Greenspan wants to be, that it is going to curtail inflating asset bubbles. Interest rates continue to rise, even in the face of debilitating natural disasters, because there is global demand. Commodity prices from oil to copper continue to rise as the world builds and the south repairs. Businesses and global economies are being squeezed by higher costs, yet most remain at full employment. What I find most beautiful about this period is how in the face of so much negativity innovative entrepreneurs continue to quickly adapt their businesses and crank out productivity. Further, the rebuilding of the south will help growth next year, a point that the smart money is considering right now.

History Repeats Itself or is It Different Now

It is becoming apparent to me that historic models will become less effective in the future. One Microsoft Executive put it best, " there will be more change in media in the next five years than there was in the previous 50...". I feel that investors must look beyond the history and into the details of their business today to make solid investment decisions that take advantage of change. If they do not they will be left behind. Stay tuned and watch what we do to adapt to this change. Visit our website at www.thesmartmoneyinvestor.com where you can see our fund's investments.

Thursday, September 22, 2005

Its Not Nice To Fool Mother Nature


The S&P500 wasted no time turning south for September. The index not only broke through its 50 day moving average but also has poked through its recent trend line bottom of 1211, closing at 1210. Making matters worse the whole move down has been on higher volume. The nasdaq composite did even worse with both indices now racing toward their 200 day moving averages.

Unquestionably, the market is sending short to intermediate term sell signals. The recent market action has us taking profits and looking for new opportunities. I have learned that through all this negativity one must stand back and do some situation analysis.

The Good with the Bad

First, consider the VIX, the S&P500 volatility index, it jump 1.15 yesterday to close at 13.79 telling the smart money that the market is scared. Many attribute the rise in the VIX to uncertainty about Hurricane Rita. Usually, the market discounts the worst and then bounces back. That said, things could be worse than expected and the market would fall more as Rita upgrades from a Category 4 to Category 5 storm. I would expect the market to hold up a bit better as the VIX continued to rise, however, if the storm causes more damage than expected all bets are off.

Second, some sectors are doing well. Metal Ores, Energy, Healthcare and some Technology stocks are holding onto gains and in some cases doing better. No doubt costs are rising and affecting the profits of some sectors more than others. By properly positioning the smart money can make profits in a down market.

Retail and Housing stocks were classic shorts and opportunities may still exist, although they are more risky than a few weeks ago. Oil and heating costs look to increasingly bite into consumer spending. For sure gasoline is hurting some, but heating costs will likely hurt more consumers further denting consumer discretionary spending. We are watching for more short sale opportunities and have our eyes on a few. Check the website as we will post our positions there.

Finally, there is significant risk in this market. Global growth has been good thus far and continues to fuel stocks at this time. However, many countries subsidize oil and gas prices creating artificially low prices. Economists know its not nice to fool mother nature and sooner or later higher costs will be past on to foreign consumers denting their profits and growth. To the extent that foreign governments unwind these subsidies we will see a near term change in foreign growth. Longer term these governments will need to allow nature to take its course and let the price of energy float at market values. In the interim many opportunities are going to be created and taken advantage of by the smart money as these inequities tend toward equilibrium. Stay tuned as we take advantage of the situtation.

Our Focus13 Fund has had Good Gains this Month

Out of the ten positions the fund held through the recent rally we have only been stopped out of three, Ebay, Zhone and Abercrombie and Fitch. Many of our positions are doing well, for example; Celgene a stock we bought around $42 went as high as $59; we took some profits above $56. Comp Vale Do Rio, a stock we first bought around $33, hit $42 yesterday. We shorted Beazer homes at $62 and took some profits yesterday at $56. And Google, which we bought at $282 rose to $318 today. My point is that there is value in this market one just needs to find it; of course that is our job. You can track what we are doing by visiting our website at www.thesmartmoneyinvestor.com. There you will find a table listing all the positions in our Focus13 fund and the buy and sell targets we use. Also, we post a link to our monthly performance that gives some detail into how we did during the previous period.

  • GOOG - Google continues to be a buy for many investors as the stock has risen on increased volume while the rest of the market falls. The company continues to expand beyond its core search business augmenting nicely businesses that are complimentary to its center. Google has become the new age media giant, offering advertisers ways to reach their customers that are more targeted and global than ever before. No other media company match Google's growth and breath numbers. Internet advertising continues to take market share from traditional media sources sucking the life out of newspaper, magazine and television competitors (just look what is happening to the NY Times). This growth is expect to continue as internet advertising is about 1/20th of all media spending and growing. But Google is going way beyond the internet. For instance, look at Google's new WiFi offering. Many see it as just a secure way to get more users in front of Google, however, we see something more exciting. Think about it, what if Google's WiFi network were to expand nationally or even globally and what if Google coupled the WiFi service with Google Talk, the company's new VoIP telephony service. Could this mean that Google would become a large wireless and wireline telecom company? Just food for thought but all the pieces are falling into place. There are many other businesses that Google is positioned to enter, all with the potential to take market share from companies inside and outside of media. As I stated in previous posts media power brokers are finding it necessary to own and control Google if they can. We expect the buying to continue for Google especially since it is likely to be added to the S&P500 in the near term. Index fund managers will have to own the stock and many are likely to anticipate the move, buying ahead of an announcement. See our website at www.thesmartmoneyinvestor.com for more details on Google.

Sunday, September 18, 2005

Higher Highs and Higher Lows Until Now?


The market has maintained its upward bias since its April '05 low. The S&P500 has maintained a series of higher highs and higher lows since then, until now. Last week the S&P500 topped out at 1243, lower than the previous high for the year, which was at 1245. The failure of the index to break higher last week brings into question whether this market can move further north as overhead resistance builds. That said, in its favor the index bounced off its 50 dma in classic form, although much of the action may be attributed to options expiration and an S&P rebalancing.

The nasdaq composite has not performed well as it remains below its 50 dma, albeit just. Much like the S&P500 the nasdaq composite failed to break through it previous high of 2219. Making matters worse the index did not clear the 2191 level, which was the January 2005 high, adding to the resistance. Much trepidation on the part of investors is due to the traditionally weak 3rd quarter for many industries. The smart money is trimming positions ahead of what is feared to be a tumultuous earnings warning period of the next few weeks and uncertainty about the Fed. If earnings warnings are held to a minimum expect cash to rush back in and the market to rally further, else, a retest of this years low is likely.

I have to admit this recently rally looks to be weakening. If technical characteristics from the nasdaq carry over to the S&P500 it could spell trouble for many issues. The fund has added several new profitable positions in the last few weeks. We have taken profits in some of them and may take more depending on the stock market's technical strength. To see what we are doing visit our website at www.thesmartmoneyinvestor.com.

Key Market Factors

At the beginning of the recent rally we identified certain parameters that the smart money would follow closely and likely dictate the rally's direction. We call these parameters "Key Market Factors" and we comment on them from time to time. The "Key Market Factors" are more in flux now than at any other time during the current rally. Speculating correctly on each of the factors is critical to the success of any investor and is likely to separate the smart money from the weak when it comes to near term profits. Below is our take of the current standing of our Key Market Factors.

Oil NYMEX (negative +) - $63/barrel - The price of Oil has come under pressure lately for a number of reasons, thus we have moved the rating up to negative plus (+). First, the damage to oil platforms from Katrina is proving to be less than expected. Second, consumption is down as users cut back and find ways to save. Higher interest rates have energy speculators concerned that consumption will slow even further. Of course all the aforementioned issues come on the back drop of heating oil, which will likely support prices until something concrete about the winter season is known.

Interest Rates 10yr Treasury (positive) - 4.27% - Although rates have risen from recent lows we still deem them positive because in our estimation rates remain below neutral. Even if the Fed raises a 1/4 point on Tuesday, as they are widely expected to do, we feel rates remain accommodative. That said, a spike in the 10yr above the 4.50% level would likely be negative for certain stocks and depending on how far rates rise negative for the market in general. The uncertainty about rates may force the hand of uncertain investors and bring down the market until the rate picture becomes more clear. Some financial companies have seen a drop in loan originations according to our surveys.

3rd Quarter Earnings (positive) - 16% over 3Q last year - Spikes in energy costs are going to affect the earnings of many sectors especially in retail, transport and materials . Starting this week the smart money expects earnings warnings or adjustments to begin with the selling in certain stocks already well underway. But global growth continues and fresh leadership from the semiconductor group have given long investors inspiration. In addition, a weaker dollar is helping global businesses out. We are sure that earnings will slow for some companies, however, others will thrive. Stay tuned as we work to maintain thriving stocks in our Focus13 fund.

  • BIDU - It is true that chinese internet stocks are not stellar earners at this time. That is precisely why they have become attractive, "at this time". It is presumed that as the fast growing chinese search market grows so will earnings in native search companies. Large US internet players have been unable to effectively penetrate the chinese search market by themselves. In order for the large media companies to grow in the region they are finding it imperative adapt to the chinese culture. The fastest way for many of them is to partner or buy an existing chinese player. We believe that BIDU will benefit from this speculation. At the moment valuation concerns are front and center, but as mergers in the group continue so will interest in these stocks. BIDU has found support at the $76 level. If the stock reaches that level again we may add a small position to our fund. That said, the technical characteristics have weakened and will force us to consider our entry point carefully.

Wednesday, September 14, 2005

Two Days of Hard Selling


Two days of hard selling remind investors that it's September. Both the S&P500 and nasdaq composite have fallen back to their 50 day moving averages and testing the mettle of the longs. The S&P500 closed the day at 1227.18, a hair above the 50 day line. The nasdaq did a bit worse closing at 2149, breaking through its 50 dma (2157).

In the past, September has not been friendly to investors, in part due to seasonal factors but also for technical reasons. The reality of the hurricane and its effect on earnings is settling in. Investors fear that higher energy costs are going to tax corporate earnings and consumer spending, while displacements in the region are going to disrupt business in the near term. On top of that Friday is options expiration a situtation that is adding to this week's volatility. To make matters even worse earnings warnings are likely to start next week as pressured businesses come clean ahead of earning reports. To the extent that the smart money has discounted the aforementioned earnings issues will determine the future direction of this market.

We are starting to take profits as this recent rally was good to us. That said, spiking oil prices and other hurricane affects may cut into 3rd and 4th quarter earnings but bolster late 4th and 1st quarter numbers. Provided that our Key Market Factors remain overall positive we are more likely to buy long on the dips than take profits or short new issues.

  • PTEN - Patterson Energy is a onshore contract oil driller. The company has been on our radar screen as it has exhibited superior fundamental characteristics and earnings growth. In addition, the stock is technically strong. We calculate intrinsic value at $54/share based on 2005 numbers and $78/shares for 2006. We are likely to add a small position as the stock dips.

Sunday, September 11, 2005

Exciting Markets


The market continued to rally last week on solid technical strength. On Friday the S&P500 closed at 1241 near its 52 week high of 1245 and within its recent trend channel. Nearly the same can be reported for the nasdaq composite as it closed at 2175. Resistance at 2191 exists for the tech heavy index. If the nasdaq can move above that level on higher volume I believe it will further embolden investors.

Not surprising the VIX moved lower last week falling from 13.10 to close the week at 11.98. The falling level of fear is not great news for the stock market, however, the VIX remains above its recent lows.

We are staying on course adding to positions on dips. To see the fund's current positions visit our website at www.thesmartmoneyinvestor.com.

A Word on Global Growth

It appears that global growth is accelerating. Recently, China reported their GDP grew at 9.4%. That number is in questions as many economists think that China's growth is higher. Today Japan revised their GDP number from 1.2% to 3.3%, an unexpected spike. India also continues its growth with its economy expanding at about 7%. In general the world economies are growing above recent trends, which is helping US business. However, this accelerated growth is spurring inflation worries. In the end we believe that global inflation will remain low and the expanding global economy will add to earnings growth of US companies above current analysts estimates.

Key Market Factors

Oil NYMEX (negative) - $62.75/barrel - We have taken oil off the negative minus rating we gave it prior to Katrina. Although we view higher oil prices as a negative, it was mostly due to the spike in its price. Since the hurricane has passed oil has fallen to about the level it was prior to the disaster. If the price holds here or falls we may take a more bullish stance on the economy. It seems like the market can handle $60/barrel oil provided its price stabilizes. We believe the spike in oil is demand driven and is the result of healthy global economic growth.

10yr Treasury (positive minus) - 4.18%- During the past year money started to rotate from bonds into stocks, however, that activity was muted and bonds continued to find investors. The 10yr treasury now yields about 4.18%, not a very attractive return considering the risk. Now large investors are leaving the 10yr and buying mortgage back securities, getting about a point better in return. This move into the more risky mortgage market has been underway for some time. The change may prompt 10yr treasury rates to rise since the smart money already sold 10yrs to buy mortgage backed bonds. Soon other investors will do the same and the running herd will pressure rates. For now rates are a positive force for the economy, that said, a sharp rise on the long end will negatively affect many sectors. Stay tuned as we watch this situation closely.

Earnings (positive) - 16% - At this point we believe that eps growth is preceding at a rate greater than that of the second quarter for certain sectors of the economy. Texas Instruments boosted its forecast while Intel narrowed theirs albeit because Intel is apparently having trouble maintaining enough inventory to meet demand. Earnings warnings from analysts have come in for six of ten sectors in the S&P, mostly due to increases in oil prices and interest rates. As I mentioned above global growth is accelerating and will help companies to weather higher costs. That said, we believe there will be earnings fall out this quarter. Depending on the names and size market reaction will ensue accordingly; in other words the market impact of a negative report from Walmart will affect the stock market more than that of one from Aeropostale. We continue to monitor earnings closely and have created a list of likely growers. Stay tuned as we add some of these names to our portfolio.

  • EBAY - We like the Ebay acquisition of Skype. We believe that Skype offers Ebay several layers of opportunity and warrants a closer look at Ebay as an investment. First, Skype's software will give Ebay the opportunity to link sellers and buyers in a new way. With Ebay integrated Skype buyers will more easily be able to discuss transactions with sellers. Fraud may be reduced as customers will be able to get a new level of feedback from sellers and visa versa. Secondly, free to very low cost international phone service will become ubiquitous world wide as Ebay gives marketing push and credibility to Skype's service. Ebay's ownership of Skype will give it the ability to push out telephone and related services to its over 200 million users worldwide. Lastly, this transaction tells us that Ebay's management is not done growing the company. Ebay's management are not caretakers of the companies assets, rather they are risk takers. They are mavericks and are continuing to find new ways to add shareholder value. We started to add Ebay back into our fund. See our website www.thesmartmoneyinvestor.com for the details.

Wednesday, September 07, 2005

The Smart Money Looks at New Internet Realities


The S&P500 stayed above trend as investors helped it to follow through Tuesday's gains. The S&P500 ended at 1236, near its high for the day on above average volume. A new leg to this year's rally was born over the last four sessions while investors played catch up and the shorts covered. The nasdaq composite did the same since the move was broad based. The nasdaq composite climbed to 2172, at its intraday high, on just below average volume.

Since August the technical landscape of the S&P500 experienced a significant change. A new trend channel has emerged as the downside leg of August fell below that of the previous low. The upper and lower band for the S&P500 now reads 1270 and 1210 respectfully. Deviations outside these boundaries, especially on higher volume, will likely signify a change in market conditions and/or trend. A similar situation has occurred in the chart of the nasdaq composite. The new trend channel for the nasdaq ranges from 2300 to 2242. Likewise a deviation from this band would spell a change in market condition for the nasdaq.

The Smart Money Starts to Time New Internet Realities

An almost underground effort is underway in the cable industry. Cable operators have been raising prices in many areas the last few years. Quietly, slowly operators are adding fees and artfully bundling viewing packages that gaff into their patrons' budgets. Sure cable operators enjoy some inelastic demand over their competitors giving them some pricing power, but this power has not gone unnoticed. Telecom companies and other network providers are working for their fair share of the home entertainment market. IPTV is coming to an Ethernet connection near you. This is likely one reason why cable operators' share prices have remained depressed.

IPTV offers the smart money opportunities to profit. As I discussed in my last post network bandwidth must be increased if network operators and content providers are to profit from innovations in media. Obviously companies like Zhone Technologies, Cisco and Lucent are going to sell more equipment to network providers, but how about the less obvious beneficiaries. Internet search companies like Google (goog), Yahoo (yhoo) and Baidu.com (bidu) will become more than just "Super TV Guides". The opportunities exist for these and other search engines to become platforms for advertisers and content providers. For example, local television stations and video bloggers will be able to use search companies to target their offerings, helping to grow their audiences. Also, as video search technology develops viewers will use search to to find specific entertainment based on image and/or description. It is projected that these search firms will partner with content providers to sell access to entertainment. It is difficult to say exactly how customers will ultimately use IPTV aside from the obvious and there is so much more to IPTV but I don't have time to include it here. What is clear is that competition has been lacking in the area and low hanging fruit exists for many. Expect companies to begin piling on. Some smaller comapnies to watch are DaveTV and Brightcove.

We have made significant changes to the portfolio recently. You can view these changes by visiting www.thesmartmoneyinvestor.com.

  • BIDU - Baidu.com has seen its stock price in a basing pattern over the last few weeks, adding to its technical strength. It is clear that support exists around $76/share. Yesterday the stock broke out closing above $82. There is speculation on a couple of fronts. First, many believe that Google wants to buy the company, which makes sense. Google made a statement in its secondary filing stating that it will use the proceeds from the event to make "unspecified acquisitions". Secondly, the firm is China's most popular search site and growing. A valuation above that of its peers is warranted. NTES, a BIDU peer, has a market cap of $2.39B while at $76/share BIDU has a similar valuation. NTES operates several sites more for entertainment and information, while BIDU is a search site. Currently, a premium is put on search, making BIDU undervalued at $76/share in our opinion. Couple that with an acquisition premium and BIDU looks attractive at these levels. Our feeling is that if a Google were to buy BIDU it would be north of $4B pushing the share price above $110.
  • GOOG - In our estimation Google is undervalued. We currently calculate intrinsic value for the company at $533/share based on 2006 projected numbers. Further, the company has made more information available regarding its secondary offering. 17 banks have been selected to participate and investors are speculating that the offering will go smoothly. Yesterday the stock broke above its 50 day moving average, an event that signals the smart money sees the value. Best of all the market for online advertising continues to grow above estimates. To see our targets on for Google visit our website at www.thesmartmoneyinvestor.com.

Monday, September 05, 2005

Traders Get Back to Business


Last week the S&P500 and nasdaq composite both broke above their 50 day moving averages on higher volume. Friday, only the nasdaq remained above the 50 day line, however the S&P500 lies only slightly below her; a fact that came on lower volume. Both indices ended the week higher, halting a four week slide.

Late last week the smart money started to place a bid under certain stocks other than ones from the energy sector. It looks like bargain hunting has started in select sectors, namely healthcare and tech.

As expected, August was a bad month for equities. Although the indices held their own it was energy stocks that kept the market together. Without the benefit of energy the S&P500 would have been down around 10% for the year. Fear tip-toed back into the market as the VIX was in the 13 range most of the month. Not typically a high level for the volatility index but up from recent levels. From our perspective it is too early to tell whether last week's move was sector rotation motivated or the result of a change in asset allocation from offense to defense. This week is likely to clarify the picture as traders return from their summer vacations and get down to business. All that said, we did make some changes to the portfolio last week. You can see what we are investing in by going to www.thesmartmoneyinvestor.com.

Broadband: Phase II

In 1999 broadband was all the rage as investors, speculators and widows poured money into technology stocks. We all know how that story ended, or do we? Consider this: In the 1920's radio was the killer app. Stocks like RCA spiked and then crashed with the market in 1929. But the crash did not do in radio, in fact, radio flourished. RCA's stock price never really recovered but companies like CBS, Motorola and others filled in afterwards and offered early investors unbelievable returns. The best returns did not come before the 1929 bubble rather years after as the radio business matured. Broadband and its components are in the process of a similar cycle.

First of all HDTV is gaining in popularity (like radio 90 years ago). HDTV Monitors and Home Theater units continue to fall in price. It is estimated that by 2007 40% of all Americans will own HDTV equipment. HDTV means bandwidth. For every channel of streaming HDTV data transport systems must push as many as 39Mb/s to each monitor. Considering Cable and DSL push about 4Mb/s now much must be done to accommodate the growth in HDTV. The infrastructure to distribute HDTV is currently under development giving investors the opportunity to profit. New transport methods which require fiber optics and processing power will be used.

Secondly, viewing habits are changing. Network TV has been loosing viewers for years to cable. In the same way cable is now loosing viewers to the internet, a fact supported by rating agencies. IPTV (internet TV) is on the rise. The amount of video and audio clips downloaded every day are increasing as people view/listen to on demand shows and movies from peer to peer (P2P) networks. Underground protocols like Bit Torrent are quickly becoming mainstream and are making it easier for viewers to participate in the download revolution. As participation increases so will the demand for bandwidth, especially as more HDTV content becomes available.

Lastly, advertising has changed. Companies like Google and Ebay have taken market share from the traditional media companies surpassing Time Warner and The New York Times in market cap. These companies are "getting the message out" in profound ways. But under the radar are equally profound opportunities. WebSideStory and Channel Advisor are two young guns helping online advertisers to sell/auction better. Nielsen ratings and JD Power awards are quickly becoming history as new line marketing intel companies help sellers to sell and adapt to new markets in realtime.

To conclude - media is changing (no duh). For investors timing is everything and we believe that this second phase has just begun in earnest. The smart money is investing in opportunities of the future now. Stay tuned as we add these future growth stories to our portfolio.

  • WSSI - WebSideStory.com is a new line information company leading the growing field of web analytics. The company's products and services are arming its customers with the marketing intelligence necessary dramatically improve their website performance. WSSI's customer list includes Disney, Sony, Cisco and Daimler-Chrysler. We calculate intrinsic value (IV) for the company at $66/share based on 2006 numbers. We are adding shares of the company to our Focus13 fund.
  • GOOG - Many short term traders are hanging their hats on the fact that Google will be added to the S&P500 in the short term. This move has been adequately telegraphed and when it does happen will unlikely result in a strong spike in the price of the stock. By our estimation the soonest Google will be added to the S&P500 will be Oct. 1st, the date that the Providian deal closes with Washington Mutual. We believe that Google is a stock to own for the longer term. Google continues to lead the advertising renaissance taking place in media. Not only is the company developing new age products and services it is adding top talent to expand its offerings. Former talent pool leaders like Microsoft and Yahoo are loosing top talent to Google. In our opinion this increase in intelligence and ability will help to bolster Google's undervalued stock price. We have reestablished a position in Google for the fund. See our website www.thesmartmoneyinvestor.com for the details.
  • ZHNE - We are carefully adding Zhone Technologies to our fund. The company is a quiet leader in fiber optic transport systems used by telecom companies to deliver voice, video and data content. The third quarter is traditionally weak for ZHNE, therefore, we are using the opportunity to buy the company on dips. Many of ZHNE's peers have broken out and doubled in price over the last several months. We feel the same can be true for ZHNE.