Sunday, November 27, 2005

Opportunities in Transport

Technical

The S&P500 and nasdaq composite raced above their previous highs to mark a new leg in this bull market. The S&P500 closed the week at 1268, above its trend channel high of 1260. If the index can hold its ground this market has a real chance of moving much higher. In similar fashion the nasdaq composite broke it trend channel high of 2230, again signaling a catch up to higher multiples is underway. Support now exists at those previous channel highs limiting the risk for new buys.

Opportunities in Transport

Since October air transport stocks have moved higher, in part due to the fall in oil prices, but also for more fundamental reasons. After years of reforms and business reengineering the slow drip of financial death still lingers for the major airlines. Former leaders like United, Northwest and Delta are now in bankruptcy forced there by old labor unions and capable competition. Many analysts call this sector dead and only bottom fishers participate. However, we see it differently.

Advances in avionics have enabled new opportunities for regional airlines. Smaller lower cost jets are filling seats where larger planes are only partly so. Regional airlines with 60-100 seat planes that fly farther on less fuel now give companies like Southwest and Jet Blue, with their larger planes, a run for their money. Gary Kelly, Southwest Airlines CEO is quoted as saying, "There's an old saying around here that you never go bankrupt with too few seats or too few airplanes,", and fewer seats and fewer planes are one way that the regionals are gaining market share. Companies like Mesa Air Group, Republic Airways and Sky West are experiencing solid growth. These small yet growing carriers are taking their faster, cheaper, better business models to market and partnering with the majors, helping to level the playing field for the big boys. As a way to save their businesses the Majors have begun outsourcing to the more efficient smaller airlines, side stepping unions and other cost centers. We are coming into the age of the regional, whose business model offers a growing competitive advantage, giving the smart money an opportunity to get in on the ground floor.

Our fund recently added Mesa Air Group (MESA). Mesa was rated the number one regional Airline in 2005 by Air Transport World Magazine. From a fundamental stand point Mesa has shown steady growth throughout the year meeting or exceeding earnings estimates and increasing average seat miles by over 11% per quarter. Further the company recently initiated a 10 million share buy-back program. Below is a table comparing various airline stocks. It is our belief that MESA is undervalued in relation to its peers.


SCROLL DOWN TO VIEW TABLE

































































TickerPrice/salesPrice/bookP/EROEDebt/EIV/shr
MESA0.272.408.033%427%$23
RJET0.723.488.332%460%$11.67
SKYW1.112.211811%59%$81.47
AMR0.144.79N/AN/AN/AN/A
RYAAYN/A4.382117%60%$49.9
AAI1.034.093874%85%$17.82

Sunday, November 20, 2005

Ladies and Gentlemen Start Your Engines

Ladies and Gentlemen Start Your Engines

Close your eyes and take a deep breath. Visualize this, two years of a range bound market with little to no volatility and meager profits for most. Okay, now open your eyes: Asian, South American and European indices all rose this year, some in excess of 25%. Global growth is not just good, its great, the best its ever been; and its getting better.

The nasdaq and S&P, representations of American ingenuity and financial strength, led stock markets out of the internet bust in 2003 and 2004. This year foreign markets performed well as US markets continued, in a technical sense, to wait for them to catch up. Countries like Japan, whose growth decelerated for 10 years or more now show real promise of reflating as "rock n roll" Koizumi leads reforms. Middle Eastern Countries, flush with billions in oil profits need planes, trains and automobiles. South Americans, whose mineral rich nations have supplied the building blocks of the world, need capital equipment, media and modernization. And America, with the most imaginative and least restrictive entrepreneurial society in the world continues to lead all markets in the scope of its growth and its ability to service these growing markets.

On Friday the S&P500 closed at a multi-year high, breaking through the resistance of its two year narrow range. What is interesting is that the index broke a short chain of lower highs setting up the next stage for the stock market. Sure, the smart money could go cold here, but we believe that fundamental and technical indicators signal longer term growth. It will not likely be a move that raises all ships though, as old leaders fall and new ones will rise, and believers compete with non-believers. It will be important to be in the right stocks at the right time as we expect the market to get more volatile going forward and new asset classes take control. The consensus calls for the S&P500 to be between 1250 and 1300 by year end; for sure others expect a flat to lower market. Perhaps the contrarian view should not be slightly lower, but much higher, like 1350-1400. Only time will tell but a rise of that magnitude is not out of the question as other economies compete for leadership and their share of the prize money.

Wednesday, November 16, 2005

Channel Traders Fight for Control: Will They Win Again?

Technical

The current rally comes under pressure. As expected the S&P500 and nasdaq composite have met with technical resistance in the 1240 and 2200 area respectfully, as channel traders sell. Adding additional pressure is the fact that it is options expiration week. Volatility generally increases at this time as large traders rebalance their positions around expirations. However, as selling ensues bidders have come to buy the dips.

Crossroads

The stock market is at a real crossroads. Will channel traders win out again, or has their low volatility strategy grown old? Will this market break out out its long term trading range or lapse into its standard patterns? These questions are at the precipice of being answered by the market. In fact, the smart money has already begun to answer them. Institutional investors buying on the dips are holding the major indices at current levels. Smart money investors have had reason to buy this week. Inflation has come in lower than expected dropping the 10 year treasury yields below the 4.50% support level. Oil prices remain lower than the summer highs. And in the face of rising 3rd quarter interest rates and oil prices; 4th quarter earnings are expected to grow in double digits.

Our expectation is that stocks will continue under pressure in the short term then make a move higher into the end of the year. This assumes that the 10 year treasury rates stay below 4.65% and oil remains or falls from current levels ($58/barrel). That said, if rates and oil rise above stated levels or an unforeseen disaster takes place the market will likely move lower on the year. We continue with our current strategy of moving into new leaders. See our website at www.thesmartmoneyinvestor.com for details on the positions in our fund.

  • IAU - We recently added shares to our investment in the gold ETF. We continue to believe that structural changes in the global economy such as currency risk among non-dollar countries is increasing demand for gold. Further, greater demand for gold jewelry in China and India and the increasing difficulty miners are having extracting the metal add to demand. We believe that an investment in IAU is low risk with a potential for high returns.

Sunday, November 13, 2005

Double Digit Earnings Growth Expected for the Fourth Quarter

Technical

The rally continues for stocks after last week's break out from a seven day basing period. Break outs from similar patterns have shown a tendency to move higher. In addition, S&P500 short term moving averages crossed above the index's 200 day moving average, a sign that the smart money continues to buy. That said, this rally is not without its technical challenges. The indices are nearly at the top end of their long term trend channels, a point where channel traders have taken profits in the past. Will it happen again? Some selling is likely in the 1240 range, but ultimately it will be speculation based on fundamentals that will determine the fate of this rally.

Key Market Factors

Our Key Market Factors are parameters we identified as mattering most to market participants. The smart money monitors these factors closely speculating on potential moves that will drive stocks up or down.

Oil NYMEX - $57.83 - (negative +)[score -1] - Crude oil futures moved much lower last week falling below the $60/barrel level and holding there on a weekly basis, the first time in many months. The recent rally in stocks has been stimulated by the fall in oil prices, a situation that can continue. Further, negative technical characteristics in the chart of the OSX may signal more declines. We do not expect a sharp fall in prices, however, short term volatility is expected. For now we have rated the price of energy as negative plus. We would become more positive with a close in oil below $55/barrel, more negative if oil rises above $60.

10 year Treasury - 4.57% - (negative +)[score -1] - Rates on the 10 year note maintain their position above 4.50%, a less bullish sign. Fed fund rates are expect to rise 50 basis points in the next few months, a level we feel is priced into the market. If commodity prices (as well as salaries) flatten or fall off we believe the Fed will pause in raising rates. Speculation about the future direction of interest rates is likely to move markets. Inflation numbers due out this week will be a major focus of the smart money. Higher inflation increases the chance rate hikes will continue beyond expectations. If the CPI, PPI come in high we expect a short term move lower for stocks; the opposite is true if inflation comes in low.

4th Quarter Earnings - 14.5% - (positive)[score 2] - Analysts expect earnings to remain strong for the fourth quarter, growing at a double digit pace. The fourth quarter tends to be stronger than the third especially for tech, a scenario that will likely facilitate buying in the nasdaq. We remain positive on earnings and continue to buy issues with accelerating earnings growth rates.

  • MESA - Mesa Air Group will report earnings this Thursday. Although we do not expect any surprises we do expect stock price volatility. Travel remains strong and lower fuel prices are padding profits. Mesa's stock price lags that of its peers. Its current P/E ratio is around 8 verses the P/E of 20+ for similar companies. In our view the reason for the P/E short fall is Mesa's level of investment. Currently the company is expanding, spending money on opening new routes (e.g. Hawaii) and expanding its operations, which is slowing earnings growth. Once the investment cycle is near completion we feel the company's stock price will normalize and industry permitting, demand a premium. Given this scenario we have a target price of $32 per share.
  • ZHNE - Interesting formations in Zhone's stock price chart are underway in the very short term. Near term moving averages have begun to trend higher, pointing toward the 200 day moving average. Further, the stock has begun a basing period in line with the rest of the market, which could be bullish near term. A break out to the $2.60 level would not surprise us at all.

Wednesday, November 09, 2005

New Leaders and Old

Technical

The stock market is acting as expected. An after rally profit taking session has been in progress keeping the market from moving higher. Market action for the S&P500 for the last few days shows a break through tough resistance at 1215 and a settling in at its current level of 1222. The fact that the index stays above the 1215 level bodes well for a move higher. Further, a falling level of volume in the period suggests that profit taking is decelerating. Thus, I would expect the market to base here then breakout higher on a short term basis. Essentially the same scenario is happening for the nasdaq composite, therefore I would expect similar action for that index as well. That said (there is always a "that said"), the consensus expects a year end rally, which could throw dirt on any rally chance. In order to beat the consensus the smart money will be looking in arcane places for the new leaders as any new rally is likely to have some new faces.

New Leaders and Old

The latest rally lifted all stocks including previous leaders that fell hard in October. As the latest round of profit taking plays itself out I expect there to be a change of leadership as old leaders stagnate and new leaders rise. Energy stocks, the hands down leader of the last business cycle, have been a mixed bag of late. Most energy stocks have come off their peaks and have started to tail off during the current round of profit taking, failing to make new highs and putting technical stress on the group. Homebuilders sing a similar song as low interest rates, unprecedented demographics, undervalued real estate and monumental consolidation drove their stocks to all time highs. Now similar structural forces that affected energy stocks are weighing on housing stocks. Rising interest rates and rising housing prices that out pace incomes (as well as high energy costs) are slowing sales and driving housing stock prices lower. If there is a market move higher I do not expect these former leaders to out pace the new ones.

The smart money knows that future market leaders are likely to be stocks that have accelerating earnings in a changed environment. What will the changes be? That is open to speculation. Left to the consensus it will be stocks that do well with lower energy prices, higher interest rates and potentially higher taxes. Only time will tell but I think the market is signaling something different. Financial, semiconductor and transportation stocks have led the recent rally and, unlike the past leaders, have held their gains thus far. What is odd is that these groups tend to be the ones that lead during a new bull market. Perhaps their move is a foreshadowing that interest rates are about to top out, the economy will have a soft landing before it returns to higher growth fueled by globalization, a scenario that is not out of the question and one we lean toward. We are not saying their will be a clean move higher at all; in fact we predict rollercoaster like volatility with peaks and troughs that test investor mettle. Carefully building positions with solid fundamentals and technically timed entry points will help to provide profits levels we are use to. In other words, educated speculation by forward seeing managers is required. We already started to invest in future leaders. See our website at www.thesmartmoneyinvestor.com to view our positions.

  • IAU - IAU is an exchange traded fund that reflects the day to day movement of gold bullion. There are many reasons to own gold at this time. Increased currency volatility, banking system surprises, stagflation/inflation, global unrest or the fact that gold has begun to break out of a long term base. We are adding IAU to our portfolio as we believe that potential structural changes favoring the metal are growing and technical characteristics exist to support an investment at this time. Further, given the long base that gold has been in we currently believe that downside risk is limited.

Sunday, November 06, 2005

Quick Thoughts

Technical

The S&P500 broke through staunch resistance last week when it surpassed the 1215 level on higher weekly volume. The nasdaq composite followed suit gaping higher through trend channel resistance. From a technical perspective this market wants to move higher.

As I wrote in a previous post I expect there to be an elevated degree of market volatility as the smart money rotates out of their bond positions and into other asset classes. The change will unlikely occur suddenly, however, "market mood swings" are likely in the short term.

Quick Thoughts

We continue to carefully shift into new positions as the earnings outlook for 2006 shifts. We remain neutral on the general market at this time due to the changing nature of our Key Market Factors. That said, a move to lower oil prices and flattening rates could signal excesses in the economy have been lapped up giving the smart money the ammunition it needs to buy more stocks. If the latter case comes to fruition we would expect the S&P500 to rise 5-10% as it catches up with the rest of the world; and the nasdaq composite to do better. Anticipation of lower energy costs and flattening rates would signal to us a buying opportunity is at hand, thus causing us to accelerate or our purchases.

Wednesday, November 02, 2005

Bond Market Turmoil Equals Opportunity

Technical

Seasonal buying is in full swing this week as the, "glass half full" scenario plays out. Large investors put their money to work in the stock market driving the S&P500 above its 50 day moving average for the first time in a month. The S&P500 closed at 1214.78 on Tuesday, right against heavy resistance as if to challenge investors. A meaningful move through 1215 on higher volume is necessary if this market is to move higher and stay there.

The nasdaq composite appears to be in better shape as it already broke through its road block when it crossed 2100. Another encouraging sign is that the index closed above its recent trend channel on Tuesday, albeit just, but paving the way for a move higher. The smart money has been buying small caps and tech in selected areas. One would be wise to tread carefully as this market is likely to be vulnerable to bouts of profit taking.

The recent gains have been steep and both the S&P500 and nasdaq composite sit up against some level of resistance, increasing the chance of a short term correction. We have acted with the rest of the smart money buying out of favor small caps and will continue to buy selectively on dips. Check out our website at www.thesmartmoneyinvestor.com to see what we are buying and selling during this run in the market.

A Bond Market in Turmoil Spells OPPORTUNITY

Bonds have sold off recently driving the yield on the 10 year Treasury above 4.60%, its highest level in over a year. Cash coming out of bonds will look to flow to the path of least resistance. Can stocks be the conduit? Cash returns are safe and so far this year have beat the S&P, but 3% is not very attractive given the potential of other assets.

A rising dollar in the face of rising foreign stock markets (the NIKKEI has risen over 20% this year for instance) make US stocks look under valued. I believe that US stocks are poised to catch up with those of Europe and Japan. These markets have risen throughout the year and may be expensive given the fact that both regions are expected to slow next year. Further, as interest rates in the United States rise foreign investors will look to diversify away from the shrinking values of other currencies. That likely means US assets, and at least in the short run US stocks.

Cash exiting bonds and foreign smart money investors looking to diversify away from fully valued markets will likely help to pump up US stocks in the short run. We continue to carefully add to fresh positions and look for new ones. The Focus13 fund has been through significant changes during the last month as we prepare for the tectonic changes taking place in global markets. Stay tuned as we find tomorrow's leaders today.

  • URBN - We initiated an investment in Urban Outfitters as the teen retail continues to grow its business. With only a 140 stores throughout the US, England and Canada URBN has room to grow. URBN continues to gain popularity among teens with timely fashions and fair prices. Although the stock has come a long way we calculate intrinsic value at $56/share. We feel that URBN will benefit from falling oil prices and a solid holiday season.