....................The Smart Money Investor...................

Rising Negative Sediment Offers Opportunities

2005-12-08T06:19:00.000-08:00

Technical

Both the nasdaq composite and S&P500 have shown signs of weakness recently. This is expected given the meteoric rise of both indices. Now sediment has become more negative driving some investors to take profits. This action in turn has caused the indices to form a basing chart pattern. In this stage of the rally there is likely to be a shake out. We expect increasing volatility and opportunities to buy good stocks at better prices. That said, both indices have broken a steep up trend thus increasing risk above normal levels (to nasdaq 2219 and 1245 on the S&P500). We are carefully adding to positions and take some profits in others.

Change in Sediment

Over the last week I have noticed an increase in negative sediment. Granted, investors have been pretty bullish of late, however, there has been a more rapid decline in the number of investors who believe that the market will move higher this year. The reports out of Iraq threatening middle east oil supplies, cold weather in the northeast, higher commodity inflation and a report out of UCLA predicting the loss of 800,000 jobs in the housing industry have put a damper on the recent rally. But the smart money knows that business in the US is booming in many sectors. In our discussions with various managements we are finding increasingly positive outlook for business. Further, it is our belief that commodity and energy inflation are the result of growing business and not stagflation as evidenced by the sharp rise in productivity. Analysts are still raising earnings for many groups and mid-quarter reports from Texas Instruments and Qualcomm are backing them up. Another surprise is the home builders. They continue to have rising profits. In short all this adds up to a robust economy, oh yeah the Government also raised GDP estimates.

We feel that recent stock market weakness is a normal given the sharp rise in stock prices and that the basing pattern forming in the charts of the nasdaq composite and S&P500 is healthy. It is our assertion that improving fundamentals and technical strength make this market more of a buy than a sell. That said, we are aware of the risks and may make moves to limit our exposure to volatility.

BOOM - Dynamic Materials is a new addition to our fund. The stock ranks second highest, just below Apple, in technical and fundamental strength. Recently, the stock while basing in the $24/share range experienced a break out to $30/share. We feel that BOOM has more upside. We like the growing niche that is the company's core business (cladding) and the potential that exists for the company to be acquired. We calculate IV to be $52/share.

Key Market Factors Revisited

2005-12-04T20:46:00.000-08:00

If you follow this blog on a regular basis you may have noticed the down time to our site. Although technology propels much of our lives, sometimes it forces us to take a step backward. We experienced some technical challenges last week that we were unable to surmount, for that we apologize.

Technical (market)

The market continued to move higher last week adding to its string of advances. Although all most the major indices were positive on the week it appears that the S&P500 started a basing pattern. Short term technical indicators signal the beginning of an over bought market and may foretell of a small correction. However, the fact that the nasdaq, often a leading indicator, started to break out last week may signal that stocks have more room to run. Multiples are such that this market can move much higher. The question right now is will it happen all at once or after some profit taking? We continue to add to some of our positions on the dips. We expect volatility to pick up starting around Thursday as investors trade through the FOMC meeting next Tuesday and options expiration on the 16th.

Key Market Factors

I have not addressed the Key Market Factors for a few weeks, so I will do it today. Our Key Market Factors rating remains at Neutral. I know the market is moving higher and the Key Market Factors have remained the same, however, markets move first on speculation of change and not when the change is obvious. Our Key Market Indicators is an objective rating and we too speculate as to its ultimate out come.

Oil NYMEX - $58.10 - (negative +)[score -1] - After several weeks to the downside crude oil moved higher last week on speculation that colder weather in the east will increase demand and the fear that OPEC may cut production. Most crude oil traders seem to think that oil is going lower, in fact Boone Pickens projected $50/barrel oil in the short term. All the negative sediment is likely to drive oil higher. I would expect rising oil prices in the short term.

10 year Treasury - 4.54% - (negative +)[score -1] - Treasury yields on the 10 year were down two weeks ago but have risen on speculation that the Fed will raise rates next Tuesday. It appears that the Fed has pricked inflating housing prices and at the moment price stability is intact as core inflation remains low. We believe that rate hikes are coming to an end, in fact we feel that rates may already be too high. That said, it looks like two more rate hikes are in the cards according to the futures market.

4th Quarter Earnings -14% - (positive)[score +2] - Smart money types continue to speculate that double digit earnings are going to be a reality in the fourth quarter. The economy remains robust as the Government recently revised GDP estimates higher and, as mentioned above, core inflation remains low. Further, many companies have stock buy back programs in progress, which tend to pump up eps, as a way of productively using their excess cash.

Opportunities in Transport

2005-11-27T10:20:00.000-08:00

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

Ticker	Price/sales	Price/book	P/E	ROE	Debt/E	IV/shr
MESA	0.27	2.40	8.0	33%	427%	$23
RJET	0.72	3.48	8.3	32%	460%	$11.67
SKYW	1.11	2.21	18	11%	59%	$81.47
AMR	0.14	4.79	N/A	N/A	N/A	N/A
RYAAY	N/A	4.38	21	17%	60%	$49.9
AAI	1.03	4.09	387	4%	85%	$17.82

Ladies and Gentlemen Start Your Engines

2005-11-20T10:25:00.000-08:00

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.

Channel Traders Fight for Control: Will They Win Again?

2005-11-16T07:38:00.000-08:00

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.

Double Digit Earnings Growth Expected for the Fourth Quarter

2005-11-13T20:17:00.000-08:00

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.

New Leaders and Old

2005-11-09T10:10:00.000-08:00

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.

Quick Thoughts

2005-11-06T21:12:00.000-08:00

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.

Bond Market Turmoil Equals Opportunity

2005-11-02T23:10:00.000-08:00

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.

Seasonal Factors Favor the Bulls

2005-10-30T08:33:00.000-08:00

Technical

A volatile stock market tends toward the upside after several false starts. The jumpy market has managed to end on higher highs and higher lows over the last couple of weeks. The S&P500 closed up 19 to end at 1198 on Friday. The 1.6% rise was welcome, albeit on just above average volume. The nasdaq composite rose 1.2% on a bit better volume. Unlike the S&P500 the nasdaq composite did manage to stay above its 200 day moving average. The market's performance has been hopeful but less than inspiring, lacking volume, leadership and breath.

Seasonal Factors Favor the Bulls

It is no secret that the last quarter of the year tends to be the best one for stocks. On average the market rises about three percent during the period. Will history repeat itself this year? Only time will tell for sure but here is some food for thought.

The current bull market is nearly three years old. From a long term technical perspective signals say this market is about out of steam. To make matters more interesting the market has traded in a narrow range for the last year, often a sign of a break-out in either direction. If this market does break out soon, the down side has to be favored given the length of this bull market and uncertainty about earnings growth. However, if the Fed is done raising rates the market may move higher, provided fiscal policy remains neutral or better. As I mentioned before in a previous post we are protecting our positions with puts in certain cases and are carefully rebalancing our portfolios.

A Word About Our Key Market Factors

Our Key Market Factors are telling us to be neutral on this market. Energy prices remain relatively high with oil above $60/barrel. So long as the price stays stable at these levels we are unlikely to get more negative on energy. We would become more positive however, if oil dropped below $55/barrel and stayed there for a while. Rising interest rates have made us negative on the cost of money. We feel that a 10 year treasury above 4.50% is at or above neutral and likely to stimulate more savings than spending among consumers. Earnings have been good this quarter with 68% of the S&P500 beating estimates while 19% have fallen short. Still fourth quarter previews have been conservative leaving investors uncertain about their future. It will be the speculation on the part of the smart money that determines the direction of stocks into the year end and beyond. New leaders are likely to emerge at some point. Stay tuned as we find these leaders first.

ZHNE - Zhone remains an interesting investment. Earnings came in flat, which was a victory of sorts given the acquisition of Paradyne. The company has increased its cash position in the quarter by about 25% and revenues have more than doubled, yet the stock trades at about 1/2 its book value and more than a 2x discount to its peers. In our opinion the street views Zhone's business as less than sexy. Although wireline telecom is a dying business Zhone brings new broadband and service life to the thin pair. Zhone's products allow service providers to send voice, data and video through existing phone lines giving customers a competitive choice in many international markets. Zhone now has 640 customers, with no customers having more than a ten percent share of revenue. In fact, Zhone's top 5 customers account for only 29% of the business. In this quarter's conference call CEO Mory Ejabat hinted at the possibility of a tier one customer coming onboard in the next few months. Further, rumors have it that there is a management shake up taking place and the making of a revitalized team is underway. We expected stock price volatility through earnings season and got it with a bit more to come when the lock up period ends in a few days. We are adding shares and remaining patient as we believe this out of favor company is in position to profit in the near future.

Is the Market Going to Make a Tectonic Shift?

2005-10-26T18:30:00.000-07:00

Technical

The smart money waits as the stock market attempts to prove it is ready to move higher before it moves lower. Sure there have been upside days on decent volume, yet the S&P500 remains below its 200 day moving average. Inertia becomes greater the longer the index stays below the 200 day line adding to upside resistance and increasing the chance that stocks will move lower in the near term. Today's action did not help as each time the market attempted to move higher it sold off, ending the day down on higher volume and stinking breath.

Over the last couple of weeks we began asking hard questions about this market and the apparent tectonic shift in progress. We believe that in order to be successful in 2006 fund managers will have to correctly postulate their portfolios around a new paradigm; one with higher rates, a new Fed Chief, an uncertain winter and a possible pandemic. Stay tuned to this blog as we identify the new wave of leaders and usher in opportunities not yet found by the mainstream.

Key Market Factors Begin Meaningful Changes

Capital Markets are being tested right now. The 10 year Treasury closed above 4.50% for the first time since late March. Will the yield continue to rise or will it fall like it did in April? Answer that question correctly and you will profit handsomely. Read on as I will give our perspective on interest rates and the market's other key factors.

First, in order to sum up our perspective and enable the reader to, with one glance, see how we view the current market climate we are adding a Key Market Factors Score to the blog. In short we are adding a number grade to each of the Key Market Factors, which when totaled will represent our perspective. For example, if Oil NYMEX is Negative +, we will assign a number of -1. If the 10 year treasury is Positive -, we will assign a score of +1. When totaled (-1 + 1=0) the result would mean we are neutral on the market. Got it, good, if not read on and it will become clear. For the record the scale is as follows positive + = 3, Positive = 2, Positive - = 1, Neutral = 0, Negative + = -1, Negative = -2, Negative - = -3. A total positive score will mean a corresponding positive perspective, likewise a negative score will mean a negative perspective.

Oil NYMEX - $60.80/barrel - (negative )[score = -2] - Oil prices have fallen from the Hurricane Katrina highs of $70/barrel, however, they are still high enough to tax the consumer. Although we like stable energy prices we feel the market would perk-up if the price was under $55/barrel in the short term. Within the last five trading days the price of oil dipped below $60 showing some promise of relief. Further, higher interest rates are likely to bring the price of energy down. That said, the potential exists for prices to stagnate if a cold winter ensues keeping heating oil prices high. For now we feel the market is impacted negatively from the current price of oil.

10yr Treasury - 4.57% - (Neutral) [score=0] - The yield on the 10 year Treasury note broke solid resistance this week when it crossed the 4.50% level and held. The question remains - is this a short term pop or will rates continue to move higher. Greenspan's "conundrum" may finally be solved as long rates look to be rising in concert with short term rates. On the positive side the yield curve is steepening signaling the economy is expected to grow. The other side of the coin says inflation is rising and growth must be slowed. Only time will tell the future of rates but for now the market is discounting a Bernanke Fed will raise rates and expand the economy.

3rd Quarter Earnings - 17% - (positive)[score=2] - 3rd Quarter earnings are turning out to be positive. In the S&P500 70% of companies reporting thus far have beat expectations with only 14% falling short. Prognosis for the 4th quarter is conservatively positive for the most part with many companies keeping estimates in line with previous guidance. Our surveys report that the economy is growing and companies remain strong with some even having difficulty finding enough qualified employees. Asia is growing ahead of forecast and Europe looks a little brighter than before. 4th quarter earnings show promise, however, other factors of the economy may hamper growth. For now we are positive on 4th quarter earnings.

The KEY MARKET FACTORS SCORE = ZERO, making us neutral on the market. We continue to be busy rebalancing our portfolios. We have started to shift out of interest rate sensitive issues and are looking for companies that will benefit from the changing environment. Airlines and some tech companies have caught our eye and more are in sight. Check our website at www.thesmartmoneyinvestor.com to see what we have added and what we have let go.

BIDU - Baidu.com reported earnings that crushed their previous year's results. The only problem is that they fell way short of what a "Chinese Google" should be. BIDU lifted 4th quarter guidance by about 30%; which normally would be good. However, the increase amounts to only a few million dollars and is chump change when compared to $100 million type increases more worthy companies produce. I would have been excited by a 200%+ increase in earnings, so the 30% was, well disappointing. Baidu.com is apparently China's number one search engine and most visited website. As far as I can tell from the numbers they are mere mortals with a me too product and adding an old school name to their board only makes matters worse. I will have to see more than so, so before I will be willing to pay the premium put on the stock at the moment. At this point $27/share looks like a fair buy point.
MESA - Mesa Air continues to look good even in the face of a negative market. MESA is set to report earnings next week tipping its hand about its latest investments and growing ASM (average seat mile) numbers. Its competitor RJET reported strong earnings today 63% ahead of last year. RJET stock rose 0.06% on solid volume. For comparison RJET has a PE of 9 while MESA's PE is only 7. We see promise for both of these small caps especially MESA and can see $14 a share in the short term based on peer multiples.

Technical Challenges

2005-10-23T22:27:00.000-07:00

Technical

On Friday the VIX (the S&P volatility index) closed above 16 for the week, one of only three times this year. Interestingly, each time the VIX has been above 16 a rally ensued. Finally on Monday the S&P500 climbed above its 200 day moving average after a three week stint that put into question the validity of a nearly three year bull rally. Was a VIX above 16 enough to flush out the hot money and make way for investors? Can this market have yet another year end rally? Is there more to go in this bull market? Based on the technical data we use it is hard to say, but if the stock market can move up from here on higher volume probability favors the bulls.

Short term technical signals for both the S&P500 and nasdaq composite point to an oversold market and are at levels where buyers are likely to reign supreme. The question remains: is there enough buying interest this time to drive through staunch over head resistance? Time will tell, but if fundamental data comes in strong backing up the bulls there is probably enough of a technical void caused by three weeks of selling to rocket stocks.

Monday's rally was a significant follow through as many indices gained over 1.6%, albeit on so so volume. If the rally is to continue the first test will come for the nasdaq as it must climb above 2125 in the short run on higher volume to break through some tough resistance. The same is true for the S&P500 at the 1215 level, which has been a real sticky point.

On a longer term basis this market is more over bought than over sold. From a technical perspective I would not be surprised to see a repeat of last year, where a year end rally yields to strong selling at the beginning of 2006. I believe globalization will fuel long term growth, however, the phenomenal growth in Asia and South America is likely to slow as widening imbalances tend to equilibrium. Hopefully, if and when there is a global slow down it comes with a soft landing, but, a market lacking volatility like this one increases the chance of a harder fall. Look for increases in VIX fluctuations as time passes. It would be better to have greater volatility now then to get it all at once. The fund is likely to purchase more protective puts than what we have over the past two years in order to protect profits in a volatile market.

We are in the process of rebalancing the fund. We have been very busy lately as we remove old leaders and shift into future ones. We continue to stay with our strategy/philosophy (visit our website at www.thesmartmoneyinvestor.com to learn more). Stay tuned as we make changes to maintain the fund's yields above 50% for the year. You can see what we are doing by visiting our website.

BIDU - Baidu.com is set to report earnings on Wednesday and investors are buying now in hopes that the stock will mirror the performance of Google. Shares rose above their 50 day moving average on Monday, a positive sign as the stock has fallen about 50% from its 52 week high. Some analysts call for a $45/share valuation based on earnings growth and market multiples. However, investors see a future significantly above that of market analysts, buying into a faster than estimated 100% 2006 earnings growth. In addition, investors have a buy-out premium on the stock, believing the company could fetch north of $4 billion in an acquisition. At $80/share we believe the stock is fairly valued when compared to its peers; that takes into account accelerated eps growth, market conditions and a buy-out premium. By now Baidu.com should have about 1,000 employees, a ten fold increase over last year. We will be looking for how well Baidu.com management has employed these assets. Further, we are interested to see the progression of search advertising on the site. For now we feel that BIDU promises more short term trading profits than investment opportunities. That can change however, if Baidu.com management can prove it is capable of growing earnings way above consensus estimates.

GUTS

2005-10-19T18:43:00.000-07:00

Technical

Investors woke up yesterday as an oversold market collided with positive earnings and beige book news. Shorts were squeezed and the longs were paid. The S&P500 closed at 1195 up over 17 points, but still below its 200 day moving average. The nasdaq composite did even better closing at 2091 up over 35 points and closing above its 200 day line.

It is apparent that investors began to speculate earnings were going to be good and inflation would be in check. The smart money dipped its toes into the market starting last Thursday and continued to buy. The market is not out of the woods yet, however, it took a step in the right direction.

We continue to remain cautious although we began to add new positions. This is a tough market as many changes are underway. It will take guts to make some of the hard decisions necessary in order to profit from the future. Check our website at www.thesmartmoneyinvestor.com for the details.

Key Market Factors

As expected our Key Market Factors, being in flux, have driven the market. Part of the reason for the recent reversal is the more positive nature of our indicators. Oil has fallen in price. Interest rates, although providing a wall of worry, remain below 4.5% on the 10yr. And earnings are not looking so bad. Below is an evaluation of the status of the factors.

Oil NYMEX (positive -) - $59.55 - Recent hurricane activity in the Gulf drove up prices last week. Obviously, the hot money was quick in and quick out as the storm moves away from oil rigs and prices fell. Further, oil consumption was weaker than expected as inventories grew for the week and gasoline prices fell 6%+ the last few days. Falling demand and growing supplies are firming up the picture for the market as energy costs fall.

10 yr Treasury (positive) - 4.48% - Inflation was on the top of investors minds last week as CPI and PPI came in higher due to the recent hurricanes. However, underlying core inflation seems to be in check and the economy looks to be cooling. Our surveys confirm this reasoning. Resistance at 4.50% continues to stand up and consensus is growing that the Fed can continue to move rates higher at a measured pace without hurting the market.

3rd Quarter Earnings (positive) - 17% - positive earnings continue to come in without surprise. More importantly, 4th quarter projections remain in line for the most part. There are still a fair amount of reports left but as of today earnings are on the rise.

There are many opportunities for the smart money to participate. That said, there is a lot of dog doo out there, so watch your step. We continue to adjust and remain positive on the overall market.

MESA - We have begun to add Mesa Air to our fund as the environment for airlines looks better. Falling fuel prices are also having a positive effect on the group. MESA operates flights for United Express, America West Express and Delta Connection. Rising prices and falling costs are a positive for the company in our estimation. Check the website for targets.
ZHNE - Zhone will report earnings next week. We feel that costs related to its recent acquisition and reorganization are already built into shares. However, we do expect price volatility around the earnings report, which is typical for the company. ZHNE continues to lag its peers and can catch up as it goes into the better 4th and 1st quarters. The sale of its legacy systems may add a one time pop to earnings. The current stock price is at a level where insiders previously bought millions of shares.

Core Concerns - Interest Rates and Earnings

2005-10-15T17:38:00.000-07:00

Technical

Both the S&P500 and nasdaq composite ended the week below their 200 day moving averages, although both indices finished on the way up. Many investors feel with the declines of the last few weeks the market is due for a bounce as stocks became "oversold". However, on a weekly basis the market may not be as "oversold" as it appears. Indicators are at levels not normally associated with a meaningful correction. Only time will tell but I will need to see a bit more technical support before I believe the tape says its okay to buy away.

Core Concerns

Today investors' core concerns revolve around interest rates. The 10yr Treasury has hovered around 4.48% all week, a tick or two below the heavy resistance levied at 4.50%. The fear is if the 10yr yield breaks above 4.50% it will not move lower for some time. Although, inflation fears were quelled somewhat when core CPI was reported last week, all indications are the Fed is determined to deflate asset bubbles floating around the economy and will continue to raise rates. With the inertia of higher rates pulling down growth 4th quarter earnings will be in danger of falling short of analysts estimates. Our studies show that the economy has begun to slow and the smart money has already begun their asset rotations. In the coming weeks we will be keeping an eye on the 10yr as its yield is on a precipice from which a change in trend can occur. If the yield moves above 4.50% for any length of time we are likely to change our investment strategy.

As if changes in interest rates were not enough investors will be fed the main course of 3rd quarter earnings this week as the core of the S&P500 serves up their numbers. As I mentioned in a prior post investors will be less concerned with the actual numbers than with what is said about the future of earnings. Expect future projections contained in the reports to drive the market. Thus far the earnings that have been reported have been pretty good. Again, the question will be can companies keep them growing profits above trend.

In summary we are taking a wait and see approach before leaning into this market. We are waiting for what is said between the lines of 3rd quarter earnings reports and what the tape does before we act. That said, rising interest rates and stubbornly higher energy costs will force us to speculate on the short side if either spikes higher in the short term. Stay tuned during the week to see what we do. You can see our changes by visiting our website at www.thesmartmoneyinvestor.com.

Good News: This Market Looks Pretty Bad

2005-10-12T15:03:00.000-07:00

Technical

This market looks pretty bad hopefully that is good news. Volatility as measured by the VIX closed at 16.22 Wednesday, which is a five month high. Around this level I would expect a bounce, however, the stock market's breath stinks and selling has been notably fierce. I am not going to rule out a turn around from here but stocks are more likely to see a dead cat bounce if the buyers come back too soon. For all the reasons I wrote about in my last post the projected fundamentals and ensuing technical characteristics of this market seem to be in sync. It is likely the stock market has more down side to go.

The S&P500 closed at 1178, the sixth day below its 200 day moving average. The longer the index stays below the long term trendline the greater the inertia to get above it again. As bad as the S&P500 has been it is not the real story. Small caps and nasdaq stocks have been hit harder. The nasdaq composite is down 9% from its August high with many high beta stocks dropping 15% or more. Former leaders from tech, energy and the homebuilding sectors have been hit the hardest, signaling a change is leadership is coming.

We continue to reduce positions and look for new opportunities. I am reluctant to short until it becomes technically feasible. By that I mean I want to see a bounce and evaluate the situation before we make the investment. The market is in the middle of correcting as the smart money positions itself for the new market realities ahead of it. All our Key Market Factors are in flux and with the addition of some new worries this market is likely to be volatile for a while.

Fed Funds Rate Above 4%

Earlier this year I wrote that if the Fed Funds Rate went above 4% we would likely reduce our stock investments. We still feel that neutral is about 4% and rates above that level will likely slow the economy more. From all indications at this time it looks like we were right. Investors believe that 3rd quarter earnings are going to be fine, its beyond that worries them. Ex-energy the S&P500 is expected to grow earnings about 12% this quarter. At this time analysts are only projecting 10% growth for the same group into next year. High energy costs and the perception of rising inflation are backing them up. Our studies show a notable slow down in the economy. This slow down is likely to continue until rates start to fall. Stay tuned as we navigate through this portion of the business cycle and come up with profitable positions. You can see what we are doing by visiting our website at www.thesmartmoneyinvestor.com.

MESA - The airline group has been beaten pretty badly over the last several years. Most of the majors are in re-organization; now opportunities exist for savvy competitors. MESA is one that looks to be one taking advantage of the situation. We are looking at MESA and calculate its intrinsic value at $19/share (currently it is trading at $9.5/share). If higher rates bring down fuel costs airlines are positioned to profit as consumers have become acclimated to higher prices. We are likely to add a position on a pull back.

Is it Time for Bold Moves?

2005-10-09T21:06:00.000-07:00

Technical Perspective

If you follow this blog you know that the stock market's slide was pretty well telegraphed. Two days of back to back heavy selling in late September set up a consolidation period (probably end of quarter window dressing), a failed rally attempt and more declines last week. Now the S&P500 sits below its 200 day moving average with the nasdaq composite closing in on the long term trend line. Some of the hardest selling in recent memory was executed last week, a sign that market forces are changing and more weakness could follow. Some indicators say that the market is oversold, while others show there are more declines to come. We remain cautious and have reduced many position. Further, we have our eyes on new opportunities both long and short.

Is it Time for Bold Moves?

The smart money is in speculation mode. They will ask themselves the tough questions and are likely to take bold moves in order to be positioned properly. Economic cross currents will collide in the coming weeks as earnings, inflation and energy costs mix to color the future picture for stocks. In addition, other forces are stirring in the back of the mind's of investors: bird flu, terrorism and natural disasters act to change the hue of the stock market.

First, lets consider the latter group. Bird flu is gaining attention as a potential pandemic. Government estimates of up to 1.9 million deaths could result from a US outbreak of the foul threat. SARS quickly clamped down China's economy taking stocks with it. It is feared that a similar outcome could result from a break out of bird flu in any major global economy. Look for the market to be initially shocked if one case is reported in the US, especially given rise of political and media attention. A like response would also occur if cases were reported in any major global economy. I believe the market is yet to discount a bird flu threat, thus look for down side pressure from the disease.

Terrorism is now a market reality and to a certain extent US citizens have become numb to the fact. Depending on the magnitude and logistics of a future terror strike the market is going to act accordingly. I think that some of the market's decline of last week was at least partially attributed to the terror threats in New York and the market will continue to discount an attack more or less depending on the media and the threat.

From a market perspective natural disasters strike hard up front and tend to recover and give back during the rebuilding effort. Hurricane season is nearly over and a major hurricane in the Southeast is unlikely until next year. Barring an earthquake, tornado or other disaster the effects of Katrina and Rita have likely been discounted and perhaps over reacted to by the market. I think the drop in the price of oil and gasoline, in part, is due to a hurricane induced price overshoot.

Far and Away it is the Details in Our Key Market Factors That Will Drive Markets

Without a doubt uncertainty about earnings is what recently drove the stock market lower. Not so much about actual 3rd quarter earnings, rather what might be said (or not) about the future. In my Key Market Factors commentary I address some of the details to be considered for the future of earnings.

Oil NYMEX (negative +) - $61.80 - Higher interest rates and the perception that energy conservation efforts will begin in earnest helped to reduce the price of oil and gasoline last week. Japanese and Korean automakers are stepping up production of hybrid and fuel efficient cars. Only time will tell whether the commodity will drop further, but many energy companies led to the downside last week. If earnings worries were not front and center the recent fall in energy prices would have likely pushed the stock market higher, but that was not the case. Either the market believes that oil prices are going to rise again, which is unlikely given the sell-off in the sector, or stocks are going to be affected by other inflation drivers, which have not risen like energy has. This discontinuity may be due to an asset rotation taking place on the part of large investors. Certainly it means that opportunity exists.

10yr Treasury (positive) - 4.37%- Long term interest rates have risen recently as the Fed appears more hawkish. I thought it was interesting that all Fed Governors came out talking tough on inflation. To me it seemed orchestrated and certainly it affected capital markets. Greenspan seems to be getting what he wants. The talk was enough to squeeze much of the speculative money out of the energy and housing sectors. Although the results are negative for the market in the short term falling energy prices and inflation will strengthen stock prices in the future.

3rd Quarter Earnings (positive -) - 17% - Investors are worried that 3rd quarter earnings are going to fall short of estimates as natural disasters, rising interest rates and a slowing economy have taken their toll. What makes matters worse is the speculation on what might be said about the 4th quarter and beyond; a major reason for the fall in stock prices last week. This week is likely to give a glimpse into what lies ahead for earnings. News from earnings reports are going to drive the market for the foreseeable future. A careful watch of what is happening will give hints about the next business cycle. Stay tuned as we sort through the minutia and make investment decisions for our fund. Visit our website at www.thesmartmoneyinvestor.com to see what we are doing.

RIO - We are watching Comp Vale Do Rio as the recent decline may be a buying opportunity. If speculators drove up the price of oil beyond its natural value mining stocks stand to benefit. Energy is a major cost for metal producers and profits may accelerate if crude falls further. We sold some shares on technical weakness, however, the stock's technical characteristics look to be strengthening. Visit our website to see what we do.
ZHNE - 2.5 million shares of Zhone were quietly traded on Friday, 300% above average daily volume. It appears that the smart money was buying shares on sale. The sector has under performed for a long time, however, it looks to be poised to improve. Jabil Circuits, a large contract manufacturer that specializes in building equipment for the telecom industry, reported solid sales and earnings on September 26. Looking ahead, Jabil said that it was on track to meet analysts estimates. Such activity bodes well for Zhone and others in the sector. We are adding to our position in Zhone.

The Smart Money Repositions for 2006

2005-10-04T19:59:00.000-07:00

Technical

The S&P500 fell hard late yesterday as all of the gains from the last few sessions pulled back to the 1214 support level. A close below this level in the next few days would likely mean further declines. In that case, I would expect a change in leadership and a high level of volatility as large investors build their 2006 positions. The nasdaq composite is in better shape, although it too has fallen below its 50 day moving average. A real challenge for the tech heavy index exists if it fell below 2120.

Based on the magnitude of the sell-off I would say the smart money has begun to reposition their portfolios. The media called it "a sell off on inflation fears", I say it was 3rd quarter earnings jitters and profit taking ahead of a changing business cycle. We are cautiously optimistic however, we have started to make some changes after 10%+ gains to our Focus13 fund in September. Visit our website at www.thesmartmoneyinvestor.com to see our current positions.

Below I have listed the top and bottom five performing sectors the last two days. It looks like investors started to move to more defensive sectors as Retail, Metal and Real Estate Operations took it on the chin. Interesting enough Medical Software, Rail and Semiconductor Equipment showed good gains as well as the five below.

Top Five Performing Sectors

1. Diversified Drugs
2. Generic Drugs
3. Building Maintenance
4. Airline
5. Telecom-Fiber Optics

Bottom Five Performers

1. Computer Peripheral Equipment
2. US Oil & Gas Explorers and Production
3. Integrated Oil
4. Commercial Builders
5. Oil and Gas Drillers

NTES - Chinese internet stocks have caught the eye of investors. Even though the nasdaq fell sharply yesterday NTES was able to hold on to 2% gains. Recently the Chinese Government announced plans to combat online gaming addition. As a result companies such as NTES have levied, what amounts to penalty points to over active gamers (gamers who play more than 3 hours at a time). By reducing the amount of "experience" points a player could earn after three hours of play Game Providers feel they will reduce over play by patrons. It has been reported that over 41% of all Chinese gamers play for 4 hours or more. Investors are waking up to the value of these stocks. We have calculated intrinsic value for NTES above $270/share and will likely add shares on a pull back. Further, the company is a component the USX China Index, which is traded on the AMEX.
BIDU - So far investors see more value than the, "at best" $45/share value Goldman Sachs and others have put on the shares. It appears that many investors are looking beyond near term earnings growth and are betting Baidu.com will grow faster than expected. We continue to value BIDU in a line with its peers. BIDU has recently been added to the USX China Index, thus increasing demand for its narrow float.
SNDA - Shanda Interactive Entertainment is the largest Asian Game Provider, yet a diversion between its stock price and its peers' stock price exists. The company appears to be building technical strength as it has based in the $26-$28 range for the last couple of weeks. In addition, the stock has about 3% of its shares sold short. The company continues to add new games and looks to be growing users beyond its peers with 18.5 million paying accounts. We calculate SNDA's intrinsic value at $114/share well above our 2x IV/Mrkt price rule.

Its All About Earnings

2005-10-01T19:03:00.000-07:00

Technical

The S&P500 ended the 3rd quarter above its 50 day moving average (dma) bolting from a sound base of support at the 1215 level on Thursday. Friday's close at a minimum gave confirmation of the move as the index stayed above its intermediate trend line, albeit just. Market internals point to a slightly oversold condition probably a product of end of quarter window dressing by institutions. The nasdaq composite acted similar to the S&P500 although its close was just shy of its 50 dma. Like I mentioned in my previous post, if either index can stretch higher in the near term (close above 1245 on the S&P and 2219 on the nasdaq composite) they would complete a "W" pattern, which is considered very positive by many market technicians. As usual the devil is in the details and only time will tell.

Its All About Earnings

Barring a hurricane or other disaster earnings reports are likely to drive the stock market this month and most of next. Now it is analysts expectations and the footnotes that will test the mettle of investors. Two hurricanes, spiking energy prices and rising interest rates have served to slow consumer confidence and dent the books of many businesses. There will be plenty of blame to go around, however, the smart money will be ever vigilant in sorting the true disaster costs from companies that merely dropped the ball. Executives will have to provide tangible evidence for why their bottom lines were temporally affected. Opportunities will exist for investors who are able to read between the lines. Stay tuned as we sort through the rubble and find profitable gems. Visit our website at www.thesmartmoneyinvestor.com to see our positions and their targets. Bookmark it, or better yet add this blog to your reader to get updated when changes are made.

As is the case every year expect money managers, especially the ones who manage for government employees, to re-balance their portfolios by October 31st. Opportunities will exist as managers shift assets into issues they believe will lead next year. Energy, healthcare and tech are the favorites right now but there are no guarantees. On the surface we are looking at tech and insurance as possible turnarounds with energy and commodities continuing to draw our attention. In coming posts I will identify some of these ideas, in fact I have included one below.

Key Factor Update

3rd Quarter Earnings (positive +) - 17.6% -Thompson Financial recently upped its earnings target for the 3rd Quarter. Until now we have use 16% as our year over year growth target for 3rd Quarter earnings. Growth in the energy sector has bumped up analysts estimates again. However, if we remove the energy sector from the S&P500 analysts predict 12% growth, which is not bad as it remains in the double digit range. The up coming quarter will be challenging for money managers as the economy has been in flux and much has shifted. I expect that there will be a change in leadership as investors move away from slowing businesses and into up and comers.

We continue to be cautiously optimistic into the end of the year. We believe that it remains a stock pickers market with increased risk and volatility expected through earnings season. We are likely to add protective puts when prudent to protect our profits and shift into new positions as opportunities present themselves.

ZHNE - We recently re-entered a position in Zhone Technologies for all the same reasons we bought it before (we were stop out of our previous entry position). From a market technical perspective the company looks to be bottoming out as the stock pushed above its 200 dma on higher volume. However, 3rd Quarter earnings look to be messy due to the acquisition of Paradyne and a re-balancing of its product mix and may spell further downside for the stock. Currently, we feel that the downside is limited. If investors can get beyond the current spat of corporate re-engineering we feel that the stock has a ways to go. First, Mory Ejabat its CEO is a prolific acquirer. His methods are not always pretty, or successful, but he always cuts his targets to the bone and gets a lot for a little. When he is right he is right and some of his previous buys have been monumentally successful. Second, on Friday the company announced the sale of its ARCA-DACS product line to Verilink. What is significant about the transaction is that in the past the line was the company's main source of revenue as newer more market grabbing lines were developed. We view this as a signal that the umbilical has been cut and management has shifted its focus more fully to the next generation and beyond. Third, many of the company's industry peers have had their market caps double or tripled in the last year. Since Zhone took on this relatively large acquisition during that period we feel that investors have taken a wait and see attitude with the stock. Obviously, we are speculating that the company will integrate successfully and skeptical investors will add ZHNE shares to their portfolios. Lastly and perhaps the most compelling reason to own ZHNE is that the market for Zhone's products is growing. In previous posts I discussed the resurgence of broadband; Zhone is smack in the middle of it.

Two Steps Forward and One Step Back

2005-09-27T21:27:00.000-07:00

Technical

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.

The World Continues to Grow

2005-09-24T20:39:00.000-07:00

Technical

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.

Its Not Nice To Fool Mother Nature

2005-09-22T19:28:00.000-07:00

Technical

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.

Higher Highs and Higher Lows Until Now?

2005-09-18T08:01:00.000-07:00

Technical

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.

Two Days of Hard Selling

2005-09-14T21:38:00.000-07:00

Technical

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.

Exciting Markets

2005-09-11T17:13:00.000-07:00

Technical

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.

The Smart Money Looks at New Internet Realities

2005-09-07T14:43:00.000-07:00

Technical

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.

Traders Get Back to Business

2005-09-05T09:03:00.000-07:00

Technical

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.

9/1/2005 Reversal?

2005-08-31T17:01:00.000-07:00

Technical

In reversal fashion the S&P500 swam up stream to close at its 50 day moving average (1220) on higher volume. The nasdaq fared even better to cut through its intermediate trend line on heavy trade. This type of market action is indicative of a market turn around. We have to say that we are skeptical, but one thing is for sure, you do not fight the tape.

The S&P500 closed above its last failed rally of 1219 on June 22nd, giving a touch of credibility to yesterday's move. Further the index crossed above the lower end of its trend channel (see our website www.thesmartmoneyinvestor.com for a definition of terms) another strong signal.

The nasdaq composite closed well of above the previous failed rally, however, it failed to break through the 2174 level, the lower level of its recent trend channel. The nasdaq's ascend has been far steeper than that of the S&P500, thus the rise of its trend channel may be considered less sustainable.

Hurricane

Hurricane Katrina caused much more devastation than expected. New Orleans, known for its unique character, is perhaps no more. Even more sad are the casualties of the disaster, the lives lost and the people hurt. Our hearts go out to all of those who have been affected by the hurricane and we hope and pray for a speedy recovery or at least the return to some level of normality.

The cost of the damage will run into the many multi-billions of dollars. All of us will be affected in one way or another. New Orleans was one of my favorite places. Some of the world's best food is there and world class jazz is played by street musicians for tips. New Orleans was special. I am going to miss her. We are going to build New Orleans and the communities around her. It will be a huge effort but the people of the New Orleans are up to it. New Orleans may never be the same, however my expectation is that it will be reborn. Yesterday's rally was due in part to the anticipated New Orleans renaissance. The effort to rebuild New Orleans will spawn unexpected growth and will add to GDP. That said, New Orleans re-birth will be a testy process.

Do Not Fight the Tape

On the surface the economy looks like it is weakening, thus the market is suspect. Yesterday's market action went against conventional wisdom (as it often does). Lets take a closer look.

Oil NYMEX (negative minus) $68.94/barrel - First of all oil is spiking and energy costs are rising. When oil rises gasoline costs increase, so do material and electricity costs. Lets put it into perspective. Oil prices are rising in accordance to market forces. If that is the case, one can argue that if market forces are strong enough to move oil higher they must also be driving other aspects of the economy higher as well. And they are. Material costs are up (affecting mfg?), personal income is on the rise and no one can argue that housing has not been strong.

In the past the spikes in energy prices have been blamed as a cause of economic slow downs. Today, Urban Outfitters (11.8%), Men's warehouse (8.5%) and Starbucks (7%) reported strong sales growth for August (no word on future profitability) a good trailing indicator. How will these companies fare against higher oil prices? No doubt costs are rising and are a concern, however, consumers are still spending and business is growing. Evidence that economic forces exceed the resistance of higher energy prices.

10yr Treasury (positive minus) - 4.02% - The rate of the 10yr Treasury is very low causing some to project an inverting of the yield curve (when short term treasuries yields are greater than long term yields). At this point low rates have to be considered accommodative to economic growth, in part increasing economic force. That said, banks are concerned with credit quality and we see evidence that credit is tightening. For example, the last time rates were in this range a fixed rate mortgage was about 5.375%, today the same loan is around 6%. Also, a flat to inverted yield curve curtails banks from borrowing short end lending long, a practice that made money easy. This money tightening has us changing our rating on interest rates from positive to positive minus.

3rd Quarter Earnings (positive) - 16% growth - Thus far there is little in the way of 3rd quarter earnings data. As I mentioned above costs are going to be an issue and unless sales breath is extremely strong, as perhaps it is according to the August retailers reports, earnings will be impacted. Discussions with manufacturing CEO's tells us that net incomes are under pressure due to higher material costs. To further exacerbate the situation the CEO's tell us that they have little or no pricing power. That said, all say that business is brisk and the future looks bright.

We are staying the course at this time. We have lighten long positions and have begun to look at shorting more aggressively. That said, we see long opportunities beginning to develop. Stay tuned as this opportunistic market unfolds to see what we are doing to make money. Visit our website at www.thesmartmoneyinvestor.com to view our current positions.

MATR - Matria Healthcare is back on our radar screen. The stock's technical characteristics have begun to firm and we are considering re-entry points. From a fundamental stand point we measure intrinsic value at $199/share based on 2006 numbers and current analyst's growth projections.

8/29/2005 Selling to Accelerate in Certain Sectors

2005-08-28T21:03:00.000-07:00

Technical

Last week the S&P500 continued to fall further below its 50 day moving average. The benchmark index closed Friday at 1205, near the low of the week albeit on lower volume. The lower trading volume is due in part to the summer holiday season, thus its effect has to be taken on a relative basis. The market is likely to move in a more meaningful way after the Labor Day Weekend when vacationing traders get back to their desks. The nasdaq composite mirrored the S&P500, although it was down less for the week.

Signals for further weakness continue to flash. Many of the recent rally's former leaders have been sold off and broke support levels last week. Further, the VIX closed below 14 (13.79) flat for the period. I would expect a number above 16 before we will see a new rally. Finally, although volume was low for the overall market certain sectors saw multi year volume highs, I will discuss this more later in the post. In addition, oil prices have started to rise steeply again weighing heavily on stocks. I expect the market to weaken further given its technical characteristics. That said, certain defensive sectors may rise. As usual only time will tell for sure.

Residential Real Estate Front and Center

Last week the residential home builders experienced further declines in stock prices falling over 11% from their recent highs. Is this price action a normal correction or something more? To help answer the question consider the following impromptu bullet point summary analysis. I have listed each item with a corresponding positive or negative sign and weight. At the end of the summary I sum the weights to put the situation into perspective:

(+) 3rd quarter new home sales were at record levels, but existing home sales flopped. I rated this positive although it is a trailing indicator.

(-) Executives at Toll Brothers (TOL) have been big sellers of their company's stock this year, accelerating share sales significantly in June and July.

(+) TOL CEO is making comments that support earnings growth.

(+ +) National home inventories remain low according to a study by Harvard University.

(- -) Rises in home prices far exceed the rise in personal income for 2005 putting forth the question of affordability.

(-) Mortgage lenders are nervous as credit quality comes into question.

(- -) As a sector home builders saw the largest level of down volume ever last week. The smart money is selling.

(- - -) Greenspan is warning of a housing ("asset") bubble perhaps telegraphing the Federal Reserves' propensity for further interest rate hikes.

(+ +) The US economy is strong.

(-) Consumer confidence unexpectedly dropped for the end of August.

(- -) Oil prices are at record levels and surging at an increased rate.

(-) Material prices are rising as production costs increase.

(+) = 6 compared to (-) = 12

Obviously the above summary analysis is far from scientific but it does seem that factors are mounting against the home builders. That said, the smart money has already been selling and further downside could be limited by short covering rallies and value investors who may buy at technical support levels. Going against the home builders has been a loosing investment in the past, however, given a relatively low level of short interest and weakened technical characteristics the fund is continuing to sell short certain issues.

KBH - KB Home is perhaps the best managed of the residential home builders and the most successful. That said the company may be over exposed to many hot markets especially in California. The company has diversified into other areas, however, pricing power is not what it is on the coasts. Short interest is relatively low at about 3 times daily volume, however, that is lower than last month by 8.6%. We are watching KBH as a possible future short.
BIDU - Baidu.com has found some price support at the $71/share level, however, it is impossible to tell how strong that support is at this time. In an earnings release last week the report showed all the attributes of a growing company. Costs are increasing fast but margins have improved (above 70%). Revenue also continue to increase. The lynch pin of the week came on management's perceived conservative revenue forecast, which was for an increase of 19% to $9.6M-$10M for the 3rd quarter. We would feel more confident in the stock if revenue grow in the triple digits. We do not consider BIDU the Chinese Google. Aside from the obvious reasons like revenue and earnings BIDU is structurally different than Google. The company generates most of its income from 3rd party sales, however, online marketing has started to generate customers at an increasing rate (above 128% over last year). Also, the company must comply with the Chinese Government's rules for information flow. We continue to monitor the company for a possible investment. Stay tuned to learn what we do.

We have published the Short Interest Trends for the stocks in our universe. Visit our website www.thesmartmoneyinvestor.com to view the reports. Select a company from the home page table and click on "Short Interest" at the company's research page.

8/26/2005 Short Sale Opportunities

2005-08-25T20:27:00.000-07:00

Technical

The S&P500 failed to rise above its 50 day moving average on Thursday, a negative sign. Several more days below the intermediate trendline and I would expect this market to head further south. We are already at a point where the market is subject to accelerated declines. I expect this market to move lower barring any short covering rallies.

This market is acting very weak and we have opened several new short positions, albeit small ones. As it stands right now the smart money has already been selling. We have reduced positions and have been taking profits where we can on long positions. As for shorts it is best to be conservative at this time, waiting for a better opportunity. A short covering rally that falls short of 1219 and then retreats would likely have us making additional short sales.

The VIX is holding at the 13 level, although it popped above 14 for a short time this week. If history is any indication the next meaningful rally will come when the VIX pushes above 16. Fear seems to be on the rise but has not yet become pervasive.

Key Factor Monitor

Oil NYMEX (negative) - $67.50 - Rising oil is putting pressure on businesses in many sectors. Material, Retail and Transportation are all on earnings watch.

10yr Treasury (positive) - 4.17% - Rates continue to fall as bond investors smell a slow down. Money is still cheap, however, my banker friends says that they are nervous, especially the ones at very large mortgage companies. Many loans are given to investors based on the equity in the properties that they own. If the bankers feel that the equity is in danger they will tighten credit. I would expect to see this tightening to occur, even though the 10yr treasury rate is low. Rates are a positive for stocks now, however, some credit quality tightening is probably under way at most banks, which is somewhat negative for the stock market.

3rd Quarter Earnings (positive) - The earnings outlook for the 3rd quarter remains positive, but is under pressure. Rising oil prices are adding cost to many business and if credit quality becomes an issue watch out. An interesting side note in this week's housing report was the fact that the median price of housing actually fell from last year (on a nation wide basis) to $203K from $212K; a fact that may mean less equity lending in the future. Less liquidity could mean less spending by consumers down the road, further pressuring profits.

BZH - We are shorting Beazer Homes once again. We purposely kept a short fuse on our last stop/loss target ($61) prior to the housing data being released, and we were stopped out on short covering. After the buying subsided we opened the position again. See our website www.thesmartmoneyinvestor.com for target details.
WFMI - In the past we have lost money shorting WFMI. Yet, the shares are clearly over valued on a fundamental basis yet they have continued to rise. We calculate intrinsic value (IV) to be equal to $104 based on 2006 numbers, considerably less than the current stock price of $130. We feel that the premium pricing nature of Whole Foods would be under pressure as oil prices rise thus affecting earnings. Impromptu monitoring of the stores tells us that there is some slowing. In addition, technical characteristics for the stock have begun to weaken. We have opened a small short position.

8/23/2005 Real Estate Topping Out?

2005-08-22T17:55:00.000-07:00

Technical

The S&P500 stood still yesterday as it continued to rest on its 50 day moving average. This market gives the appearance that it is holding up, however, weakness abounds. Many previous leaders have fallen and broken their key levels of support. Of late, sessions have started higher then have been met by selling. Although a break down below 1215 on the index has not yet taken hold, if and when it does the market would likely fall swiftly. We are very cautious at this time. We have begun to short some issues as a slow down is being discounted by the smart money.

Party Notes

This weekend I attended a party, a reunion of sorts, with friends, many of whom I grew up with. The guest list was diverse. Friends from all stations of life came together for the night with the most popular discussion of the evening, aside from reminiscing, was real estate. I was surprised to learn that many of my old friends owned more than one home. In fact, several of them held more than three or four homes and were looking to flip them. Some of these real estate investors were contractors others were real estate agents while others where average joes. My point is that everyone was dabbling into real estate, usually a sign of a topping market. Without exception all the investors were hopeful that they would be able to sell their properties, some of them would even be happy to get out with a smaller profit than they expected. Regardless of the real estate demographics this impromptu analysis tells me that the rise in real estate prices is coming to an end. When everyone owns an investment class that investment class tends to become over bought and then subject to over supply. When over supply happens then prices tend to fall. I would say that this is a top, at least for the time being, in the real estate market.

As you know, if real estate prices flatten or fall a bit their change will affect the economy. I am not predicting a doomsday scenario, however, it appears that the economy is setting up for a pull back. All the signs are there: a toppy real estate market, a weakening stock market, a flattening yield curve and higher commodity prices that affect the consumers' ability to spend. That said, corporate profits are expected to rise in the 3rd quarter while business activity looks brisk. We continue to monitor the situation, however at this point it is looking a bit shaky.

Key Market Factors

Oil NYMEX (negative) - $65.5 /barrel - Oil prices remain high after a sharp rise the last couple of weeks. That said, the price is stabilizing, which may be considered less negative.

10yr Treasury (positive) - 4.20% - A fall in existing housing sales has bond investors buying today helping to keep rates low.

3rd Quarter Earnings (positive) - 16.3% - Consensus estimates at this time say 3rd quarter earnings will increase by 16.3% over last year. I am calling this a positive at this time, however, changes in consumer spending, real estate and the above two factors may force analysts to reduce their estimates. I am cautious about earnings at this time and feel that certain sectors will perform better than others.

We are staying the course for the time being. As I mentioned above I feel certain sectors will out perform others. You can see all our fund's positions by visiting www.thesmartmoneyinvestor.com.

APPX - American Pharmaceutical Partners recently broke out from a basing trend, a strong technical sign. In addition, the company's fundamentals have improved as our screen put it in the top 10 of our research universe. We are lightly adding APPX on a pull back below $46.
BZH - Beazer Homes has been pressured as housing investors look for a slow down. The slow down comes during the usually busiest time of the year. The stock's price has been resting at its 50 day moving average, until today. We started shorting BZH above $61, see the website for the details.
BIDU - Baidu.com bounced today. Could this be the bottom forming, only time will tell but we are interested in BIDU below $80. $66/share would be better and at $56 we would likely buy it. We are watching the technical characteristics at this point to see if the other smart money investors see what we see. Stay tuned to see what happens.

8/19/2005 S&P500 Hangs on at Its 50 Day Moving Average

2005-08-19T10:03:00.000-07:00

The S&P500 is currently bouncing around its 50 day moving average (dma), a tipping point of sorts. In a bull market the smart money will usually buy stocks at the 50 dma, however, if those buyers abate the market will be subject to further declines, perhaps to the 200 dma. I would become optimistic if the market experienced a bounce and headed higher from here. Likewise, I would become bearish if the index fell below the 50 dma and held there for more than a few days.

On a positive note volatility has been on the rise of late. The VIX has pushed through 13, a sign of increasing investor fear. A rise in the VIX above 16.5 would likely help the market move higher. In addition, mutual fund flows have been negative for the last few weeks; another positive sign related to investor sediment. All and all market sediment has been negative yet the market has held up pretty well. The next few weeks are going to be interesting for stocks.

Don't expect much movement today, however next week is a different story. Typically the stock market closes flat on options expiration Fridays, and looking at today's market I do not expect any surprises. Starting Monday though I would expect the Key Market Factors (see my last post) to play on the market. Stay tuned as we watch these factors to see how they affect stocks.

Oil NYMEX (negative) - $65.60 - A sharp drop mid week and a sharp rise today still are an overall negative for the stock market going into next week.

10yr Treasury (positive) - 4.21% - Rates have come down from the spike a week or so ago when they rose above 4.40%. Lower rates benefit stocks in this environment.

3rd Quarter Earnings (pending) - I am waiting for more information from corporate executives before setting the tone on earnings. As it stands right now earnings are under pressure due to higher energy costs.

Watch our fund on a daily basis by bookmarking or subscribing to this blog. You can also see all of our fund's current positions and get access to a little research by visiting www.thesmartmoneyinvestor.com.

BIDU - Baidu.com is getting interesting at this level ($80/share). The recent IPO has fallen from a market cap of about $3.94B on its opening day to $2.56B today. To give you a basis of comparative value NTES, a competitor of BIDU, currently has a market cap of $2.29B. Given that Google has surprisingly announced its intention to raise roughly $4B in cash speculators are entertaining the idea that Baidu.com is a Google buy-out target. Only time will tell if a buy-out is in the cards. Whether or not Google makes a move on bidu the fact remains the value of Baidu.com is coming into line with its peers. We are keeping an eye on bidu as it may soon be an interesting addition to our portfolio.

8/16/2005 Key Factors Will Move the Stock Market

2005-08-15T20:48:00.000-07:00

Technical

The S&P500 continues to move within its trading range of 1215-1235. However, the index has broken from its recent trend channel (RTC) that was set between 7/14 and 8/4, implying the index has some work to do before it can move higher. A break out and close above 1245 on higher volume would go a long way in reviving confidence in the current rally. Conversely, a close below 1226 on higher volume would likely spell further declines and a possible break down.

The nasdaq composite is behaving quite differently than its large cap counter part. The index broke the 2200 resistance level on 8/2 only to realize a topping pattern on 8/3. Since then the nasdaq has fallen in a sharp way, loosing 60 points until Monday when it finally bounced, unfortunately on lower volume. Action in the index has been less than inspiring of late, leaving smart money traders to focus on individual stories.

The market is weaker than it might look. Many leaders have fallen and the indices have shown clear technical signs that the smart money has begun to consider risk. I am becoming more cautious as well, however, I am carefully adding to positions.

Key Factor Watch

In my last post I talked in depth about what I feel are the key factors that will drive the market in the 3rd quarter. As the picture becomes clearer about oil, long rates and 3rd quarter earnings so will the direction of the market, perhaps in an unexpected way. There are not too many investors who think that oil prices won't rise, interest rates are moving lower and third quarter earnings are going to be less than 8%-10% higher than the 2nd quarter. In fact, these consensus scenarios are likely already built into the market. That being the case, notable changes in the key factors above will shake the consensus thinking and swing the market. Therefore, I am going to publish a key factors watch to help me monitor changes in the key factors and their effect on the market.

Oil (negative) - I wrote in my last post that a rise in oil prices would not completely burn the market, however a sharp increase of 10%-15% or more would. Last week oil rose from $60 to $66/barrel, a 10% increase that certainly caught the attention of the smart money. If oil does not correct here I would expect a sell-off in the stock market followed by further weakness.

Long rates (positive) - Greenspan's conundrum continues to confound the market. After a brief rise above 4.45% in interest rates, after the last FOMC meeting, 10yr treasury bond yields have fallen to about 4.21%. Remember a sharp rise in interest rates in a short period of time would be a negative for the market.

Earnings (neutral) - CEO's have given their estimates for the 3rd quarter and growth is likely to continue in the 10%-12% range. Earnings growth is the prime consideration when forecasting stock prices, and the above factors are two driving components in determining that growth. However, many other factors will come into play such as payrolls and market conditions. We will continue to monitor these other factors in the this section of our "Key Factors Monitoring" report.

I am extremely cautious at this point. We are identifying short positions in the event the S&P closes below its RTC (1225) and our fresh long investments have tended to be restrained in volume. Stay tuned and visit this site daily to watch what we are doing. You can see all our fund's positions by going to www.thesmartmoneyinvestor.com.

SNDA - We have recently added Shanda Interactive Entertainment to our fund. As it turned out our timing was pretty good and the stock bounced the day after we entered it. The sector continues to be active as M&A activity continues. Other factors are at play as well. I have included a chart showing the growth in short interest in the stock, click this link to see it http://www.thesmartmoneyinvestor.com/data/10C/snda%20(si).pdf. This trend may play a part in furthering the stock's recent run.

GOOG - No one can argue with Google's stock performance and the future certainly looks bright. However, a recent technical break down and a higher level of competition have investors thinking otherwise. The stock recently fell below its 50 day moving average and failed to bounce above it. Further, it appears that a head and shoulders pattern was built into the stock's chart. We are considering shorting Google, however, there are probably better risks out there. Shorter term traders may be playing from the short side at this time. Another reason that I am cautious about shorting GOOG is that it may soon be named to the S&P500. If news breaks about its addition to the index the stock may rally higher. That said, GOOG short interest has been falling (see chart at http://www.thesmartmoneyinvestor.com/data/goog/goog%20-%20si.pdf) for months.

8/10/2005 Looking at the 3rd Quarter - Near Term Future of the Market

2005-08-10T10:33:00.000-07:00

Technical

Yesterday's mid-day break down has significantly challenged the markets' recent rallies. Whether or not this is just a correction or change in trend is yet to be determined, however, many classic signs of weakness were present in the later days of the recent run up in stocks. First, the rally's leaders started to falter about a week ago. When a change in leadership occurs and no new leaders emerge to take their place the stock market generally gets into trouble. The signals intensified yesterday when the general market rallied without the small caps. The DOW and S&P500 were up over 0.7% while the S&P600, a harbinger for leaders, was up only 0.1%. Finally, a failed attempt to build off of yesterday's gains may be a sign that another leg down is in the cards. Higher oil and uncertainty about interest rates and 3rd quarter earnings are likely to force investors to take profits and engender a wait and see attitude.

Certainty vs Uncertainty

One thing the market is certain about is that 2nd quarter earnings were well above estimates. The average S&P500 stock beat consensus estimates by roughly 16%. The rise in earnings surprised most investors and helped to move the stock market higher. Now that the 2nd quarter is history; investors, uncertain about what lies ahead, must speculate about the future. Many money managers that have made good profits this quarter will take some money off the table rather than risk it in the face of the unknown (a bird in the hand is worth two in the bush). This process has been going on through earnings season as evidenced by the many leaders that have fallen from their recent highs.

The smart money knows that the US economy is like a ship; once it gets going in one direction its hard to turn it around. The economy will likely continue to steam forward barring any unforeseen shocks. That said, when a ship hits an iceberg it is likely to sink. I am not suggesting that markets have hit a stopping point, rather I am making a point for consideration as these issues are on the minds of the smart money.

Oil prices rose sharply this week topping the $65 mark yesterday. Fear about supplies and increased demand seem to have speculators back in the market. And why not, with the increased threat of terrorism and growing global demand, the smart money has taken the stance, "if you can't beat them join them". Obviously, the higher oil prices will affect some stocks more than others, especially ones from the retail, transportation and materials sectors. Higher oil prices are likely to put a dent into corporate profits for the next quarter; a fact that has investors worried. I do not think that a gradual rise in the price of oil will derail the economy, however, a sudden 10-15% spike may inspire a new breed of sellers. Look for large investors to become increasingly concerned about how oil will affect profits and the consumer.

Long rates have finally started to rise with rates on the 10yr treasury right around 4.40%, the top level of its recent range. Most investors now feel interest rates are going to move higher as the Fed promises to continue on its measured pace. However, there is a camp that believes rates will top out at the current level regardless of what the Fed does as market forces will keep rates low. If rates do break above 4.5% they are likely to move higher as money managers, forced by technical characteristics, will sell the bond. A sudden rise in rates may shock the market. That said, a steady rise in rates will signal a growing economy with low inflation; a favorite scenario of investors. I look for the market to sell off significantly if the 10yr treasury climbs above 4.5%. At that level many investors will look for the exits and a sharp rise in rates may ensue.

Perceptions about 3rd quarter earnings will drive the stock market for the next few months. The reality is that investors are unsure about how earnings will end up next quarter in part for the reasons I discussed above. I expect that the market will correct in the short term until investors minds become more clear about 3rd quarter earnings. The depth of a correction will be determined by oil and interest rates as the US economic ship is moving full steam ahead. A spike in either oil or interest rates beyond trend is likely to slow the ship and deepen any correction. Also, a terror attack, which is becoming an increasing risk, would be the ice berg I mention above and further stall/stain the market.

In the Focus13 fund we have reduced positions to take profits and also have been stopped out on technical weakness. We are likely to make new investments in the near future as new leadership is developed and perhaps add some short positions as old leaders fall. One big issue not necessarily pretaining to the 3rd quarter is the Highway Bill just signed into law. $280B+ over a number of years will flow through the economy in the coming years. The smart money is taking this fresh cash into account for the next phase in the stock market. In the short term this bill may limit the market's downside.

See our website www.thesmartmoneyinvestor.com to watch us in action. On the home page you can see all the fund's current positions with their buy and sell targets. You can also browse our other pages to see our thoughts on the companies the fund follows.

SNDA - We started to carefully add Shanda Interactive Entertainment back into our fund yesterday. A recent decline on lower than expected earnings put the shares on sale by over 10%. Normally, I would run from lower earnings but given the M&A activity in the sector and the BIDU IPO, which are driving stock values higher, we feel the stock is under valued. I am carefully adding shares as the nature of a fall, like the one yesterday, is a slower recovery rather than a bounce. That said, if other investors take the same view as we do a bounce is more likely.
BIDU - Baidu is still interesting to us but not until the stock settles down, as I mentioned in a previous post. There will be much interest in owning or controlling the company on the part of large media companies. That said, any poison pill tactic taken by the company would be a significant negative short term, however, it is unlikely to deter investors as everyone has their price and poison pills can be dissolved.

8/8/2005 Correction or Change in Direction

2005-08-07T09:48:00.000-07:00

Technical

Friday the S&P500 broke below its recent trend line on above average volume. The nasdaq composite also changed course and reacted in similar fashion to the S&P, however on less than average volume. Jobs data and spiking oil were the culprits according to the mainstream media; the smart money knows better. The future of the market is now driven by the answer to the question, "is this a correction or change in direction?".

Although selling was the order of the day, some issues had a bid under them especially at key support levels. For example, Google fought off a fall during the day to rest at its 50 day moving average, a point where the stock bounced 7+ points the last time it touched the intermediate trend line.

Seasonal market weakness and uncertainty about interest rates are sure to provide volatility this week. Although volume on Friday was above average, summer time trading volumes have been the norm. What is interesting about Friday's volume was that with the amount of down volume one would expect a bigger decline, probably over 1% given the liquidity lost by traders on holiday. However, the S&P500 and nasdaq composite were off only 0.6%. Was there some background buying? Maybe. Anticipation about the future of interest rates has traders jockeying for position. Cash continued to rotate out of the financial and retail stocks, while bond investors pulled cash out of the bond market ahead of the FOMC meeting. An almost 20% increase in the value of the VIX ensued as the volatility index continued to rise. Fear is creeping back into the market as most investors do not want to get caught long when interest rates finally turn to the other side of neutral. The smart money is quietly adding shares on the dips, perhaps a sign that the recent sell off is a correction rather than the beginning of the much feared bear market of 2006.

To learn about our fund's positions visit the website www.thesmarmoneyinvestor.com.

Data Salad

Job creation in the US was up over 200,000, at the high end of estimates but not a surprise. Oil prices continue on the high side, but as I wrote before, due to growing demand and not run away inflation.

Current market logic (forgive the oxymoron) says climbing rates equals a growing economy, therefore stocks will rise. Thus, if the jobs report means that there is going to be more rate hikes then it is a sign that rising stock prices are going to be extended. Obviously there will be a point when rates will tip the economy south, however, lately the stock market has risen in the face of interest rate hikes as their resistive nature is still not enough to stop this economy's electricity.

Higher oil prices are a result of the growing global demand for the commodity. A Globalization fetch is generating formidable waves of economic growth. This growth is likely to continue for some time provided that governments stay out of the way. Higher oil prices will continue to be a result of the global demand until substitutes and/or corrective troughs provide relief. In the end energy will be in growing demand in some form during the next decade, and as energy demand grows so will demand for stocks that shape global growth.

GOOG - Google is in the process of redefining many aspects of modern media, especially advertising. First, Goggle's effectiveness is far and away better than other search engines. In an ad hoc study performed by our fund team Google ads increased our test cases' popularity over MSN by a factor of 522 to 15 (Our study with Yahoo is underway). Further, Google is able to attract key talent and is building new businesses. The company continues to eat away market share from mainstream media companies to the point those companies are becoming unprofitable; which may be one reason they are buying GooG stock. Institutions are also buying GOOG and not aggressive growth like one might think, rather 9 of the top 10 holders are value or GARP funds. Another reason we are buying Google is its absence from index funds. Google is not yet a member of the nasdaq 100 or the S&P 500 but is up for consideration for both. When inducted into either or both index fund managers will have to buy the stock to round out their holdings. We calculate intrinsic value (IV) for GOOG to be $427/share based on 2006 numbers. To learn a bit more about our thoughts on Google visit our website at www.thesmartmoneyinvestor.com.
BIDU - Baidu's IPO was the best in recent memory and exhibited similar market behavior to Google on its debut. This weekend much of the mainstream media has cried that BIDU is over valued. The smart money knows that something is only worth what someone else is willing to pay for it. If you are Google what are you willing to pay for the number one Chinese search engine, a company that potentially gives you local knowledge and cultural familiarity with over 200 million Chinese? Or what if you are Microsoft, rift with cash; what are you willing to pay for BIDU given your most formidable foe just captured your General in the region. Or how about all those mainstream media companies who lust for the good old days and would love to be part of the Chinese media expansion. At Fridays' close BIDU's market cap was about $3.9 Billion, which could be considered undervalued by some. I would not be surprised to see the stock price double from here moving toward $8.0 billion in market cap; only time will tell as it all depends on what someone is willing to pay for BIDU. The fund does not own any BIDU but over time, when facts become more clear, it could become part of our holdings.

8/3/2005 Break-out or Window Dressing?

2005-08-02T20:47:00.000-07:00

Large money investors bought up the market today driving the nasdaq composite to a new near term high. Most of the buying came late in the day as up volume rose above its 50 day moving average. There was some evidence of late day selling though, as many of the leaders reached a high for the day and based there 30 minutes before the close. But new money kept most stocks from falling off the day's highs as selling was met by more buying. Can the market sustain these levels and finally move higher? Below is a summary of where my head is at regarding the markets' direction, however, as usual only time will tell.

The major indices are being tested right here and now. The S&P500 closed the day at 1244, re-establishing its trend north, yet not high enough to mark a new leg higher. The climb in the index has been steady with one step back for every two taken forward. I like this type of movement as it generally portends a more solid foundation from which a bull market can springboard higher. It also helps to limit downside risk as near term support tends to build on the solid footing.

But it was the nasdaq composite that took the leadership role today as it broke from its recent basing pattern to move its rally to the next level. If today's market action turns out to be more than just window dressing the nasdaq composite could move above 2300, with some resistance around 2260. Our fund's screening process has yielded some new names, most of which are from the nasdaq. The extended rally is helping to set up a fresh lot of leaders, a much needed component if this aging bull market is to continue running. To see the fund's positions visit our website at www.thesmartmoneyinvestor.com.

Several positive technical signs from the VIX and the 10yr Treasury may also be helping stocks at the moment. Movement in the volatility index (VIX) was interesting of late as its moved higher on Monday in lock step with generally higher stock prices. Typically the VIX has an inverse relationship to the market. On Monday the index rose above 12.25, up from 10 just a few days ago. The short term negative sediment is likely responsible for the tight basing pattern and its extension above 12 no doubt helped the nasdaq break to the upside. The index closed Tuesday at 11.75, not too far from the 12 level. A VIX that moves up with the market is a positive sign from my vantage point. In addition, a sell off in the 10yr Treasury has rates near intermediate term highs and is sending some large investors looking better returns. It is likely that a goodly portion of the money coming out of bonds will go into stocks; for now another positive for equities.

As I eluded to in my previous post, I thought that investors would come in at the beginning of the month and put new cash to work in the stock market, on queue they did. Fund managers put the new money up against the wall, now lets see if it sticks. As this market moves higher it appears that the consensus is getting more negative as evidenced by the action in the VIX. Add to that the fact that some investors are changing their asset allocations and rotating cash from bonds to stocks; I feel like the market can move higher. That said, many money managers are on holiday, while others will shy away if third quarter earnings are perceived to be in jeopardy. I continue to rotate in new names as changes occur and new leaders have emerge.

COGT - Cogent, Inc. designs and manufactures biometric devices and currently holds the leadership position in this niche market. Based on 2006 numbers we calculate IV to be $60/share with room to grow. The company holds several patents in the area and builds many of its products around its custom Application Specific Integrated Circuits (ASICS), which is another way of saying intellectual property (IP). Technically the stock has firmed up as prices have risen with the addition of fresh investment. In our view the Biometric niche market is growing and is likely to become mainstream within the next 2 years. Not only does the stock stand to benefit from a growing market it also will be come a buy out candidate as large intergrated circuit manufactures look to grow their revenue and earnings. We are buying below $31.5/share and have a near term target of $40/share with a stop loss at $27.5/share.

8/1/2005 Which Way Will We Go?

2005-07-31T11:00:00.000-07:00

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 www.thesmartmoneyinvestor.com 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 www.thesmartmoneyinvestor.com to see our fund in action. You can learn about all the fund's investments and their buy and sell targets.

7/26/05 New Insights

2005-07-26T14:10:00.000-07:00

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 www.thesmartmoneyinvestor.com. 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.

7/22/2005 Structural Surprises

2005-07-21T22:34:00.000-07:00

Technical

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 www.thesmartmoneyinvestor.com 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.

7/20/2005 Asset Allocation and Sector Rotation

2005-07-20T06:56:00.000-07:00

Technical

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 www.thesmartmoneyinvestor.com 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.

7/18/2005 A Pivotal Point for Investors

2005-07-17T22:00:00.000-07:00

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 www.thesmartmoneyinvestor.com. 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.

7/13/2005 Paradigm in Flux

2005-07-13T07:12:00.000-07:00

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 www.thesmartmoneyinvestor.com 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.

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

2005-07-10T19:56:00.000-07:00

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 www.thesmartmoneyinvestor.com. 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.

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

2005-07-07T08:24:00.000-07:00

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.

Technical

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.

Markets

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 www.thesmartmoneyinvestor.com.

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

7/5/2005 Three Ideas for Mid-Year

2005-07-04T11:22:00.000-07:00

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 www.thesmartmoneyinvestor.com.

6/30/2005 Warning: Fed Ahead

2005-06-29T22:51:00.000-07:00

Technical

The S&P500 lost some steam today closing at 1199 on meager volume. Average volume has been on the decline the last few weeks. The nasdaq composite closed at 2068 also on lower volume. Although the nasdaq technical characteristics look a bit better than those of the S&P500 neither index has anything to write home about. It seems that large investors are sitting on their hands waiting for the 3rd quarter earnings and the Fed to play out. I wish I could say, with certainty, that I knew the near term direction of stocks but I cannot. That said, here are some interesting facts to digest while we all wait. First, July is a rotten month for stocks, only being up twice in the last ten years. Second, June 30th marks the end of the quarter and the middle of the year. Investors will get to see their fund managers' report cards in a few weeks. Just like in school the managers will be cramming for good grades. Lastly, the VIX closed below 11.6 today not a number consistent with a rally. I am very cautious here and have take profits in many positions during the last market run up. That said, an analysis of intrinsic value has yielded some surprising results.

Fundamentals

While looking for some good short sale opportunities I noticed that some stocks that have recently run up are under valued. For example, Aeropostale (ARO) is trading around $33/share, up from $26. It looked like a good short opportunity until I calculated its intrinsic value (IV) to be $53. If interest rates stay low and ARO pulls back I am more likely to buy it long than to short it. A similar example is Marvell Technology, the stock is sitting near its 50 day moving average pulling back a bit from a nice run up to close around $38. It looked like MRVL was ready to give it up, but I calculated IV to be $62 share. If it pulls back I may also add it to the fund. The bottom line is that certain companies are still able to increasingly grow earnings ahead of their current valuations. If the market corrects then there are likely to be buying opportunities. That said, structural issues like higher oil, higher interest rates and a stronger dollar may throw water on the party.

My view is that the fed will raise interest rates a quarter percentage tomorrow driving the federal funds rate to 3.25%. I would not be surprised (although the market would be) if the fed raised rates by a half percent and stopped there. In the end higher interest have hurt the market in the past as investors winced short term. Once they realize that the higher rates are still below neutral investors have stepped back in and continued to buy stocks. I expect more of the same at these levels.

GOOG - By the way, Google may be a good short if you catch it right but I am more likely to buy it on a solid pull back. I calculate IV at $457.20/share making it under valued by my estimation. Technical characteristics are firming up too. I may add goog to the Fund if it becomes priced right. You can see all my fund's positions by visiting thesmartmoneyinvestor.com.

6/28/2005 Excess Liquidity

2005-06-27T23:21:00.000-07:00

Technical

The S&P500 closed below the major support level of 1191 to finish at 1190.81, an overall negative sign. Volume was lighter yesterday than the two previous sessions, however, down volume yesterday was ahead of the up volume seen last Wednesday (the last up day for the index). The technical end of the market has broken down a bit ahead of the FOMC meeting. I am not enthusiastic about the recent market action and several of my key indicators show weakness. That said, the market may pop from here as it is a bit over sold coming into July when fresh cash is likely to come into the market. Also, investor sediment is a bit more negative than last week and may support prices in the near term. I am holding steady at this point with a bias toward shorting and special opportunities.

Limbo

Fundamentally the market is in economic limbo right now. Uncertainty about higher oil prices, quarterly earnings and interest rates are likely make investors skidish at best. The smart money believes that liquidity from structural changes in global markets will continue to fuel global economic growth for the time being. It seems that the easy cash is finding its way into real estate and business development, which is great for stocks. The problem of course is that once the liquidity dries up the party will be over, interest rates will rise and savings will beget investment. Ergo a recession. When will the demise occur? Many market analysts and experts have been predicting the eminent demise to happen at any moment; I have been hearing this for the past two years, so much for the experts. However, cycles are cycles and the smart money will discount these changes six to twelve months ahead of the event. This fact will also provide worry for the market.

I look for a 1/4 point rise in the fed funds rate Thursday. However, in the past the fed has ended its raising with a larger than expected rate hike. I would not be surprised if the rate is hiked 1/2 percent. In any case, the market is likely to have a negative reaction to the fed action. I am careful right here especially as the fed closes in on 3.5%.

FYI - I have updated the short interest trends charts for the fund's positions. You can see them at thesmartmoneyinvestor.com.

6/24/2005 Protectionism Schism

2005-06-23T20:00:00.000-07:00

Technical

Animal spirits spit poison into the markets today. The S&P500 dropped past the 1212 support level to close near 1200 on higher volume, not a good sign. The froth on many leading issues evaporated quickly when oil hit $60/barrel and the smart money ran for the exits. I have been taking profits in many of my positions recently as targets have been reached and/or exceeded. That said, I have been building new positions and am still holding others, albeit at a reduced rate. I am likely to start some short selling if the markets' technical characteristics continue to break down.

On a side note the VIX has been below 12 for several sessions. A level not conducive to a rally.

Protectionism Schism

I am very cautious about today's move as many factors that ill the market have come front and center. High oil prices and the worry about a slowing economy added to the markets' inertia. However, "protectionism", something that I have written about in the past as being an absolute negative for stocks, was hung in front of investors today like a beheaded comrade. Nasty rhetoric from unemployable old politicians reverberated through the media scaring the smart money into thinking that average joe's are dumb enough to go along with the, political "group think". Like I wrote before if the fed funds rate exceeds 3.5% and/or protectionism takes hold I will likely sell all the fund's positions and rethink the strategy, which may not include stocks. I am not alone in this thinking.

AMHC - American Healthways continued its decline falling below my target levels. I originally bought AMHC in the upper 20's and sold many shares in the 40's for a good profit. Technical weakness and a falling revenue forecast have me taking profits now. I think that AMHC is a fine company and I may add it again to my fund, however, given its recent performance I feel that I will find a better investment elsewhere.
GAP - Great Atlantic and Pacific Tea Company recently reached a multi-year high when it crossed the $29 level. My original investment in the stock was just above $8/share. I built a large position in the stock and have taken profits. However, the short interest is still above 40% and the stock has firmed on stronger fundamentals and technical characteristics. I am likely to add back shares on a pull back as the stock may go beyond the $35/share level.

6/20/2005 The Trickiest Time of the Year

2005-06-19T08:18:00.000-07:00

Technical

Friday the S&P500 broke the 1212 level on higher volume, an event I classified as important if the market was to move higher. However, much of the volume on Friday may have been due to technical buying during options expiration rather than large investors adding new positions. The weeks leading up to Friday came on below average volume even as the market moved higher; defining a divergence that is a technical negative for the market.

I am a bit skeptical about the strength of this rally. That said, I am cautiously adding new positions while taking profits in others (see thesmartmoneyinvestor.com for the details). The reason for this slight optimism is that although up days have come on lower volume so have down days. It is as if investors are at a stalemate, which often ends with the market moving in a positive direction.

The Trickiest Time of the Year

History shows that June is a good month for stocks and July is not. Fundamentals surrounding this period are starting to stack up against the market. Higher oil prices and interest rates will eventually take their toll as well as foreboding about a generally weaker third quarter . That said growth in the US and Asia continues and is driving investment. Traders are starting to speculate the end of interest rate hikes and new leaders have emerged in oil and healthcare.

As I mentioned above I have started to take profits in several positions. Many of the fund's stocks have gained 15% or more since I added them, with some exceeding 100%. My fund's strategy is to turn 20%+ gainers as many times as possible during the year; in 2005 I have been able to make two major turns thus far. I also cut losses quickly. I set a staunch stop/loss level and stick to it, mostly between 5-10% depending on the situation. I have been stopped out of some positions and taken the loss. In some cases though I have protected the positions by hedging. In the case of APPX and EBAY (earlier in the year) this strategy has proven beneficial. Currently I am carefully holding on to reduced positions and adding a few new names.

Stocks like Valero Energy and Comp Vale Do Rio have had solid moves off of recent lows and are poised to base before moving higher. The basing period is often a test of stamina for a stock; if the market moves higher so does the stock. However, if the market moves lower often times the stock breaks down. The next few weeks are going to take careful execution and attention to detail in order to maximize gains. Stay tuned as I maneuver the fund through this critical period, perhaps the trickiest of the year.

APPX - American Pharmaceuticals has reached oversold status and may have bottomed out. The fund was stopped out of its position in APPX earlier in the month, but the use of protective puts flattened the position. Healthcare remains a particularly good sector in my opinion and I am cautiously buying shares again as the price has based and fundamental and technical signals are positive. I am shortening my stop/loss level though as investors are not taking chances with the company's current manufacturing issues.
AMHC - American Healthways will report earnings after the bell on Monday. I am somewhat concerned about the reaction to the numbers. The company reduced guidance earlier in the month as management anticipated higher costs due to a new pilot program with Cigna. This is a good thing in the eye of most investors and a sell off may prove to be a good buying opportunity. I am careful about what happens to the stock on Tuesday and am adding protective puts to protect the fund's profits.

6/15/2005 Good News Bad News

2005-06-15T09:00:00.000-07:00

Technical

A divergence between price and volume has occurred in the S&P500 over the past month. The index has risen from 1191 to 1206 while volume has been below average. It seems that the smart money is bleeding off shares, taking profits ahead of the typically slower 3rd quarter. Such a divergence is typically a signal that a reversal is on the horizon. That said, most of the selling has come from the tech sector while some groups are seeing fresh investment, namely energy.

My sense is that a break out will occur shortly, up or down. This week is likely to remain flatish as options expire on Friday, after that I will look for a break out above 1212 or break down below 1191 on higher volume to signal the future direction of the market.

Energy

It seems that global competition for oil is driving prices higher. The good news is that economic growth is healthy in support of higher prices. The bad news is that higher prices mean lower profits for many companies. The good news is that this means a new cycle for fuel efficient products, which will help to drive new markets over time. The bad news is that there are likely to be bouts of pain for companies (and consumers) that do not quickly adapt. The good news is that more fuel efficient behavior will reduce the need for oil thus dropping prices. The bad news is that... In short there will be a fundamental change in the market. Stay tuned as I will no doubt make lemonade from the lemons.

Currently I am staying the course. I have been stopped out of several positions lately while others have done well. The fund's strategy is still best served by healthcare and we remain over weight the sector. See the fund's website thesmartmoneyinvestor.com to view its current positions and targets.

6/13/2005 After It Is All Said and Done

2005-06-11T20:23:00.000-07:00

Technical

The stock market has reached an inflection point. The recent rally has met its first real level of resistance at the 1212 level (1208 officially). Investors must now weigh the rational and irrational and decide if the market still has legs or if it is going to correct in a meaningful way.

Volatility has come down once again. The VIX pushed above 18 at the market lows in April but has since fallen to weaker levels not typically associated with a rally, closing at 12 on Friday. Extreme bullishness is seen as a negative for the market.

Volume has also dried up in relative terms. There has been a slight divergence in price and volume action over the past week or so. A similar, but much more pronounced, level was experienced in late December (2004). The result was a tumultuous decline.

Traditionally, June has been an good month for the S&P500, up 8 of the last 10 years. As for July and August, FO GET ABOUT IT!. July has been up just 2 of the last 10 years while August did a bit better being up 5 of the last 10. From a historic perspective June has been a good month to reduce long positions and take on short ones.

Fundamentals

Interest rates have mysteriously fallen to near record lows. Has the new reality of globalization crept in to change the traditional recipe or is growth slowing and we just don't know it yet. I think that it is a bit of both. Socialist economies like Germany, France, Italy, Spain and others have chosen to stick their heads into the sand and pretend that everything is fine as their growth continues to slow. In the mean time the rest of the world continues to pluck them clean of their old money wealth. More protectionism will only continue to hurt them and quicken the pace of their fall. That said a sick Europe is not good for the rest of the world and will be a drag on global growth. The combination of a weaker Europe and increasingly productive world will serve to keep natural rates low. I believe that the natural rate is somewhere between 4.5%-5% for the 10yr treasury. Rates below the natural rate are a positive for the stocks.

Oil costs are likely to be the "X" factor the stock market. Currently, oil below $50/barrel is positive for the equity market; between $50 and $55/barrel neutral and above $55/barrel is negative. The smart money expects oil prices to remain between $45 and $55 /barrel through the rest of the year. Consumers have begun to change their energy consumption habits as SUV's and other gas guzzlers are traded for more fuel efficient models. (Look to Toyota and Honda to benefit as the American manufacturers, dragged down by union labor, are slow to change.) A rise in oil prices will hasten the transition to a more fuel efficient economy. In the short term oil prices are a negative for the market.

Earnings will ultimately drive the direction of the market and will be reported starting in July. It is widely assumed that earnings growth will slow overall as year over year comparisons narrow, energy costs remain somewhat high and the European economy has slowed. That said, interest rates are low, Asia continues to grow and the American consumer still spends. I believe that 2nd quarter earnings will beat overall consensus estimates, however, there will be casualties that will likely shake the market.

After Its All Said and Done

I continue to believe that Healthcare and certain story stocks are going to out perform the overall market for the remainder of the year. Although growth has sprouted in some tech sectors I feel that the recent rally is premature. I am careful about tech because the 3rd quarter tends to be disastrous for the sector. I will look for bargains but right now I would probably short sell before I buy long in most cases. I do like google but consider it a story stock rather than pure tech. I am waiting for a good entry point before adding it to the Focus13. Click on thesmartmoneyinvestor.com to see all my fund's current positions.

WFMI - Whole Foods has been a stellar performer and nasdaq darling. The specialty grocery retailer has grown quickly, however, I feel that the stock price is stretched. I calculate IV to be $87/share. Further, projected 2005 earnings growth has slowed to 21% and technical weakness is settling in. There is reason to believe that the company's fast growth is causing inventory problems and turnover is not what it should be as high prices have customers taking a second look. I started a short position at $118 with a short term target of $109. See the website for more details.

6/8/2005 The Smart Money Takes Some Profits

2005-06-07T22:25:00.000-07:00

Technical

Although the markets were mixed today many leaders sold off on slightly higher volume, exhibiting a bit of technical weakness. As I expected the 1212 level on the S&P500 is going to be a tough one to crack. The index rose above 1208 yesterday before plunging back below 1200. In a strange way this is exactly how I would expect the market to act, reaching toward a resistance level then consolidating at lower levels where the smart money may be more willing to buy.

Taking Profits

I took some profits today. The fund is up over 30% in the first 5 months of the year. Although I am still bullish on certain sectors I opted to log good earnings. Stocks like GAP and AMHC have increase as much as 100% since my original purchase. To see all the current positions in the fund go to thesmartmoneyinvestor.com.

Oil and Interest Rates

I do not expect oil to go much higher than the current level for the foreseeable future. As I mentioned last week a strong dollar and slowing global economy are likely going to keep prices in check; so far they have. Lower oil will be a net positive for the stock market although the indices many not move in lock step with oil's price fluctuations.

Greenspan still thinks that low long term interest rates are a conundrum. He believes that the global economy has changed and as a result interest rates are acting in an unprecidented way. I see the natural rate as lower than in the past. If the fed raises interest rates much higher (beyond 3.5%) I will have to re-evaluate my current position. Hundereds of millions more people are in the global labor market and increased productivity will keep prices, especially labor prices, down. I think that core inflation is well under control and if Fed funds rate rises above 3.5% the economy may pull back farther.

Lower oil prices and interest rates will be positive for capital markets. I will likely increase my equity investments as oil and interest rates fall. That said, although global economies remain active the current business cycle is getting a bit long in the tooth. A correction within the next year or so in not out of the question.

6/6/2005 The Smart Money is Buying the Dips

2005-06-05T23:13:00.000-07:00

Technical

Friday's drop may not have been as painful as it looked. Although the major indices were down so was volume across the board. The S&P500 ended the week at 1196, which was above major support at 1191. The next level of major resistance is 1212. As I mentioned before expect a pause at this level if the market moves higher. A break through above the 1212 level would be bullish for stocks. It appears that the smart money is still buying the dips.

Eyes Are On...

Rising oil prices are likely to get the attention of investors this week especially if it closes in on $58/barrel. I would expect higher prices to be a drag on the market since they would tax the consumer and its inflationary effect may support a more hawkish Fed. That said, a rising dollar should come to the aid and serve to cool prices. If the dollar remains strong I would expect oil to head lower from here. Tanker (oil) fixture trends are down and oil inventories are still rising, eluding to slower demand for oil. If this is the case oil should fall and perhaps offer a short sale opportunity in certain stocks. Keep an eye on the website www.thesmartmoneyinvestor.com for changes to my fund's positions.

Allan Greenspan is to meet with Fed Governors on Monday and testify to Congress on Thursday. No doubt speculation about his intentions will play on the market all week. I would expect more volatile capital markets during the period, moving at each release of data as investors speculate ahead of Greenspan's testimony. I am likely to protect some profits with puts if technical weakness creeps in to this week's trade.

APPX - American Pharmaceutical Partners has firmed technically. I have moved up my buy target to below $44. LIBM has trended higher showing the best numbers since its recent decline. EPS growth rates remain high and the market for generic pharmaceutical companies is strong.

6/2/2005 Smart Money Investors Anticipate to the Next Level of Resistance

2005-06-01T23:25:00.000-07:00

Technical

The S&P500 popped through its base yesterday closing above 1200 for the first time since March 14th. The jump likely paves the way for the index to move to its next major level of resistance of 1212, where a significant challenge exists. I expect that if the index does move to 1212 it will pause and base for a bit or even correct. Time will tell for sure, however, it should be noted that although the market has been rising volume is slumping off. If this market is to drive much higher it will need an increase in large investor participation.

Money Flow

Capital markets have been active of late to be sure. Money is pouring into US Treasuries as the dollar strengthens and the economy slows. The 10yr treasury dipped below 4% yesterday marking a solid environment for investment, yet the fed continues to raise interest rates. Several months ago I wrote that excessive rate increases by the fed may put the economy into a recession since their effects are not felt for six to ten months after the hike. As the economy slows and long term interest rates fall fed officials, not wanting a recession, will likely stop raising rates sooner than later. In fact, one fed governor hinted that the fed was in its last innings of rate increases. Lower rates will be a net positive for stocks.

If you read this blog on a regular basis you know that I believe the traditional paradigm for interest rates has changed and lower rates will prevail throughout the decade. I would argue that interest rates are already high and the fed should stop raising rates. I am in the camp that believes the neutral rate for fed funds is around 3-3.5%. I will be surprised if the fed moves higher than that and will likely re-evaluate my positions if it does.

I do not believe that the smart money investor is buying the recent tech rally. In many cases, such as that of the semiconductors, I believe the recent run up is due to a technical bounce rather than a change in fundamentals. Manufacturing has pulled back for the last five months and we are likely in the tail end of the hardware cycle. That said, I do favor certain internet plays. I have owned Google for a while in another fund and it has done real well. Since its current IV is less than 2x market price I have not picked it for the Focus13. I am however buying Shanda Interactive Entertainment (SNDA). SNDA has a LIBM which is trending higher and a growing short position. Chinese stocks may also benefit from the rise in the US dollar. Check the website thesmartmoneyinvestor.com for my latest targets and new positions.

I have included the table below to show May's five best and worst performing sectors. I think that you will find it interesting as it hints to the flow of money into equity investments.

Five Best Sector Performers May 2005

Internet Service Providers 15.1435
Internet Content Providers 13.3627
Retail Shoe 13.1935
Pollution Control Manufacturers 13.072
Metal Product Distributors 12.9854

Five Worst Sectors Performers May 2005

Textile - Household -17.8167
Oil&Gas-Intl -9.5175
Generic Drugs -5.8168
Soap & Clng Prep -3.3938
Metal Ores -2.5220

6/1/2005 Smart Money Investors Look at Currencies

2005-05-27T01:11:00.000-07:00

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.

5/24/2005 Markets Brace For New Data

2005-05-24T08:22:00.000-07:00

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.

5/23/2005 Markets Will Be Tested This Week

2005-05-22T16:40:00.000-07:00

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.

5/19/2005 Higher Ground

2005-05-18T23:01:00.000-07:00

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.

5/17/2005 The Goal of this Blog

2005-05-17T07:56:00.000-07:00

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.

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

2005-05-12T22:40:00.000-07:00

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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.

5/11/2005 Danger Equals Opportunity

2005-05-10T22:41:00.000-07:00

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.

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

2005-05-07T23:10:00.000-07:00

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.

5/4/2005 Brave Newer World

2005-05-04T21:30:00.000-07:00

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.

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

2005-05-01T20:50:00.000-07:00

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.

4/26/2005 Investors Are Shocked By An AC/DC Market

2005-04-26T19:52:00.000-07:00

Alternating currents deliver shock waves through a schizophrenic market leaving many investors wondering what is happening. A closer look at the details of the down then up then down again market reveal some telling insights. The S&P500 fell to a 2005 low on Friday, April 15th closing at 1142 ending a three day fall that bled 3% from the benchmark index. The ugly drop came on higher volume, a telling sign that large investors headed for the exits. To make matters worse the fall completed the right side of a head-and-shoulders chart pattern, one of the most negative signs market technicians use to trade on. Short interest seems to be shrinking as well, not a bullish sign. A drop of 1.4% was realized in the 60 most heavily shorted stocks on the NYSE (down 1.6% on the nasdaq stock market). I would expect the level of short interest to be higher given the recent fall of the stock market. With fresh yearly lows, negative technical signals and dropping short interest, it is no wonder why investors are exiting the market, but what is the smart money doing?

I admit that holding stocks in times like this can be difficult. I am cautious but there are some positive signs to consider. First, earnings have been ahead of analysts estimates. By most accounts earnings estimates are ahead of last year by 12% verses the 8% predicted by analysts. The stock market has been weak during recent earnings seasons and moves once the uncertainty of earnings reports has past. Technical factors may also be firming. Since the market's fall on April 15th the S&P500 has started a basing pattern, albeit a volatile one. Even though the market has gyrated during this time its short term trend is higher and the S&P500 has stayed above the 1142 support level. Fear is more prevalent now than in recent months as measured by the VIX. The volatility index (VIX) touched 18.5 last week and closed just below 15 today. The year end rally of 2004 started when the VIX climbed to 19.9. Other lesser rallies were sparked when the VIX reached 16.5. Can better than expect earnings, basing technical characteristics and building fear move the market higher? Only time will tell for sure, however, I believe a move will come sooner than later.

It is times like this that the market will act on a catalyst. I will not be surprised if on Thursday, when traders get the Advance GDP Report, the market moves in definitive terms. The consensus is for an increase of 3.4%. A much lower number will send fears of a slowing economy through the market, similarly a much higher number will send fears of inflation to investors. In both cases the market will likely correct, sending indices lower. For now I am staying the course. You can see my fund's position table by clicking on www.thesmartmoneyinvestor.com. The fund's performance has been good as its healthcare issues offer institutional investors inelastic growth and short positions have yielded short term profits. That said, a pronounced trend lower could sink all boats forcing me to make changes.

I am looking at several short sale opportunities. Many of the former leaders have already been shaken down and I have made some profits in RIMM and EBAY. Although energy is the obvious choice I am cautious as the sector has been strong and I am not likely to go against the grain without a definitive negative impetus. ERTS and EBAY both look like they can move lower as the US consumer weakens and technical characteristics continue their negative ways. Also, RIMM is still vulnerable because many of the company's former differentiating functions are becoming commodity features. Also, their peers have reported sales that have fallen short of investors expectations and the stock's technical characteristics are less than stellar. Stay tuned as I will post new positions on the website(www.thesmartmoneyinvestor.com).

4/25/2005 Volatile Volatility

2005-04-24T21:42:00.000-07:00

Last week the market's volatility increased as capital markets experienced daily positive and negative swings in excess of 1% on higher volume. The VIX, a measure of market volatility, expanded to a 33 week high touching 18.59 before ending the week at 15.39.

The S&P500 and S&P600 ended the week slightly higher. The S&P500 closed below its 200 day moving average (dma) on lower volume; down on Friday but up for the week. The benchmark index remains above the 1146 support level and may be starting a basing period. I am staying the course as my fund's positions are collectively doing well. To see my positions click on the following link www.thesmartmoneyinvestor.com.

The smart money seems to be rotating investments as they take profits in old leaders and find values in new ones. Below is a table of the top and bottom performers for the period between April 1 and Friday's close. It appears that large investors are still rotating out of commodities and into consumer stables and healthcare stocks, although Metal Distributors jumped to the lead during the period.

Top Performers 4/1 - 4/21

Metal Distributors +6.1%
Generic Drugs +5.3%
Consumer Electronics +4.8%
Water Utilities +2.9%
Drug Stocks +2.7%

Bottom Performers 4/1 - 4/21

Plastics -10.4%
Flour and Grain -9.6%
Trucking -9.2%
Basic Chemicals -8.9%
Gem Mining -8.8%

As I mentioned before I am staying the course. I am reluctant to add new long positions as the market remains volatile and technically vulnerable. I am afraid that if energy prices rise higher and inflation fears turn to stagflation fears the market could go lower. Shorter term traders should benefit while this push and pull continues between contrarians and worn out bulls. That said, I may add new short positions as my current monthly short interest analysis looks like bears are reducing positions.

MATR-Matria Healthcare reported earnings last week and the stock fell sharply on managment's conservative assement of the second quarter (they met eps estimates). According to the company the second quarter is on track and following a similar pattern to prior years. The company is expected to grow 2005 earnings by 53% and 2006 earnings by 31%. I did reduce my holdings as the stock retreated below my stop loss level and then bounced. The company is positioned well as its peers such as American Healthways AMHC have reach new highs last week. I am watching the situation closely as LIBM has dropped a bit. Stay tuned to see what I do.

4/21/2005 Where is the Market Heading? Corrective Bull or Precipitous Bear

2005-04-20T22:40:00.000-07:00

The trading activity in the S&P500 was about as bad it gets yesterday. The index closed below 1142, a major support level, to end at 1137. Adding insult to injury the index touched its 200 day moving average early on then turned lower on accelerating volume, closing at a fresh 2005 low. In the my previous posts I warned of a "sick market". Technically the stock market has confirmed my assertion.

Fear indexes continued to rise causing contrarian investors to pause, as the market continued lower when previously a bounce was to be expected. The VIX closed the day at 16.92, above trend. If the stock market doesn't bounce before the VIX reaches 21 I am afraid it will signal the return of pricing volatility and further down side risk.

On the surface business fundamentals remain strong. First quarter earnings are, for the most part, in line with consensus estimates or better. Relatively low interest rates, a lower but more stable dollar and low tax rates continue to bolster business activity. However, uncertainty about long term energy costs and a concern that interest rates may structurely rise in excess of neutral have fuelled a decline in the value of stocks. Concerning oil prices, I believe that speculative energy is currently being worked out of the price of crude. A more accurate mean price for energy will likely result in my estimation and if I am right will help alleviate uncertainty around the issue. As for interest rates, globalization and higher rates of productivity are likely to hold interest rates down long term. In Alan Greenspan's testimony today he said he did not see stagflation. By all accounts increases in payrolls are negligible and will ultimately serve to keep prices down. Time will tell but if stable energy prices and low interest rates prevail long term the current decline in the market will prove to be a correction rather than a new bear market.

Rotating the fund's investments into healthcare stocks and special situations last year has paid off as the Focus 13 held up well during the decline in the market this year. That said, a falling tide brings down all ships. As the true structural nature of energy prices and interest rate change plays out I must consider whether or not the investment waters are stable enough to support owning stocks at this time. I am staying the course for now but may change the fund's positions to be better in line with the unfolding economic climate.

I want to welcome John Creighton to the subscriber base. John, your warning that I should proof read my post before I publish them is well taken. I promise I will make an effort to write in English from here on.

4/19/2005 Investors Hold Their Breath

2005-04-18T22:22:00.000-07:00

The market held up yesterday after its precipitous decline of the prior three trading sessions. Although the capital markets ended flat decliners out numbered advancers on most exchanges. The fear factors (RSI, VIX and Newsletters) pulled back a bit as the fright of another drop greater than 1% was not in the cards. Mergers and acquisition news and a spat of positive earnings reports started to look like good news again helping to keep the market from collapsing.

Technical

The S&P500 remains under its 200 day moving average and although its member companys' fundamental characteristics remain good the index flashes signs of technical weakness. The nasdaq stock market bounced the most, however, I think that the smart money was absent from the buying for the most part especially in the tech sector. The nasdaq remains significantly below its 200 day ma.

Currently I am staying the course. Vist http://www.thesmartmoneyinvestor.com to see my fund's current positions.

Buying and selling in the month of April has been telling. Large investors have rotated cash and are building positions in some sectors while exiting others. Below are two tables that show the process. Table 1 shows the top and bottom 5 performing sectors from April 1, 2005 through April 15 (the day of the 191 point drop on the DOW). Table two shows the top and bottom 5 performers for the period from April 1, 2005 through April 18 (Monday's close). Notice the move from commodity type sectors to healthcare type sectors, then notice the change that came about when the market stabilized a bit on Monday. It will be interesting to see how this table shapes up at the end of the week.

Table 1 - 4/1 - 4/15

Top Performers

Drugs +5.7%
Genetic Drugs +4%
Hospitals +1.8%
Ethical Drugs +1.7%
Alcoholic Beverages +1.5%

Bottom Performers

Metal Ores -14.75%
Oil Drilling -14%
Steel -13.8%
Energy -13%
Specialty Steel -12.7%

Table 2 4/1-4/18

Top Performers

Drugs +4.5%
Genetic Drugs +4%
Consumer Electronics +4%
Water Utilities +2%
Generic Drugs 1.2%

Bottom Performers

Oil Drilling -13.7%
Metal Ores -13%
Energy -12.2%
Steel -12%
Plastics -11.6%

4/18/2005 The Markets' Future: Black Monday? A Tremor or Earthquake

2005-04-17T20:18:00.000-07:00

Technical

The S&P500 fell convincingly below the 1160 level in Friday's trade to end at 1142. The session's trade happened in the worst possible manner accelerating declines as the day progressed on accelerating volume. The S&P500 now rests at a support level of 1140. Many in the mainstream media have expressed that this is a buying opportunity. I am not so sure at least not right away.

Bad News is Good News?

Pessimism is at a high as measured by many indicators. RSI is below 30, usually a buying opportunity. The VIX is at 17.74, a number higher than what was experienced during past market rallies. And newsletter surveys show bullish writers represent 16% of the lot, a multi-year low. In general these numbers are quite positive, however, I have some reservations. First, RSI reached 30 a week or so ago only to end in a failed rally, perhaps it will go lower as investors don't trust the 30 level. Previously I expected a rally when the VIX reached the 16.5 level, a level that initiated the Oct 2004 rally. However, the fact that the VIX shot past the 16.5 level with no support until the 20 level makes me fearful the index may test the level of support at 20. I like that newsletter writers are pessimistic, however, just because writers are less sanguine about the market now does not necessarily mean the market will turn on a dime. It may take some time for weak investors to be shaken out of the market. Further, many fund managers interviewed this weekend articulated the level of the market as a buying opportunity; is this change in attitude a negative for the market.

I have increase my short positions and if you follow this blog you know that I have been defensive for a while now accumulating positions in healthcare and special case investments. This market can turn at any time now and then turn again just like that. I am staying the course with my current investments, although I have bought protective puts just in case, this seems like a good time for some insurance. Visit and bookmark my website www.thesmartmoneyinvestor.com to see the stocks currently in the fund.

A Tremor or Earthquake

No one can argue that the capital markets have not been shaken in the past few trading days. What has captured the attention of investors is whether on not the current market movement is a tremor or something more. I was young but I profoundly remember Black Monday, October 19th, 1987. No one knows for sure what caused the DOW to fall 508 points that day. Some blamed program trading, others say short sellers accelerated the trade to the down side and still others blamed portfolio insurance providers. Whatever the cause one thing was for sure a rabid herd mentality infected Wall Street that day. I am not predicting a crash today necessarily, however, Friday's trading action was reminiscent of the Friday before the '87 crash. I will not be surprised to see selling in a herd like manner in Monday's session. The question will be at what level is the next buying opportunity and what sectors are going to out perform?

The price of oil and cash (interest rates) have a demonstrative effect on the economy. In short, low prices for oil and interest rates mean more money is available for investment (growth); the higher the prices the less money that is available (for investment). It is quite possible, in the short run, the market will go through the process of finding a new equilibrium based on the effects of oil prices and interest rates that have been bid up too high by speculators. See my previous post "A Spoonful of Capitalism Helps the Medicine Go Down".

In my opinion oil prices rose too high as the Fed kept interest rates artificially low to boost the economy post 9/11. Global economies heated up as investment in business, driven by the desire for returns beyond what was available for simply holding cash, snow balled. Cheap money made growth easy thus increasing the demand for energy and commodities. Speculators, many of which are hedge funds, bought oil long on the promise of rising Asian growth. The problem is it is not steadily rising Asian growth. As usual growth will be cyclical. As it stands prices have likely overshot natural to the high side and are in the process of correcting toward equilibrium in a meaningful way.

I believe that globalization will help to keep interest rates low longer term. In several of my past posts, some of them months ago, I talked about a lower neutral/natural interest rate. As a large population of educated Asians assimilate into the global economy the competition for commerce is likely to keep prices low. However, a recent rise in energy and commodity prices accelerated the rate of inflation. The Fed in an effort to catch up with its already artificially low rates and now increasing inflation have raised interest rates seven straight times. It takes 6-10 months for each rate hike to be felt by the economy, so their effects lag. It is quite possible that the Fed raised rates too aggressively and the effects, not yet felt, will sink the US economy into a phase of lower growth and perhaps recession. If this is the case the Fed will have to reverse course dropping rates more in line with the new, lower, neutral/natural interest rate.

I believe capital markets are faced with a perfect storm of higher speculative oil prices and not yet felt higher interest rates that are going to drive markets in the short term. The stock market is likely to fall further or at least until it declines past equilibrium before another buying opportunity is born. Until then investors will probably rotate cash out of growth sectors and into defensive sectors like healthcare, consumer staples and bonds. Further, I believe that short sale opportunities exist to take advantage of these rotations. Visit, bookmark or subscribe to my website www.thesmartmoneyinvestor.com to see the fund's current trading table on the home page. The table lists the fund's current positions and is updated as changes are made. Stay tuned as I provide the commentary of the smart money during the changes in the nasdaq stock market and S&P500.

4/15/2005 A Spoonful of Capitalism Helps the Medicine Go Down

2005-04-14T17:25:00.000-07:00

Technical

The S&P500 rests just below a key level of support sitting at 1162. The latest decline in the index sets up a very negative technical pattern and does not bode well for stocks in the near to intermediate term. The fact that the market ended near its low on much higher volume adds to the negativity. Today is an options expiration day and history being my guide I would not be surprised to see a flat close. However, Monday may be a different story. Unless we get some very good news around interest rates or oil this market is likely to correct while speculative forces unwind. That said, the VIX is on the rise and the put to call ratio is above 1.0 both positive signals from a contrarian standpoint.

The Market is Sick

The good news is that its cause seems to be a dose of capitalism; the bad news is its cause seems to be a dose of capitalism. Speculation, a symptom of capitalism, often drives market prices to extremes one way or the other. Add competing speculative markets and you are guaranteed to double your pleasure. Case in point, interest rates and oil, two catalysts that have held the attention of investors lately. Oil prices have risen to all time highs partly on the belief that China's growth is going to super sap world crude supplies. How much oil will the world need in the future? Well no one knows for sure. Economic slow downs, more productive uses of crude and un-named crude oil substitutes may all negatively affect the use and price of oil. The crude market has been especially speculative of late as evidenced by its volatility. Speculative markets tend to be more volatile as the fast money investors push each other around. Interest rates on the other hand have experienced a form of indirect speculation. Intervention by foreign governments into currency markets and mortgage and financial institutions who hedge their interest rate risks are some examples of the indirect speculation that affects interest rates. Rates have remained low for a long time due in part to these indirect forces.

Competing Speculative Markets

Like a Yankees Red Sox game when two competitive markets meet sparks are going to fly. The world economy began to fire up with the unwinding of the tech bubble, the end of SARS and the normalization that came after 9/11. Until last year global governments remained fiscally accommodative adding liquidity to their economies. World economies recovered and began to thrive as the effects of globalization kicked into high gear driving the demand for oil and other commodities higher. Smart money speculators, seizing the opportunity, invested in these commodities. Side lined investors, not wanting to be left out piled in and drove prices higher. As prices inflated the Fed stepped in and raised interest rates applying routine inertia to prices. But long rates did not move, a "conundrum" due to the indirect speculative effects I explained in the section above. Artificially low interest rates made leveraged speculation a no brainer and prices rose even higher as investors added to positions. The price of energy and other commodities continued to rise even in the face of the Fed's rate hikes.

Speculators who drove up energy and commodity prices clash with speculators that indirectly kept interest rates low. Since all economies tend to equilibrium something has to give. Naturally, the change is being telegraphed by the stock market. Higher oil prices weigh down an economy in much the same way that higher interest rates do. In general it takes six to nine months before the effects of higher interest rates are felt, which is right about now. The problem is that higher energy costs have already started to slow the economy. Retail sales figures have lagged recently and consumer confidence has trended lower. I believe that the delayed effect of interest rates is going to further slow the economy and the Fed may to have to reverse course in order to thwart a recession. In the mean time energy and commodity prices are going to fall toward equilibrium. All this speculation points to lower levels in the stock market in the short to perhaps the medium term. However, the stock market is a discounting mechanism and has a certain amount of these developments built into its price. It will not likely take long before speculators step in betting that lower interest rates and fuel costs are going to feed the global economy. The smart money has already started to rotate cash into more defensive industries and they are eyeing future bargins. To see my fund's positions click on www.thesmartmoneyinvestor.com. Keep and eye on that site as I am also going to add new positions as the economy makes its transition.

4/13/2005 Astute Investors get a Look into the Future Today

2005-04-12T19:59:00.000-07:00

Catalyst Pending: Interest Rates

The smart money showed their cards today giving astute investors a look into the future. In recent days the market seemed to idle around the uncertainty about earnings, oil and inflation. Investors held their breaths as they waited for a catalyst to kick capital markets one way or another. Although oil fell hard today, generally a catalyst for higher stock prices, the stock market fell just as hard in apparent sympathy. Similarly, earnings reports, which for the most part have been as expected, and an analyst upgrade for Cisco did nothing to ignite a rally; in fact they seemed to backfire on investors. The S&P500 fell 0.9% on light volume and stayed at that level for most of the day. It was not until the FOMC meeting minutes were released, a supposed nonevent according to most investors, did the stock market catch fire rising 0.6%, a 1.5% turnaround. Apparently, large investors' fear that the Fed would accelerate raising interest rates to cool inflation were quelled. More importantly a statement by Bill Gross, Pimco's bond investment head, that 3.5% on the Federal Funds Rate was neutral gave investors all they needed to buy equities. As it turns out, investors can live with $55 oil and 8% earnings growth, but high rates to stop inflation are a show stopper.

In my post last month http://thesmartmoney.blogspot.com/2005/03/3242005-phased-outthe-new-market-ahead.html I wrote about why I think that interest rates will remain low for the foreseeable future. If Mr. Gross is correct a 3.5% Fed Funds Rate would equate to about a 5.0% rate for the 10 yr Treasury, a number that would likely favor stocks. Gross went further to say that he thought the US economy was already slowing, again something I brought to light last month in my post above. In any case it is clear that events which affect interest rates and thus economic growth are likely to be the main driver for the stock market during this phase.

Technical

The S&P500 and S&P600 went through a substantial reversal today as both indices came back from harsh declines to end with solid gains on above average volume. The S&P500 bounced off the 1170 level midday to close at 1187. 1160 on the S&P500 has proved to be staunch support for the index, a level that has its roots back to March 2002. Today's move was encouraging as it again tested the low, however, it does not confirm a rally. In fact, if the S&P500 fails to get above 1212 near term I am afraid market technical characteristics will break down and the indices may make new lows. What is interesting is the nasdaq stock market. The index has been written off with most analysts recommending that investors stay clear of tech. Looking at the monthly chart today I noticed that a classic basing pattern is underway and I would not be surprised to see a rally in a new wave of nasdaq leaders. Stay tuned as I will being adding new nasdaq stocks to my fund so as to capture profits ahead of the mainstream. You can see my fund's current positions at www.thesmartmoneyinvestor.com.

GAP - Great Atlantic & Pacific Tea Company has held its gains through this choppy market. As of March 15th short interest was roughly equal to 50% of the float. The company has been a victim of Walmart's competitive pressure, however, its situation is much like that of Kmart's. The company has been family owned and in business since the mid 1800's and has some 649 stores. In many ways GAP is a real estate company and it can be argued that the true value of the company's real estate is being over looked by investors. Recently, the stock rose on news that the company intends to sell off some assets to pay down debt and re-organize, a move which will make it more competitive. Time will tell how GAP's story plays out but I believe that management is making the necessary changes to reinvigorate the company. I have been accumulating shares below $14.5 with a near term target of $18. I am waiting for signals that the stock worth more, an event which will trigger my targets higher.

4/11/2005 Pending Catalyst: Markets Wait for Direction

2005-04-10T22:59:00.000-07:00

Earnings, Oil and Inflation

Today earnings season goes into full bloom as many members of the S&P500 and nasdaq start their quarterly reporting ritual. Analysts expectations have been lowered since this quarter's comparisons with last year's super growth rates are widely expected to fall short. Negative pre-announcements are up slightly and the market showed signs of nervousness falling hard on Friday but remaining up for the week. Earnings, oil and inflation are the current poster children of uncertainty that will drive capital markets in the short term. So far this month the smart money has rotated cash out of inflation friendly sectors and into others. Below is a table of the top and bottom five sectors by performance for the first nine days of the quarter.

TOP FIVE SECTOR PERFORMERS

Airlines +4.6%
Consumer finance +4.5%
Drug stocks +4.03%
Automated machinery +3.9%
Discount Retail +3.7%

BOTTOM FIVE SECTOR PERFORMERS

Flour and grain -8.2%
Canadian oil and gas -3.5%
Trucking -3%
Security software -2.2%
Fertilizers -2.1%

Many large funds will make changes to their portfolios starting at the beginning of the quarter. It will be interesting to see how these flows progress into the start of the second quarter. Stay tuned as I will make updates to the top and bottom five periodically.

Technical

The S&P500 and 600 have held new support levels above 1180 and 315 respectfully. Recent price and volume action suggest that these indices are in a basing period as investors perform next phase asset allocations. High levels of short interest in some sectors like airlines and healthcare gave their stock prices an extra bump in the first wave of re-allocation, often a precursor to a longer term rally. However, the recent up trend over the first days of the month came on lower volume, almost always a bad sign, and may signify that stocks will head lower. Another negative is in the fear indicator, the VIX. The VIX remains at depressed levels and recently failed to reach the 16.5 level, a number I feel is the minimum necessary to see a more pronounced rally. Clearly the market is looking for a catalyst to define its direction. That catalyst is likely to come from earnings, oil or inflation news. I am very cautious near term, however, I am accumulating certain stocks at my buy targets. You can see the fund's positions by clicking on www.thesmartmoneyinvestor.com.

Healthcare

Healthcare stocks have held recent gains although many were down a bit on lower volume today. I expect select sectors within the group to significantly out perform the general market. As employment increases so do many healthcare stocks since new employees will be more able to pay for insurance and healthcare services. Further, the hospital sector has cleaned up its uncollected fees expense in recent times helping those issues to add more cashflow to their bottom lines. Couple that with a more friendly Medicare and Medicaid environment and superb demographics and this sector should continue to grow longer term, bouncing from the negative returns of the last three years.

MATR - Matria Healthcare reported higher than expected earnings numbers in its last report. I calculate intrinsic value above $121, well above my two times market value requirement. In addition, the technical characteristics of the company are solid, building a base and forming a classic break-out configuration. Currently shares are just above my $31.5 buy price. I am accumulating more shares on the dips and am considering raising buy levels. The company provides disease management, high risk pregnancy care and health enhancement services. Matria has found a way to increase customer service and satisfaction while also reducing costs and increasing profit.

4/7/2005 Just as Anticipated

2005-04-06T23:02:00.000-07:00

Healthcare

If you are a regular to this blog you know that I have been accumulating healthcare stocks for the last few months, along with the rest of the smart money. If you follow my fund's Focus13 at www.thesmartmoneyinvestor.com you may have learned about these issues and perhaps bought them yourself. This week several of my investments made new highs for the year. Recent momentum in the stock market has been with healthcare, a trend that is likely to continue through the next phase of the market. Companies like American Healthways, Matria Healthcare and others experienced large investor buying momentum and media attention. See my story at http://thesmartmoney.blogspot.com/2005/03/3292005-phase-outthe-new-market-ahead.html; in it I give my views on the first phase of the next stock market cycle and some reasons why I believe healthcare will benefit from the change. You might also want to try clicking back through my archives on the right side of this post; there are many examples about why healthcare will be the sector to own in the next market phase.

Technical

The S&P500 has started to rally the last couple of days bouncing off its 1163 bottom twice. The VIX rose above 14.5 once again as the index approached its near term lows but has since backed off, standing closer to 13 now. A number closer to 16.5 would get me more excited about a real rally. Yesterday the market shot out of the gate and stayed there for most of the day, however, later in the session the S&P500 experienced a lower volume pull back to stand at 1184, a sticky resistance level. For the rally to extend itself I believe it needs a pronounced catalyst like a drop in oil, stellar earnings report or real good political news. Without a change in climate stocks will likely stay in this range as investors are likely to face continued head winds from high oil and interest rates; lack luster earnings will not help either.

Focus 13 - March Performance

The good news first, the fund is up 11.3% for the quarter, 45.2% on an annualized basis. That said, it lost (1.5%) in the month of March, its first monthly loss in nearly a year. I closed out several positions that were profitable on the year but not in March as they broke down technically and large investors redirected their funds. I also added several new issues to the group and cut several others. Click on www.thesmartmoneyinvestor.com to see the Focus 13 table that lists all the funds current investments. Also, details on the funds performance can be found at the same address, look in the left side bar for the link.

Hopefully the first few days of April are an indication of what the rest of the month will look like. Many of the funds investments are breaking out as the market moves like I anticipated.

AMHC - American Healthways broke out to a new 52 wk high for the second day in a row. The stock had been basing between $29 and $35 for the last several months until Monday when it rose above that level on high volume. Intrinsic value (IV) is at about $85/share while shares sold short were about 20% of total shares on March 15th. AMHC's market capitalization stands at $1.2 billion. Given its 2006 eps growth rate of 31% I feel the company can be worth in excess of $2 billion provided it continues to grow earnings at or above 31%. Given the favorable demographics and available market share I believe that $2 billion is achievable.
MATR - Matria Healthcare is very similar to AMHC on a smaller scale, which may mean it has more growth ahead of itself. The shares have been basing for several weeks between $28 and $32 per share. It too has many shares sold short exceeding seven days of average daily volume. I calculate IV at $121 /share. Currently I am still accumulating shares in MATR as its current price is just below my buy target. The company's eps growth is the same as AMHC listed at 31% for 2006. MATR's market capitalization is just under $500 million.

4/5/2005 Oil and Vinegar

2005-04-04T23:35:00.000-07:00

Think about it? Oil last year...the Iraq war was raging, hurricane Ivan blew through the Gulf of Mexico like a hot winded wave maker and US refinery capacity was limited. The price of oil was less than $50/barrel then. Fast forward to today...when was the last time you heard about a disruption in Iraqi oil. The people of Iraq need money and you can bet they are pumping it for all its worth. And hurricane Ivan...at $56/barrel do you think those oil companies are taking their time fixing rigs. Fo get about it...I'll bet the rigs were fix the day after the winds stopped. Oil inventories have been building for several months, yet there has been a draw on gasoline. Think about it...if refinery capacity is limited it acts like an oil dam. Oil inventory will grow as a bottle neck at the refiners will in effect ration gasoline causing a shortage (or higher prices) in the fuel and an over abundance of crude oil. So why does the price of oil keep going up. Are there that many more people using oil today then last year? very doubtful. Perhaps speculators are keeping oil prices high. Remember the analyst who predicted Yahoo shares were worth $400 and the stock shot up in value eclipsing that level. Well that was the beginning of the end of Yahoo's rise. Climatic endings are the standard of market tops. It may very well be that someday we will experience $105 / barrel oil. Whether or not it comes sooner or later is something only time can tell.

The technical characteristics of oil are a bit top heavy. A drop in crude prices could signal a buy for the stock market with the exception of oil stocks, a vinegary situation. Intrinsic Values calculated using >$55 crude will have to be adjusted causing an oversold market to bounce. In my last post I wrote about noise: Incremental moves in capital markets whose action is based on speculation and hear say tend to equilibrium over time. The smart money knows this, therefore, I am staying the course with the fund's investments. If I sense a sustainable reduction in the price of oil or a change in the future direction/momentum of interest rates I will adapt my strategy accordingly. To see my funds positions click on the following link www.thesmartmoneyinvestor.com. The Focus13 table on the home page gives you an up to date view of what I am doing. I'll bet you find it interesting.

4/4/2005 Market See Market Do

2005-04-03T16:05:00.000-07:00

Noise

The stock market has seen a high level of selling this year. Although the S&P500 and S&P600 reached highs last month a significant amount of selling by large investors has reduced the indices to their 2005 lows. Energy is the clear leader in this market. Its rise has countered the fall of tech and financial issues leaving index charts flattish for the past five months (while many non-energy issues have corrected 10% or more). Unfortunately, the higher energy costs are pumping up inflation around the world making the stock market leary of the consumers' propensity to spend. That said, techical characters of the market have shown signs of strengthening. The Relative Strength Index, a measure of investor momentum, has reach a low in par with that of the last market bounce. Further, the weekly chart of the S&P500 is showing a bottom basing pattern also consistent with a bounce. I am not yet ready to buy up in bulk, but I am buying selected issues. See my website www.thesmartmoneyinvestor.com to have a look at my Focus13 trading table.

This week is likely to give investors a healthy dose of information to contemplate. The challenge will be to correctly distill the pertinent facts from the minutia. From earnings announcements to Greenspan, oil to inflation, investors will be busy discounting it all as their mettle will be tested. In the end the market will do what it will do. Just like some days the market goes down when oil rises and others it moves higher when oil goes higher. Though this noise will drive capital markets in the short term, in the end market fundamentals will prevail. The smart money will determine the future direction of the market by voting with their buys and sells. I pay close attention these LIBM trends (Large Investor Buying Momentum) for the individual stocks I invest in. Ultimately it is the large investors who will determine where and when I invest.

Right now large investors have sold tech and financials and bought energy. However, there is evidence that investors have begun the transition into other sectors like healthcare and consumer staples. One stock that has seen a rise in LIBM is The Great Atlantic and Pacific Tea Company (GAP). The stock has seen an increase in investment as investors have come to speculate that real estate assets will be sold to reduce costs. In addition, on March 15 the company had more than 1/2 its float shorted (over 7 million shares). I have owned the preferred issues of GAP for a long time and have been rewarded. I am accumulating shares.

Fear and negativity are growing. Investors have started to sell and perhaps are not yet done. A test of the 200 dma on the S&P500 is not out of the question, however, the index has been basing for last 19 weeks making it a tough short. For now I am staying with my current game plan, check out the website www.thesmartmoneyinvestor.com for the details. You can find my specific targets in my Focus13 table on the home page.

3/31/2005 Caution

2005-03-31T06:59:00.000-08:00

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

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

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

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

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

2005-03-28T20:54:00.000-08:00

Part II Profiting from the Situation

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

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

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

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

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

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

Department Stores +14%
Drug Stores +13%
Construction Machinery +10.5%
Discount Stores +9.4%
Aerospace/Defense +8.5%
…
8. Medical Hospitals +7.2%

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

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

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

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

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

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

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

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

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

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

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

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

2005-03-24T07:07:00.000-08:00

First Part of a Two Part Series - Situation Analysis

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

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

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

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

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

3/22/2005 Warning: 1180 Breached

2005-03-22T06:44:00.000-08:00

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

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

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

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

3/21/05 The Easy Money

2005-03-20T17:55:00.000-08:00

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

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

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

3/17/2005 Macro Picture Grows Horns

2005-03-16T18:48:00.000-08:00

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

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

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

3/16/2005 Tipping Point

2005-03-16T07:59:00.000-08:00

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

My Perspective

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

What is holding this market back?

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

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

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

3/14/2005 The Ides of March

2005-03-13T10:48:00.000-08:00

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

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

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

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

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

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

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

3/9/2005 No Pain No Gain

2005-03-09T10:42:00.000-08:00

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

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

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

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

2005-03-07T21:25:00.000-08:00

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

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

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

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

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

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

2005-03-05T07:07:00.000-08:00

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

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

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

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

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

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

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

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

2005-03-02T16:54:00.000-08:00

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

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

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

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

3/2/2005 Fear Factor Revisited

2005-03-01T21:42:00.000-08:00

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

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

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

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

3/1/2005 Flogged by the Blog

2005-02-28T21:11:00.000-08:00

Yesterday's sell off came on que. The S&P500 failed at Friday's 1210 level twice, now three times before. What will be interesting to see is whether or not the rest of the week will be bought up like the previous sell offs or finally given up on. It is hard to say. The fact that the market bounced off its intra day lows is a good sign. If anything has come from the sell-off/buy-back gyrations of last month its the development of a higher trend channel. In the short term I would expect to see investors support the market by buying in the low 1190's and selling the 1220 level, in step with the RTC. That said I am still sticking to my 1217/1180 levels for major resistance and support respectfully. I am sure that the consensus is thinking that the market will move higher on the first day of the month almost guaranteeing its demise. Yet, I am staying the course and going with my targets that are listed on my home page www.thesmartmoneyinvestor.com in the Focus13 table.

Three sectors hitting new low this year are Autos, Trucks and Newspapers. Autos and Trucks always do badly in a rising interest rate environment but Newspapers? Media has been changing for sometime now but recently it seems like Newspapers dropped another notch lower. The missteps of the Wall Street Journal have been well publicized. I cancelled my New York and LA Times subscriptions long ago, too late and too boring.

The Journalists want to blame their fall on bloggers. Personally, I think that view is short sited. All the good journalists are blogging too, bypassing their old bosses and gaining in some popularity on their own. Newspapers are quickly becoming modern day buggy whips. Their classified adds are parsed out to Monster.com and Ebay. Their advertising goes to Yahoo, Google and MSN. Their publishing is going to bloggers and e-zines. I am sure that slow moving magazines are next.

As always I am looking to see what energy is generated from this paradigm shift. Obviously Monster, Ebay, Yahoo, Google and MSN were the low hanging fruit. I am going to take a hard look at Macromedia, Adobe and Sonic as possible beneficiaries of the new publishing order. As blogging grows and newspapers fragment and morph it will be interesting to see if opportunities exist in the software publishers. Below I give a few thoughts about Macromedia.

MACR - Macromedia is a software developer of web based publishing tools. The company is best know for Flash, an affordable multimedia software tool. The company expects 2006 earnings growth of 27%, the same as 2005. I calculated intrinsic value at about $40/share, so at $34 its not really a buy for the Focus13 as it does not meet the IV=2x more than market price criteria. However, large investors are speculating that earnings can exceed expectations. The stock has run up from $26 in mid January on higher volume. I am keeping my eyes on MACR as the new media develops. I did really well with the stock in the 1990's, maybe its time has come again.
CTGI - Capital Title Group (totally switching gears) is a holding company whose subsidiaries provide appraisals, title insurance and other related services to the mortgage industry. At first glance it seems like this company is on the wrong side of the business cycle. However IV=$21/share and its market price is about $6. The company has shown that they can grow through acquisitions, buying national competitors. The company pays a small dividend of $0.02/shr. Lately the company's stock has been under accumulation and has started to break out. I am watching CTGI as it meets fundamental and technical criteria. It may be a good 20-30% gainer or it might be the next version of Kaufman and Broad. It may also be dragged down with the rest of the sector.

2/28/2005 Does That Old Dog Still Hunt

2005-02-27T14:53:00.000-08:00

If you are a regular viewer or just searching through click on www.thesmartmoneyinvestor.com/Getthemost.html to learn how to best use this blog. The page informs viewers about the strategies, tools and research I use to generate the 40% plus returns chronicled in this site. The page pulls together the bigger picture of my approach.

Friday marked the 3rd time in eight trading sessions that the S&P500 reached the 1210 level. The prior two times were eventually sold off. That said, a higher trend maybe forming in the S&P500. Large investors have consistently placed a bid under S&P500 and DOW stocks, but have not done the same with the nasdaq composite. Every time the stock market sold off in the last few weeks investors have stepped in to bid it up again. This is a very healthy sign from a technical perspective. I have noticed a bit more volatility in the market lately. The VIX did see the 14 level earlier last week, but has since pulled back signaling a fearless investor. I still am waiting for a move above 1217 or below 1180 on the S&P500 as a catalyst point defining the future direction of capital markets.

It is interesting to see Carl Icahn moving his cash into the healthcare sector. You may know that last year the LBO specialist started a $3 Billion hedge fund. It is hard to argue with the strength in the demographics for the healthcare industry, certainly a path of least resistance exists. The question will be one of timing. With Icahn making moves one has to ask is the time right, or does that old dog still hunt? My Focus13 has several healthcare stocks. It was reported today that Icahn successfully thwarted Mylan Lab's bid for King Pharmaceuticals. Icahn is Mylan's largest shareholder.

AMHC - American Healthways has risen to its RTCh of about $34. The stock has been vacillating in a channel recently. I do not know what to think about the technical characteristics, as they are somewhat wonky; but fundamentals look quite strong. I am staying with my current targets.
MATR - Matria Healthcare reported earnings last week in line with estimates. The stock dropped hard on the open, losing almost 15%; however by the close the stock was up almost 1%. Large investors want to own the stock. Currently the stock is holding its own. I like the fundamental characteristics, although technically it has trended lower since its stock split. The stock is nearing its 50 dma. I recently dropped my targets for the stock as I think its a good buy, that said if I am stopped out I may have to wait for another day.

2/25/2005 Trendless

2005-02-24T21:05:00.000-08:00

Trendless defines the direction of the S&P500 this year. Although the year started in retrograde it has since bounced back to a neutral state. It is critical to identify the trend as almost all stocks will follow the direction of the general market over time. However, looking at only the general market can be mis-leading when speculating ahead of the mainstream. Several sectors of the index have broken out to new highs and others to new lows. Although the net effect has been near zero it is obvious that capital markets are trembling underneath it all. There is a 44% delta between this year's best and worst performing sectors, Oil and Gas +22% vs. Fiber Optic Equipment -22%. That said, as of today 39% of all sectors are positive on the year compared with only 9% at the end of January. I have been studying which sectors are seeing fresh capital and making investments into the leaders of those groups that are receiving fresh money and meet my investment criteria. Check out my website www.thesmartmoneyinvestor.com to see where I am placing my capital and to learn more about me and my strategy.

RIO - Comp Vale Do Rio shot above $37 in after hours trading today as the market is finally waking up to the benefits of owning raw material during this business cycle. I originally bought the stock at $23. The company has been under heavy accumulation this week as its peers have reported record growth and earnings. As Asia continues to build itself out RIO will be a prime supplier of raw material and I believe will continue to see growing investment.
NIKU - Niku reported earnings today and jumped over 5% in after hours. This is another stock that has done well for me as it nears my target of $24. I bought the shares in November for $15. Niku is an example of why it pays to be a good stock picker. Even though the nasdaq is under performing the S&P500 at this time NIKU is performing ahead of the market. I am staying with my current investment plan for NIKU.

I rely on identifying market trends ahead of the large investors to be successful. I also have several other strategies that use the trend channel in helping me to identify buy and sell points. I post what I call the RTC (recent trend channel) on my website for each stock that I own in my Focus13, shown on my home page. I have not updated this portion of the website lately because of the lack of a trend in the general market. Watch my site as I will be posting new RTC information for each stock. The general market may be trendless but the underlying issues are in rotation and soon or later a trend will develop. Perhaps today's GDP report will give global and nasdaq stocks a kick in the right direction.

2/24/2005 Boing

2005-02-23T21:32:00.000-08:00

The capital equity markets bounced yesterday on lower volume after Tuesday's fall. The S&P500 closed just below its 50 day moving average, which suggests that resistance now exists and it will take a heavy volume push to move the indice higher. I maintain my stance that a move above 1217 or below 1180 on the S&P500 will likely define the stock markets' intermediate trend. I am staying on plan. See my website www.thesmartmoneyinvestor.com to see my positions, which include my entry targets, sell targets and stop loss points.

A word about Matria Healthcare (MATR) and my basic strategy: MATR reported earnings on Tuesday after the bell. Numbers came in line with analyst estimates and the company reiterated its eps growth for 2005 (30%+). The stock dropped in price below my stop loss level and I missed the sell. I rarely if ever ignore my stop losses as it is a sure way to loose money. In general my strategy is to use my investments to make 20%-40% gains then move on to something else; I do have controls in place that allow me to gain more provided certain benchmarks are met. Likewise, I sell an investment the moment it looses 5-10% depending on my risk research. In the case of MATR I missed the stop loss trigger and was given a scare today. Without getting too verbose I did not properly update my company's internal software and the trades were not initiated. If you watched MATR today you would see it was one of the markets worst performers early on dropping almost 15% on higher volume. My experience tells me to do some situation analysis rather than panic and sell shares at the low. I knew the company's earnings are what large investors are looking for. Further, the sector is in a sweet spot were investors are putting new cash to work; I decided to hold onto the shares. At the end of the day MATR went from a heavy loss in the morning to a small gain on much higher volume by the close. The bid under the shares strengthens my resolve that MATR is a good investment. I have modified my stop loss and feel that my upside targets can be met. See my website www.thesmartmoneyinvestor.com for the specific numbers.

2/23/2005 Be Afraid, Be Very Afraid

2005-02-22T21:20:00.000-08:00

The machinations of the global macro economic machinery decisively moved beyond speculation. Investors showed their cards yesterday as fear got the best of them forcing stock and bond sales as global currency markets twisted their arms. The paths of least resistance that I have been writing about and investing in are now firmly in place. Large investors will have to more quickly move cash from investments that will no longer lead into investments on the fall line. Although today's move was not below the 1180 support level on the S&P it was decisive enough on high enough volume to warrant attention. A few days below the current level of 1184, especially on higher volume, signal a downside trend. The tone of the market was one of fear for the first time in a while.

Volatility returned as all major indices sold off. In a sadistic way I was glad to see the VIX shoot up almost two points pushing above 13. I have sensed a shift in sediment for a while, but today I felt it. Over the past few months I have been positioning my investments to reflect the changing economy. Overall they have held up well closing positive for a day that was down significantly. The nasdaq and S&P may sag in the near to intermediate term, however, global growth unlike any before it in history is unfolding. Subscribe to this blog today and watch me invest ahead of the mainstream.

RIO - Comphania Vale Do Rio was up sharply today as it announce further price increases for Japanese steel manufacturers. Further the falling dollar added support to a stock that is positioned well for a global expansion. I am staying the course as outlined on my website www.thesmartmoneyinvestor.com. I calculated IV at $90/shr and have a near term sell at $40. I bought RIO at $23/shr.
MATR - Matria Healthcare reported earnings today, and it seemed that no one cared http://phx.corporate-ir.net/phoenix.zhtml?c=84029&p=irol-newsArticle&ID=677746&highlight=. The stock beat estimates. It will be interesting to see how the market reacts tomorrow. No matter what happens I believe that MATR is part of a sector that is positioned for long term growth. The company supplies customers with quality healthcare below previous costs and realizes higher margins.

2/21/2005 Will Favor Fall with the Unfavorable

2005-02-21T08:58:00.000-08:00

The market is shifting gears, something the circulation of this blog has known since last November. Suddenly, commodities are where its at (I bought RIO last year now up over 25%) and energy is hot and getting hotter (I bought and sold VLCCF last year for a 200% profit). Investors are bullish in the short term and I am nervous. I am holding back investment, with some exception, as I wait for a true trend to develop. 1180 and 1217 on the S&P500 are important levels. A break either way on high volume will likely set up the intermediate/longer term direction of the market; in my opinion these levels are that influential. Options expiration was last Saturday, which usually sets up a flat period in the week ahead; and it happened on que. I think that we will see higher volatility this week as cash rotates (within all assets including bonds).

Unquestionably the economy is strong and growing. There is liquidity in financial systems and companies are stepping up their investments. Global market trends are pointing up, in concert with my prediction that global growth will out pace the growth seen in the 2000 tech boom. However, the smart money has already been in many of today's popular sectors and will likely look for fresh profit centers. I am not saying that I am going to abandon my current investments, although I may take some near term profits. But as the rotation continues I anticipate that there will be corrections* while signals of new opportunities are coming in. Some say it is best to be in the market between October and February and out from March to September. Last year I made a good portion of my profits in the latter period, I just need to be in the right places ahead of the curve. Tune into my website www.thesmartmoneyinvestor.com for a look at my actual positions and their entry/exit points.

VLCCF - Knightsbridge Tankers became a buy again last week, although I am less sanguine about its future. I am carefully accumulating shares below $38, however, I am not likely to build a large position. The company will go ex-dividend on February 23th reflecting the $1.75/shr dividend, perhaps this will be a buying opportunity as the dividend will go to share holders of record on February 25th. Earnings growth going forward can be a limiting factor for VLCCF, however, if anticipated dividends continue coming in well above the inflation rate the stock should hold its value.
ZHNE - Zhone Technologies is a manufacturer of telecom equipment from the network edge to the core. This company is run by the former CEO and CTO of Ascend Communication, which was sold to Lucent for $24B in 1999. The company survived the tech melt down and is just now becoming profitable. Recently, there has been large investor interest in the company as shares have started to rise and volumes have picked up (LIBM is trending higher). The telecom equipment sector has been on its butt for a long time and this year it has been among the worst. However, I do see a need for networks to expand as demand has finally caught up with current capacity. VoIP and HDTV are some of the drivers. I do not expect to see the stellar profit growth realized in the late 90's as the sector has become somewhat of a commodity business. However, ZHNE sports some of the latest in innovation and is much more responsive and nimble than many of its competitors. I also have noticed that a few of its competitors, like Redback (RBAK) have broken out doubling in value. I have started to accumulate some shares below $3/shr. I am being cautious though as this is a risky investment albeit with a high reward if I am right.

*Already, we have seen such names as Ebay (EBAY), Research in Motion (RIMM) and Symantec (SYMC) correct. Many times stocks will correct at the height of their profit cycles as large investors want out while someone else is there to sell to.

2/16/2005 If Bill Gates told you to jump off a cliff, would you? Probably

2005-02-16T14:30:00.000-08:00

Why Bill Gates is shorting the dollar.

In my experience most people are sheep. They find it easier to be told what to do than to create an opportunity for themselves and others. Since the beginning of civilization there have been leaders and followers. In general it has been a symbiotic relationship where leaders promote a vision and followers buy it then go with it. Sometimes the followers, who are in the majority, get edgy, disgruntled and may even revolt. What then? In many cases the leaders do what Caesar did, they distract them with gladiators or entertainment. What does this all have to do with Bill Gates? Read on and you be the judge.

Bill Gates is the full package, a modern day John D. Rockefeller. Of all the digerati who shaped the earth in the 1990's no one was more than Bill Gates; not Jobs, not McNeally, not Ellison, not anyone. Gates basically picked these guys clean and let them eat when he was done. Sure, they are all worth billions, but Bill is worth hundreds of billions; and there is a big difference.

Bill did surgery on everyone he wanted to. With razor precision he built Microsoft. When Bill's prey saw him coming it was too late. Bill is an engineer and a ruthless businessman, a unique combination able to deal with the rational and irrational equally well. The people I know that have dealt with him say what my mom use to tell me about trouble, "if you see Bill coming go the other way". Bill is not known for telling the public what his plans are. In fact, the only time a good CEO lets the public know their plans is when it suits them.

Knowing what I know about Bill Gates makes me wonder why he went on national television and announce his plans to short the US dollar. Even more interesting is the timing of his announcement. Within a month or so of agreeing to serve on the board of Berkshire Hathaway, Warren Buffet's company, Bill let everyone know what he was doing with the dollar. Perhaps even more interesting than that is the fact Warren Buffet let the world know that he was shorting the dollar a year or so ago. And you know what is even more weird than that, the dollar went down. Warren published this didy for stock market investors http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html a while back. From an elementary level it seems sincere, insightful and logical. The only problem is that I cannot help but think back to what I know about Bill Gates. All this transparency does not add up. I could be wrong, but something seems out of place.

I asked myself the question: If I were Bill Gates why would I announce that I am shorting the dollar? To answer the question first consider that Bill Gates' wealth exceeds that of many nations. Bill is smart and unlike some nations Bill distributes his wealth across different currencies. The same is true for Warren Buffet. If I knew I could drop the value of the dollar beyond its already low levels and I held wealth in other currencies...well to put it simply "Land Grab". A low dollar (relative to other currencies) puts all US goods, services and ASSETS on sale including US companies. What if you could buy the company of your dreams at a 30% discount or more. Hell you could probably fund a number of great buys given the price of funds or you could sell off one of your assets, say Gillette or maybe give yourself a shot in the arm with a $3/shr dividend. If I am correct, I am sure Bill and Warren's motive is not to grab whatever they can, especially given that they have teamed up. If I were them I would have a strategy like taking control of the media to guide public opinion and place investments in the way of that opinion. Recent 13G filings with the SEC show that Bershire Hathaway has made large investments in cable and communications companies (Of side interest is that George Soros has followed suit).

I think you get my point. When there is a monumental change in currency values you can bet there will be a power struggle between global power brokers. The force of monetary change and the momentum in money flow will make for opportunity. Stay tuned as I will expose some of these opportunities in future postings and place investments in front of them that profit.

2/15/2005 Catalyst?

2005-02-15T08:14:00.000-08:00

Yesterday was the slowest trading day of the year. Periods of notable high or low volume are generally significant in the short term for the market. I believe the market has taken pause as it waits for Allan Greenspan's testimony to the Senate Budget Committee tomorrow and Thursday, which is speculated to be positive. It is also possible that the rise in the S&P500 over the last two weeks is running out of steam and investors are lightening their buying as they speculate a global recession will come sooner rather than later. In either case one can argue that near term a catalyst exists to move the market in a meaningful way. I am staying the course until the S&P500 breaks either the 1217 or 1180 levels. Moves either way will define the market trend.

Conventional thinking is that a slow down in Europe and Japan project trouble for global growth, I argue that is not exactly true. True, lost growth from major economies increases resistance to US growth. But times have changed as communication technologies are globally adapted and ideas are quickly exchanged by more people than ever before. The third world is now becoming the second and perhaps is moving to be the first. China is picking up some of the slack lost by Europe and Japan, but what about India, Pakistan and many other third world countries. Have these economies been taken into account by the stock market http://www.ecommercetimes.com/rsstory/40418.html (this story in Ecommerce Times sites one example). I think that growth in the third world may be under estimated by the market. It is possible third world growth will out pace the ground given up by the larger economies and will benefit US companies. These countries tend to have currency values closely related to the US dollar and are giving the US a one up in bi-laterally trading with them.

I believe that the trend for global growth is up and will be good for the stock market long term. In fact, the globe is growing faster and bigger than anytime in history. Business is cyclical and moves straight up and down rarely occur, there will be fits and starts. Tomorrow's testimony by Greenspan may profoundly affect the market, but ultimately business is going to grow around the world. Stay tuned and watch were I move my capital. Check out my website www.thesmartmoneyinvestor.com to see the specific details.

RIO - Comp Vale Do Rio has continued to move higher amid some researchers' down grades. Some argue that commodity prices for copper and steel have topped. I see more growth for many of the reasons I site in my discourse above. I continue to accumulate shares based on my targets.
VLCCF - Knightsbridge Tankers has moved to a technically strong position. I am investigating the situation and am considering putting new capital to work with the company. A move to the 50 dma in the short term would likely be a buy. Stay tuned as I present my ideas in this forum.

2/14/2005 Catywompus Signals

2005-02-12T16:10:00.000-08:00

Trading patterns that generally occur during market reversals seem to have been randomly generated the last two weeks causing several false starts. I am not sure if it is because large investors are rotating investments at a faster than normal rate or if big buying is being met with big selling as a bear bull tug-of-war is under way. I am finding it hard to make larger investments and am likely to stay the course until a more defined trend develops, namely a solid move above 1217 or below 1180 on the S&P500.

APOL - I was quickly stopped out of APOL last week faster than ever before. Fundamentally the stock is strong with an intrinsic value of more than 2x its market value. EPS growth rates are above my minimum 25% for 2006 and new markets for the company are under development. The stock did break down technically (in classic fashion) 6-8 months ago as its peers went through allegations they violated SEC and Department of Education laws. In January the SEC exonerated Corinthian Colleges of the charges and more than lightened the groups over hang placed on it by the stock market (see: http://biz.yahoo.com/fool/050125/1106669520_1.html). The stock built a base and technically staged a buy signal. I started to accumulate shares around $77 with a stop at $75, which was just below solid support. If you follow my blog you know that I was stopped out in only two days, only to have the stock bounce back to the buy point. I am a bit nervous about getting back in. APOL was a favorite of day traders a year or so ago. Perhaps I was a victim of market makers clearing out the fast money or just got in the way of large investor selling. In any case the move was atypical. Although I like the stock I am apprehensive about investing in it until a more defined trend develops.
FRBK - First Republic Bancorp moved higher last week on increasing volume. The successful spin off of its Delaware division and the announcement of a new strategy have increased the combined value to over $18.60 (20% return). I started to accumulate shares at $15. The increased interest in both FRBK and its spin-off FBOD give me some confidence that others think the bank made a good move as well. FBOD is using Delaware's favorable banking laws to expand its Payday loan program, which allows the company to charge annual interest rates above 440%. The bank has a fresh marketing approach to selling its payday loan products. Recently other companies like EZcorp, a pawn broker gone payday loans lender that operates in 11 states has seen much buying. EZ corps P/E is at 24 whereas FRBK and FBOD are around 12. Regional banking is currently attractive as it is on the path of economic least resistance as well as a candidate for consolidation.

The trend is your friend and the stock market's recent tight trading range have made it difficult to get investment traction. I am still worried about the lack of fear in this market. Currently, I am working on the state of China's banking system and the value of the dollar. Stay tuned as I will be posting my opinions shortly, perhaps we should be scared.

2/11/2005 The Trend is Your Friend

2005-02-10T22:02:00.000-08:00

The general trend of the market has a profound effect on its individual components. There is a tight correlation between the trend in stock prices and the trend of its indice. The earlier I identify a trend the faster I can make a profitable buy or sell. This premise is why I spend a fair amount of time studying the major indices and also why I almost always start my posts with a technical view of the S&P500 and nasdaq.

Comparing the S&P500 and nasdaq composite since the beginning of 2005 reveals an obvious divergence between the two. A short term view of this divergence is striking as the nasdaq is 4% below that of the S&P500. However, I think that it is interesting to analyze the whole journey, in this case the period from January 2004 to the present and then beyond.

To build a perspective I first looked back between January of 2004 and July of the same year. During that time the S&P500 and nasdaq moved closely together with a tight correlation between their percentage moves. Starting on July 12, 2004 the nasdaq broke step with the S&P500 and experienced an accelerated divergence falling 13% for the calendar year verses about a 7% drop for the S&P500. On August 12, 2004, both indices bottomed in lock step with the nasdaq several percentage points below that of the S&P. The VIX closed at 19.97 and fear and uncertainty about the up coming elections was at a high. On August 13, something changed. Investors started to speculate that the election would be beneficial for the market and all would be right with the world. From the August low to the end of the year the S&P500 rose about 12% while the nasdaq rose about 24%. Even before the year ended I noticed sector rotations as large investors started their stealthy switch to fresh investments. Fund managers were able to keep index prices high as the market topped year end on declining trade (disguised as holiday volume). The journey from the 2004 lows through the end of the year summarizes the technical moves of one market cycle. Thinking back the market was fixated and driven by a political tug-of-war and speculation as to its out come. It makes sense that the next business cycle will, in part, be defined by the execution of the new adminstration's goals.

With the election behind them large investors started to speculate about the next business cycle, one that was driven in part by conservative politics and the President's agenda. Investors got what they wanted out of the 2004 election and the market moved higher. However, on the first day of 2005 investors woke up to the realization that their investments were likely to be affected by the President's agenda and his ability to execute on it. Through January the market corrected as investors took profits and positioned themselves for the next business phase. Fear did not rise, as measured by the VIX, but the S&P500 and nasdaq diverged once again with the Nasdaq falling about 5% while the S&P500 was down only 2%, hinting that a transition was underway. Confidence in the President began to build when the Iraqi elections were held as expected, job growth continued and earnings remained high. Investors, started to buy stocks again on a broad basis and the market recovered some of January's losses. Whether or not you agree with this administration's goals I believe the market respects the President and his ability to get things done and are investing by giving him the benefit of the doubt.

So, where is the market trending and how will I position capital to get the best return? Clearly, politics are a driver and how the President's agenda is executed will steer the economy. The economic realities of increased government spending, a falling dollar, high energy prices, terrorism and rising interest rates effects of this administration's platform. Each of those economic realities has their balance. For example, increased government spending means more debt for the country to pay off; however, the money is invested and has a return. When businesses borrow they do so in the hope that they will have a return greater than the cost of the funds, believe it or not it is the same for government. President Reagan increased government spending on the military and brought us an end to the cold war, the internet and advances in technology to numerous to list here. Further, a falling dollar does devalue American assets relative to the rest of the world, however, it makes US businesses more competitive with lower cost labor societies and facilitates paying off our debt to creditor nations at effectively a lower rate.

One place large investors are placing investments is where government spending affects are felt the most. Also, large investors will move cash to areas of the economy that will inflate due to the change in the value of the dollar. Below is a list of this years top 5 performing sectors. It is obvious that fresh money has been put to work in these areas. Notice that commodities are well represented, a usual beneficiary of a low dollar environment. Also, healthcare is high on the list, however, not making the top five today. My Focus13 universe, the 13 stocks that I currently follow, represent many of these sectors. In January of this year my return was +5.5% verses a fall in the market. I am adapting my investments to grow as a result of the government spending that continues to reverberate through the economy. These investments include stocks that are in sectors which are complementary to the mainstream government spending beneficiaries.

Oil and Gas +15%
Home builders +11%
Steel/Alloys +10.5%
Commercial Printing +10%
Flour and Grain +10%

I believe that the general market will trend higher this year. It will be driven by many factors including goverment spending and global growth. However, the leaders of the past will change as a new business cycle begins. I do not expect the market to move straight up nor do I expect all stocks to have the same move; certain sectors will out perform as is always the case. The economy has its challenges and will be subject to volatility. One of my biggest fears is that this is no fear. If this complacenty persists I fear for the market. Perhaps that says something about the trend.