Stock Action on week of 3/13

[Fish2006]

Well, the volatility continues. Some things to consider:

We are within 50 points of this years high on the S&P index. Things are more volatile, but it is hardly a bloodbath.

Subprime - bad mortgage debt affecting the market at large, is going to be blown out of proportion. The biggest losers are going to be bad underwriters who wrote "liars loans" using stated income, option arms, 125% financing, sometimes all at the same time. Amazing when the market realizes that you can't own a million dollar home with 100% financing on 50k per year (seriously, people in CA were doing that using option arms loans with stated income).

Forex is the real driver of the market right now. There are fundamental reasons for that, but moreover, psychological reasons (people scared of the yen carry trade) - are ruling the day at this point. Forex problems (weakening dollar) causes companies that are primarily valued in US dollars to become worth less money on the world market. As well, in a world where the value of oil is measured in US dollars, a weakening dollar causes the price of oil to go up.

For defense, be in large caps that operate internationally - especially if they have been hammered in recent weeks. Companies like GE, C, XOM, MO. Capital expense (see last weeks note) is key, but anything that will be bought when there is a "flight to quality".

Flight to quality will also benefit high-grade corporate debt. Buying the LQD EFT is a way to get into that game using a normal brokerage account. Consider also looking into higher grades of corporate junk bonds (i.e. B and above) - possibly through a mutual fund, should the spread between B rated corporate junk and investment grade corporate bonds increase to more than 300 basis points.

Avoid US based utilities (no international exposure), avoid war stocks like HAL, and for god sakes, avoid anything related to the subprime mortgage market until April, at which point, the brave should probably start to bottom fish (i.e. Countrywide - CFC, under 30 isn't a bad trade - its getting hammered because of it subprime unit, but has much better underwriting than some of the real stinky subprime lenders like New Century).

[Kevin]

Good stuff.

I love those blue chippers you mentioned too. MO and GE are ROCKS!

[fitter]

Even though the subprimes are hammering this market, there appears to be a ton of money just waiting to get in. A lot of corporate money, fund money, etc. just waiting to get in. With a reported depreciation of homes in some areas, people just may not feel like they're getting ahead right now. Plus, corporations are annoucing cutbacks, downsizes, and outsourcing just about every day. Makes a lot of people jittery. A lot of puts right now, so it appears that the pros are looking for some downpressure before a return to the upside. It may be time to look into the "rocks", but I just wonder how much value and upside is there to companies with the market values they hold now. Agree with international exposed companies, just wondering why the opinion of downside to US based utilities. Some basic good returns on yields in some, and some have a nice return so far this year. MO is being touted thruout some areas, and I do hold some of MO, but it has been weak thus far for the year to date (down a little over 4% year to date). Hopefully it will turn around. Maybe this is one of those times to just sit, wait, and let the dust settle before moving in either direction. A lot of "antsy" folks out there right now, and I'm sure some fund managers are spending a lot of time on the phones w/nervous clients. Some pundits keep telling everyone that the fundamentals are very strong, but IMO, I am starting to see some very weak signs. I still believe that the market will turn around to a very good upside this year, and to add insult to injury, every time we turn around there appears to be another shot across the bows in DC. Invest in Tums and Rolaids for now. Any input is appreciated.

[Fish2006]

Reason I dont like domestic utilities is that you get the worst of being tethered to the dollar, plus energy market risk.

The key to this is buybacks and private equity activity. A lesser part of this is the upcoming sarbox act reform, which will reduce the costs of a lot of small and mid caps later in the year, if it passes.

Right now, we have a massive overpricing of risk because of subprime and forex fear. The S&P multiple at 13 or 14 is almost silly. We have this strange dichotomy of inflation fear (economy growing too fast) - and deflation fear (homes depreciating, stock multiples declining, global slowdown, etc.).

The reality is that the fed hikes and japanese liquidity tightening are driving us towards a deflationary trend. This means, in all likelihood, if the economy starts to slow down, we will get lower interest rates from the fed, which will un-invert the bond yield curve in the 2007-08 period.

The further lowering of rates will drive people back into housing, which I think bottoms in most areas around mid-year, and starts back up at more realistic levels in most areas (4-6% annual). You can't tell me that if you are getting A paper mortgages at 4.5% with zero points that people wont jump back in with abandon.

The lower rates will also, as usual, drive up multiples in stocks, back to around 17, reflecting the real amount of risk and growth in large cap, blue chip stocks. This, of course, will mean a 18% bump in stock prices from where they are today - putting the S&P around 1650.

Thanks for the post!

[fitter]

A paper w/ 4.5% would definitely allow momemtum to turn around to the plus pertaining to the real estate portion of the economy. But, and I say this with just a laymans view, with the subprimes gathering rot, and the possibility of knocking out a pretty sizeable portion of homebuying costumers (the subprime lenders and consumers), I wonder how much the direct effect would be on the economy. The 4.5% might allow those that did not or could not remortgage 18-48 months ago that option. But, with material costs skyrocketing, and no relief in sight, and with the predicted tightening of the lenders as a whole (until money flows again- then all will be forgotten), new home construction may only see a modest increase, and those that got in w/questionable credit may miss this run. I, like you, forsee a run up in the market on large caps due to money sitting on the outside waiting to get in, and there is a ton of it. Earnings were pretty good for the last 3-4 quarters. The mention of the sarbox act reform is something I am unaware of, in context and in meaning. May be something I look into in reference to small-mid caps. My feeling is there are some very attractive mid caps to look at right now, if you have money to "play" with. And the fact that you mention Japan's tightening leads me to believe that you are about 6 steps in a 12 step program ahead of me. It is just hard for me to envision some valuations of these large caps in terms of worth that is larger than most countries in the world. I do have a concern with China's way of controlling their money. But, beware of the "global economy" per say. With some hard and true companies that resisted moving production/services out of the US doing so now, it may only be a matter of time before the middle class that this country depends on for economic well being is squeezed out of the equation. Some of that discussion is political as well. That could be interesting. Always appreciate any return advise and items for discussion.

[Fish2006]

As far as housing goes, the bottom will be much lower than now before the end of this half.

The subprime rot is going to play out with a ton of renters re-entering the market. On the real estate side, savvy investors are going to bottom fish good rentals as rates drop while rents actually increase. What else are they (the people who are foreclosing) gonna do! They are gonna rent something. Never been a better time to get into the slumlording business!

Personally, I am considering looking around in certain areas of where I live (Chicago area) - looking for 4 unit jobs in poorer areas of the burbs and renting them to section 8 people at $1k/month/unit. Ive seen em (4 units) in the area going for as low as 350k - which if you can get at 5.5 on an IO, with taxes, you still net 12k/year, with zero appreciation.

I guess what I am trying to demonstrate is that, at some point, investors support the housing market from the bottom. With 4.5% rates, the cost to carry at A credit a typical 100k 1-2 bdr condo is approx 6000/year after tax. A 3 bdr single family is around 15k/year. With a surge in renters that no longer have access to cheap money to buy these places, investors with access to cheaper funding will fill the gap.

The only difference is that the rich will get richer, and the people with bad credit will no longer enjoy the pleasures of rising home equity. However, with the Democrats coming in, some of those same folks will get their money the way that Democrats prefer to, which is to hand it out themselves in small chunks to everyone regardless of personal discipline, rather than do it through letting them invest and create their own wealth through being a disciplined investor.

I think the middle class will be fine. Despite all the doom and gloomers, most people in the middle class still have reasonable credit scores and access to mortgages. Household net worth is at an all time high right now - they have been buying stocks, homes, and other investments, rather than putting it into their savings account (why the national savings rate is considered important, but does not include 401k or investment accounts, is silly).

It is changing though. The days of the secure job from a company are rapidly disappearing. Most of what I see is that people get their job security from the network of people they work with. People are fast becoming independent contractors and freelancers en masse. While it is more stressful, the upside is greater. Seldom anymore does one person (your boss) control your entire destiny, because your boss will change frequently. Even in big companies, the speed at which M&A happens means that you have to adapt to structural change more quickly even in the corporate sector.

The biggest problem I see is that, for a lot of people in the economy, there is a lack of financial planning. I know guys who make 6 figures who live paycheck-to-paycheck. I've seen single mothers who spend $800 per month on groceries because they never learned how to cook. Stupid **** that people do that keeps em poor and not investing. I would love to see Best Buy lose half it's stock value (from people spending less on big screen TVs) if that money got invested into promising drug companies or tech startups instead. But I don't control the world, I just observe it, and invest accordingly :glass:

[Bucknut]

great stuff and you make a ton of sense with the housing market. A buddy of mine said his rent is going up so much that he is forced to buy a house, which is perfect for the first time home buyer. Do you have ant good plays in the $5.00-$10.00 range

[Fish2006]

lol - I dont play the 5-10 / share game. I would rather own 1 share of a good company than 10 or 100 shares of a bad one.

If I were, however, to look at small caps, and not buy a sector fund (which, frankly, is how I handle small caps in my portfolio) - I would study up on which biotech drug companies have something promising, and buy a few thousand dollars worth of the top 5 - but not after a TON of painstaking research.

Never, ever, ever, buy a stock because of its nominal price. Buy a stock based on PE (price to earnings) relative to value and growth rate. Figure out how much you want to invest (never more than 2% of your portfolio in any one name), divide that number by the share price, and buy that many shares. If that means you are buying 1 share of GOOG at $450, or 100 shares of DICKWAD at $4.50, it means the same thing - if you have done the research.

[Daws1089]

great stuff and you make a ton of sense with the housing market. A buddy of mine said his rent is going up so much that he is forced to buy a house, which is perfect for the first time home buyer. Do you have ant good plays in the $5.00-$10.00 range

Not trying to hi-jack this thread, but i saw this and i wanted to throw out there a stock that i'm a big believer in. SVLF which is 4.80/share is a timeshare company based out of texas. They are a very solid company financially. Lots of opportunity for growth as they have recently acquired a Colorado ski resort and a water park. They have produced better earnings than expected each quarter last year. Banks have also been a believer in the company as SVLF now has a credit line of 100 mil. The stock just moved to the Nasdaq and it is pretty much a stranger to anyone. No one knows about the stock which isnt necessarily good, but when the stock gets some press time it should trade at well above the 4.80 it is now. Thats my 2 cents.

[Bucknut]

Thanks for the info. I have been lucky in the past on some bio stocks......BSMD which I bought @ 1.12 and sold for 45.00. Some of the stocks I look at don't have a P/E listed. Another I have is GNVC which is going in the right direction, up 45% right now.

[Kevin]

lol - I dont play the 5-10 / share game. I would rather own 1 share of a good company than 10 or 100 shares of a bad one..

THIS IS GOLDEN ADVICE.

[Kevin]

Thanks for the info. I have been lucky in the past on some bio stocks......BSMD which I bought @ 1.12 and sold for 45.00.

Congrats on your home run and that is indeed a tape measure one.

Keep in mind that the avg investor is going to strike out 15 or 20 times for every dong like that though.

Not that I'd ever insinuate you change your style because for all I know your a genius with great vision, but to the newbies out there, that type of ROI is not the norm. Just wanting to note that.

Great job on your pick. That feels damn good I bet!

(im a pussy that only plays blue chippers lol)