Needed to think

Ok, its been a long time since I blogged. The year has been good to the portfolios but the last 3 months - not so good. I thought I'd talk it out with myself here. I held the mid caps, and retailers too long. I let too many stocks get too stretched simultaneously and ended up with correlation issues - to quote C. Brown "Aaaauuuggggghhh!"
Ok, here's the scoop, everyone's looking at the real estate issues and makes the easy transition to get down on the economy. The real estate issue is real - long term, but may get a bounce in the next 6 months if the Fed begins to lower rates, the long bond is already acting strong, and with any further weakness in housing the Uncle Ben and his rice are likely to plump up the economy. The lower rates may provide stimulus that no one is looking for to continue to support the economy - look for the rally that no one else sees currently.
Here's the scoop, other than a brief rally commodities and the stocks they move, specifically related to energy (yes that includes ADM's ethanol run) and metals are done - gold bugs and oil speculators are about to take a beating. Too many speculative players with too much speculative money in the game, we're going to find that commodities actually can't float to the sky, they are are tangible, heavy and will return to the earth via gravity with a 'thud!'
What is going to go up??? Techs! Yes, too many investors can't stomach buying these after the millennium Bear but they are acting very well - nearly every area of tech is working - even old biggies like CSCO, ORCL, and EBAY looking interesting and cheap. Ok, over and out I'm starting to put some thoughts together that I like.

The most consistent momentum sector since the end of the Bear market has been the Utilities and in the coming months it will probably continue to be an attractive place for money. However, a view of the very near term shows they are a bit too stretched and way too consistent (straight edged advance for 12 1/2 months) and a near term challenge of all time highs (DJ Utility Average) is likely to effect a sell off - add on the sell off. From there the play is likely to not be long term so dividends and capital improvement are not likely to receive favorable tax treatment.
Healthcare providers and payors as well as Oil stocks & oil service look stretched and vulnerable to excess downside should they break their rally. Prior to that a spike is always a possibility - in any case its a time to be very sensitive to any breaks - money will be made and lost here. Countrywise the commoditycentric Canada and Australia look highly vulnerable (ok throw in the commodities themselves) to large declines when they begin to break, as does Austria and I'd keep an eye on Latin and Western European stocks for increased risk levels over the next 12 months.
Gold bugs - Some gold bugs tell me the metal is going to rally because of inflation, others tell me it will rally because of deflation - ??? - It doesn't seem congruent that both stories hold water.

"HE'S BACK!"

CLOSES, 06/24/05: Dow 10298 (-1.19%), S&P500 1191.57 (-0.76%), NASDAQ 2053 (-0.84%), Russell2000 630.41 (-0.59%), TBond 118.94 (118.94%), US$ 88.71 (-0.36%), Lt.Crude Oil 59.84 (+.71%), Gold 440.08 (-0.34%), VIX 12.18 (+0.05)

I've been gone for 7 months as daily reviews seemed a luxury of time that couldn't be afforded. However, in review the effort to diary daily was a worthwhile and helpful exercise. So, that out of the way... The market has been short-term stretched recently at a time that the VIX just kept moving to lower relative levels, it broke mid-last week and is likely to continue down over the near term.

Fed meets/announces Wed. or Thurs.

Short Term Direction --- Lower
Long Term Direction -- Unresolved

INDUSTRY REVIEW
The sectors to add new monies seeking possible long-term gains include Techs (but not boxes), Healthcare, some Financials and Asian issues. The sectors to avoid/short include those involved with the industrial sectors including, non-energy Commodities, Cyclicals, Chemicals, and the ways they're Transported, avoid Europe.

S&P500 VALUE STOCK REVIEW
Attractive stocks for long-term gains; A, ADI, AMAT, AMZN, ANDW, BLI, BRCM, CHIR, CSCO (yes csco), DCN, DJ, DPH, FHN, FNM, FRX, GM, IGT, INTC, JPM, KG, KO, LLY, MBI, MOLX, MU, MYG (on dip), MYL, PFE, PMCS, UVN, VC, WMT, WPI,

VALUE ACCUMULATES
Reits $DJR, IYR
Internet $DOT, $IIX
Pharma $DRG
Insurance $INSR
Healthcare $NHG
Health Products $RXP
Networking $NWX
Tech $PSE
Semis $SOX
Brokers $BDX
N. Amer Telecom $XTC
Financials (IYF)
Asian Markets

Avoids
Commodities $CRX (non-energy)
Cyclicals $CYC
Chemicals $DJUSCH
Computer Hardware $GHA
Transportation $TRAN
Europe Markets

Quotes Abelson

conspicuous by its absense
what the sound and fury about ...
clutching at fantasy
commented on their exodus
and their presumed virtues
Twain - "No man's life, liberty, or property is safe while the legislature is in session"
unlamented 108th Congress
viewing the workings of Congress through a cynical lens
tourism is Alaska's biggest contibutor to the state's economy, after oil and Eskimo pies

Year End Rally & The Fed

From Michael Belkin, "The year-end rally has its roots in Federal Reserve monetary policy. The Fed expands its balance sheet by buying and repoing Treasury securities to accommodate the holiday shopping season from mid November to early January. The liquidity boost usually spills over from money markets into equity markets. So, barring some terrorist calamity -- stocks are likely to float on monetary helium until early next year.”

Joke: What do you get when you mix a Derelict and a 90 Yr Old?

Kmart is buying Sears - A recent immigrant from the land of bankruptcy and a retail dinosaur hope to team up to compete with Wal-Mart, Target and Costco - what are they smoking? Do they really think they have a chance as a tag-team partnership or are they just going to have a joint suicide and sell off body parts or at least real estate and plum divisions?

CPI and PPI climbing, but no one cares, the Dollar is in a free fall but no one cares - least of all the Treasury Secretary who is intent on letting it fall for a short-term boost to our economy at the expense of others and to stable pricing - I can only think that Snow owns a lot of gold coins. Does anyone remember the dollar's freefall in 1986 and 1987 and its financial contribution ?

Portfolios: I have to admit to benefiting large from a high-beta sectoral rotation theme based on liquidity flows - the momentums - I don't believe this move is fundamentally based but instead on a monetary sugar rush. The next post will quote Michael Belkin on this year end phenomena.

High Alert Remains.

Ok, so my high alert call has been for naught, and my cash is trash. Although the markets stretch marks are quite evident to all that view her, she continues on her rally guided pursuit. I remain on high alert but will not raise additional cash until the market begins to roll over - then cash will be king.

Short Term Equity Correction Imminent

The post-election rally has been impressive, coupled with it a rapidly declining cost per barrel of Texas Tea and the thirst for equities has left most indices at their most extended levels since late January of this year. In response to various nagging stimuli I'm anticipating a 2-5% broad equity correction to commence within the next 1-4 trading days.

In making this case I first note that all major US market indices are extended (see list below), add to these issues the Bulls to Fear Factor is out of line, to create this ratio I calculate the S&P500 relative to the VIX (an option premium pricing measure), the ratio closed today at a nosebleed level of 89.99. The VIX alone is at a bothersome low of 13.04, thus showing no Fear of investors seeking insurance on positions, this index has dropped below 14 on 7 separate occasions this year, each led to a swift decline within days. Investors Intelligence's Bullish investors reading is at 58.1%, readings above 60% have proven incredibly prescient regard market corrections. Finally, proprietary market breadth work has shown signs of strain for several days.

What will initiate the short-term correction? Who knows, my #1 suspect is oil which may begin to rally correcting its recent sharp decline to an oversold condition. Another possible suspect is the military initiative against insurgents in Fallujah which could be prone to bogging down, still another suspect could by a successor issue to Arafat (who passed away overnight) or finally any of a vast litany of other known and/or unknown suspects. Regardless of the commencing spark, it is this managers opinion that the chances of a broad equity market decline beginning in the coming 1-4 days are in excess of 60% and as high as 75% by the end of next week. The only thing I see that could represent the other side of these odds are the markets recent momentum which has led to breakouts in most major indices with the exception of the Dow30. I'm adjusting the tactical portfolios accordingly with my odds - my money's moving to where my mouth is - I just can't find many safe havens other than cash as this time REITS, utilities and dividend paying stocks are also stretched and offer no comfort.

STRETCHED INDICES: SP500, Dow 30, Amex, Consumer Stocks (especially cyclicals), Utilities, Healthcare providers, Industrials, Transports, Financials, Mega Caps, Large Caps, Mid Caps, Small Caps, Wilshire 5k, -- Everything with the exception of Energy, Big Pharma and Insurers which have all been subject to dark news in recent days/weeks.

A Bush Vote Is Good For Stocks.

A Bush victory would be postive for the economy and for stocks. Tax breaks and deficit spending are stimulative economic behaviors, couple them with attractive taxation on stocks (15% LT capital gains tax, and a 15% dividend tax) and you get a potent mix for equities. Many investors are waiting on the sidelines fearful of administration change and the reshuffling for economic sectors favor that such change assures, and/or worse they're fearful of a hung electorate. I suspect this latter fear has almost no chance of transpiring, regardless of the medias high hopes and its efforts to raise expectations of such a non-outcome outcome. Should Bush win 4 more years watch for an equity rally, with extra emphisis on healthcare. If Kerry/Edwards win uncertainly will rule for months. Good luck Mrrs. Bush and Cheney may wisdom be your guide.

Bullish
Treasuries
Banks
Basic Resources
Building Materials
Chemicals
Construction
Divers. Tech Services
Utilities - Electric
Utilities - Gas
Utilities
Energy/Oil/Services
Fixed Line Communications
Home Construction
Industrial Transportation
Leisure
Lodging
Mining/Metals
Precious Metals
Railroad
Real Estate
Recreational
Retailers - Specialties
Tech Services
Telecommunications
Textile/Apparel
Wireless Communications
Transports
DJ Utility Average
Midcaps
Australia
Canada
Sweden
Italy
Belgium
Austria
pain
Singapore
France
Hong Kong
United Kingdom



Bearish
Auto mfgs./parts/related
Beverages
Biotechs
Communications Tech.
Consumers
Cosmetics
Diversified Financials
Electrical Components
Food/Beverage/Food Retailers
Furnishings
Gen. Industrial Services
Healthcare
Heavy Machinery
Insurance
Large Caps
Large Growth
Non Cyclical Goods/Services
Paper/Products
Pharmaceuticals
Pollution
Semiconductors
Tech
Tobacco
Toys
Dow Jones 30
Nasdaq 100
Nasdaq Composite
Small Caps
S&P500
Wilshire 5000


Japan

3rd Quarter Review - Expect 3.8 - 4.1% GDP Growth (announcement date 10/29/04 8:30am)
Manufacturing was strong
Transportation was strong
Housing was strong
Retail was initially strong and falter thru the quarter
Expectations for a slowing in economic expansion several quarters out has held down stock prices.

4th Quarter Expectations - Expect the weakest quarter in what has been a very strong year
Oil is slowing consumer
Housing is strong
Retail slowing

Equities for 2005
First year of a presidental cycle
Lower P/Es positive
Lower growth & earnings growth but reasonable
Balance sheets are improving as debt as a % of total capital has decreased, and interest coverage ratios have improved.
Earnings and stock prices traveled in differrent directions in 2004 and although prices are not cheap it might appear that reasonable returns will be available in coming years.

CLOSES, 10/15/04: Dow 9,933.38 (+0.39%), S&P500 1108.20 (+0.45%), NASDAQ 1,911.50 (+0.45%), Russell2000 568.42 (+0.80%), TBond 113.00 (-0.36%), US$ 87.09 (-0.57%), Lt.Crude Oil 54.93 (+.30%), Gold 420.10 (0.14%) VIX@15.04

SECTORS: Winners - A pallet of green as all sectors were positve today. Leading the way were Materials up nearly 1%, Utilities and Consumer issues were up about 3/4% Tech was up just over a half. Losers - None

INDUSTRIES: Winners: Trannies and Gold were both up over 2%, Bios, Banks, Brokers and Chems were all up over 1%, REITS, Retailers, Commodities were all up over 1/2% Losers: Drives were down over 2%, Airlines were off over 1%, and Internuts were off a half.

'Temporary Soft Patch' or 'Persistently Sticky Quagmire' - 10/8/04

MARKET DAY: The equity market fell nearly 1% today weighed down by lower jobs and higher prices for a barrel of slippery black stuff. A rush to safety was prevalent as Gold, Commodities, and predictable income streams (bonds, REITS, utilities) all rallied- the general rush to safety stuff. Missing from the safety rally were Consumer Staples issues, as weaker and weaker retail figures suggest that the consumer is running out of steam to carry the economy's growth from here.

ECONNEWS: September payrolls grew at a paltry 96k vs. 150k consensus forecast and the more optimistic whisper forecasts of 200k. Adding further new job insignificance was a downward revision for the August figures which apparently were more like 128k than the 144k previously reported by your friends at the Bureau of Labor Statistics+. It could be an anomaly but announcements this week that Bank of America and AT&T are jettisoning a combined 12k employees were not brightening the picture.

MORE: Not everything was down today, as fear was in a bullish run. Oil continued to rally quite impressively and is now decisively above $50 @ $53.31, a level that would normally foster discussions of perkier inflation. Keeping inflation chatter idle are the incredible shrinking interest rates. Yes, that 'temporary soft patch' that Fed Chief, Alan Greenspan, labeled for the economy is quite possibly less temporary , and even softer and more patchier than even the 'ye olde wise one' had previously reckoned. A weaker economy is likely to cause the Fed's band of brothers to remove their collective FOMC foot from the higher cost-o-money accelerator.

Now, doesn't that all just make perfect sense?

THE MARKET WEEK AHEAD

• Monday will bring Sweden's Noble's announcement for the laureate prize in Economics. Ever ready, I've polished my shoes and polished my acceptance speech - 'I'd like to begin my long list of 'thank you's with my Mother and Father....'
• Tuesday begins earnings claims in earnest. Lots of anticipation over Intel - with all the negative pre-announcements in Semis I have to believe INTC likely to acknowledge disappointing sales, margins, inventory levels and a negative forward outlook - Uht Oh!.
• Wednesday is the last Presidential Debate - Zogby polls are now suggesting it's the challengers race to lose.
• Thursday is the trade deficit figure and an early morning speech by Fed Govenor Bernanke, speaking at the CATO Institute he's likely to toss out a eco-zinger or two. He just can't stand to not have a pithy sound bite.
• Friday will be September retail sales figures, and the producer price index - all eyes and excuses will be on weather and oil.
  

Jobs or Slobs? - 10/7/04

THE MARKET: Today's market looked like a complete reversal of yesterday (plus a little for measure). It remains unsettling that the equity market has priced little in the way of risk premium. Risks and uncertanties that easily come to mind include; possible extension of economic malaise (Greenspan's 'soft spot'), oil teasing $53 a barrel, a miriad of negative pre-announcments by Techs and Consumer companies (including KO and PG - 'say it ain't so'), Iraq, terror uncertainties, the Presidential election, FNMA raising corporate governace issues again, parabolic budget and trade deficits, increasing inflation, decreasing manufacturing jobs, slowing retail sales (bad for biggies today), etc... The VIX has moved back above 14, up from 9 year lows, but continues to confirm that fear is not a component being priced into the equity markets, similiar low levels of fear are apparent in the high level of bullish advisors (55%) and low yield spreads in junk bonds over Treasuries.

Are stocks climbing a wall of worry or are there issues yet be dealt with and appropriately priced via further discounts. I can't shake the feeling that we will yet again price in additional premium for potential future risks - today it's just not there - maybe it will come. Possibly a sign will be offered in tomorrow's September Jobs figure which Bloomberg is publishing a consensus # of 150k. I'm thinking it could be a suprisingly problematic figure. It's been brought to my attention that recent hurricane activity doesn't help and that the highly correlated Liscio's State Withholding Tax figures are weak, these are negative indicators although the Monster.com listings figures today were quite strong. Is the econony flexing it's Job muscles or looking like a 90 lb. weakling?...We'll see tomorrow.

Risks of a 3%+ loss in the coming week are increasing to 40/60.


PORTFOLIOS: I'm disappointed that my tactical portfolios didn't perform a bit better in today's downdraft. Off a half to three-quarters of a percent I faired better than the market (see scorecard below) but thought I'd get more out of my Energys, they were up on the open, faded into the lunch hour and flopped sideways from there to the close. I remain with 40% in cash and in the remainder overweighted with Energy and Materials (although my Mats were mixed today). I remain underweight in Healthcare but it offers little solace - as I wish I owned none at this time.

CLOSES, 10/7/04: Dow 10,125.40 (-1.12%), S&P500 1130.65 (-1.00%), NASDAQ 1,948.52 (-1.14%), Russell2000 582.60 (-1.70%), TBond 110.84 (-0.14%), US$ 88.33 (-0.14%), Lt.CrudeOil 52.67 (-0.47%), Gold 417.83 (-0.21%) VIX@14.50

SECTORS: Winners - NONE Losers - Healthcare (-2.27%), Materials (-1.28%), Industrial (-1.14%), Tech (-1.05), Utilities, Consumers and Energy were all off (-.05 to-0.77%, Finance was least loser down 0.28%

INDUSTRIES: Winners: Nothin' Losers: Airlines and Bios were both off more that 3.5%; Disks, Healthcare, Drugs were all off 2+%, everything else was off a half percent to 2%. Today was a broad selloff.

This is a recent work of art by Alex! Age 11

$50 Oil + Lower Confidence = Stock Rally..."Huh?" - 9/28/04

Important econnews included oil trading above $50 for the first time (more below) and weaker Consumer Confidence figures. The Michigan Confidence number just adds to a string of evidential offerings that the economy is slowing - but now I think it's slowing below trend growth. The market responded in the first hour with lower prices but switched direction and rallied thru the day to finish up over 0.5%, the Dow30 rallied back above 10k to finish a strong 77 points above it. Now three important indexes are back above their 200 day moving average (SP500, Dow30, Russ2k) although each remains below its respective 50 day line suggesting meager momentum.

Oil traded over $50 for the first time ever, contained somewhat by announcements that Saudis will increase production by another 1+mm barrels, my guess is that this will eventually be viewed by traders as 'jawboning' and any extra oil may come from their standing reserves, this is on top of last weeks 'jawboning' from the White House that the President was considering using Strategic Reserves - both were meant to scare long traders and speculators to push prices lower - I'm betting it doesn't work (at least at this time) and that prices will be higher next week, after that watch for CNBC talking lettuceheads to begin espousing $60...$75.....$100 oil!

PORTFOLIO THOUGHTS: My energy issues were were pumping like a gusher today as was gold and other commodity and materials issues, additionally dividend stocks (utilities) rallied with strength. It appears to me that the rally is a rush to all the run for the hills stuff, but if the rally continues I'll have to play a few high beta issues. Let tomorrow begin.

CURRENT READING LIST: An econ-horror offering from Morgan Stanley's economist, Stephen Roach @ http://www.morganstanley.com/GEFdata/digests/latest-digest.html#anchor0

CLOSES, 9/28/04: Dow 10,077.40 (+0.89%), S&P500 1110.6 (+0.59%), NASDAQ 1,869.87 (0.54%), Russell2000 565.66 (1.31%), TBond 113.50 (-0.22%), US$ 88.13 (-0.17%), Lt.CrudeOil 49.94 (+3.29%), Gold 412.50 (+0.46%) VIX@13.83

SECTORS: Winners - Materials (+2.46%), Energy (+1.71%), Industrial (1.01%), Healthcare, Utilities & Cons. Staples were all positive appx. +0.50%. The only sector negative in today's sea of green was Consumer discretionaries

INDUSTRIES: Winners: Airlines, Commodities and Gold all in the 2.75% to 3.75% range, Chemicals, Oil, Transports, were all above 1%, Semis were down 1% and Disk Drive makers down 0.5%