Monday, August 27, 2007

Recession?

Im a bit torn on this issue.
Short term, I don't underestimate the FED's ability and willingness to manipulate the currency enough to promote/deter growth at its whims.
Long-term, I think the USA is bent over reaching for the soap in a prison shower.

Lets consider:
20-30 years ago, Americans needed 20% down payment to buy a home and that requirement provided a couple economic safeguards:
1- ABILITY and/or WILLINGNESS to pay: Those who could save such a substantial sum likely had substantial earning power or the character and discipline to save up such a sum.
2- EQUITY!! No matter what the market did in the short term, buyers had an automatic 20% hedge in their investment, ensuring easy liquidation if a sale was necessary.

Well, about a decade or so ago, we had a number of politicians who played the populist heartstrings with rhetoric about extending the "American Dream of home-ownership" to all americans and all income levels.
There was intense pressure for institutions to create liberal loan programs...and government subsidized Fannie Mae and Freddie Mac led the charge. Just a matter of time...and the $500 down, 520 FICO score loans came...along with the stated income "Liar Loans".
Oh...and these lending practices coincided with historically low interest rates and a booming economy.

The result was two-fold.
#1 - The supply/demand nature of housing was stretched as a whole new class of buyers entered the market, driving prices up.
#2 - The rocketing home values, along with low interest rates and low down-payment requirements, created a new class of real estate speculators and a new mentality of borrowing through equity valuations.

America was already showing a disturbing trend away from personal savings in favor of debt. Well, now with a real estate boom and lax lending practices, this practice was furthered as Americans borrowed against the little "equity" they had and used that new credit to purchase cars, wide screen tvs, jewelry, etc.

Conservative contrarians have been voicing cautionary sentiment for years and are just now being heard. The high debt ratios, adjustable rate mortgages, high foreclosure rates, excessive inventory and the dwindling demand have finally led to a shift in the supply/demand equation.

We've already heard the media and markets admit the obvious....foreclosures, excess inventory and lack of demand have led to a credit crunch/liquidity issue. The banks got smart and tightened up, leading to a big selloff in the stock market. The FED responded with a few band-aids in the form of a cut at the discount window, the purchase of sub-prime securities, and loans to 4 main banks...furthermore, a rate cut seems in order.

However, I think they are simply sugar-coating the greater ugly truth.
Americans are in debt up to their eye-balls...and without the HELOCs and 2nd mortgage loans to provide cash flow, the spending binge is over.
Credit card rates are rising and lending standards are tightening.
This is surely going to manifest itself in corporate earnings over the next year or so as companies continue to sacrifice long-term profitability by slashing prices and offering incentives for the sake of quarterly expectations.

Meanwhile, you can expect the FED to manipulate rates and liquidity as an artificial incentive for continued consumer spending. Course, all this comes at a price...the continued inflation of prices due to artificially stimulated demand results in a DE-valued currency....postponing the larger dilemma!

the question is simply WHEN!?
So-called conservative Republican Bush opened the door to socialized health care with his "Free drugs for old people" program and has approved the drunken sailor spending budgets of congress.
So just imagine if a democrat such as Hitlery Clinton gets elected while Democrats control the House. Tax increases have already been alluded to...trade protectionism is already festering, mortgage/finance regulation is gaining popularity....and socialized health care is sure to come.

Recession?
I think its just a matter of time.

Monday, August 13, 2007

Market Correction-The CHART gave us plenty of warning!

Watching the markets on a daily basis, I've been amused by the financial media's compulsive denial of reality. Along with economic news regarding housing struggles, a sub-prime meltdown and the impending speculation of a credit crunch, the daily trading clearly indicated selling sentiment...but the media continued to preach the Goldilocks Gospel, clouding the undeniable reality of a correction with sugar-coated apologetics and optimistic sentiment.

Feeling that a normal, healthy correction was overdue in this extended bull market, and seeing signs of slowing economic growth, I began paying very close attention to DAILY trading over the last few weeks. After flirting with all-time highs, but failing to establish new support levels, the initial sell-off in mid-July caught my attention. August 1st and 2nd provided some hope of a rebound, the lack of conviction in terms of volume and price action was a warning and opportunity to get out before watching my profits evaporate.

August 3rd was a moment of clarity for me...and I finally closed all my positions...sitting on 100% cash for the first time in years. That morning session failure to trade above the previous day's close created a selling frenzy culminating in the simultaneous violation of yet another support level AND the 200 day Moving Average. Since then a rebound fell short at 1500 and failed the 1400 support level again.
I don't think we're done yet! 1380 is the next level to watch!

In the meantime, this is a great opportunity to illustrate the value of technical analysis and charting as a clear indicator of market psychology! Candlestick charts in particular are a fantastic way to view the simple, but often neglected foundation of supply/demand as the foundation to securities pricing.

Wednesday, August 8, 2007

Next Investment Ideas

OK...so those who attended the last meeting may agree that we are increasingly focused on the long-term prospects of the companies we invest in, rather than the short term market gyrations...especially while each holding is a relatively large part of our still small total portfolio. That said, diversification is a natural strategy we may want to implement while we build a watch list for our next investment.

Our current holdings are spread through 4 sectors:
Basic Materials-CHK, Consumer Goods-BEBE, Financials-USB, Healthcare-PETS
I LOOKED AT my own watch list and pulled out some companies in those sectors we've yet to invest in.

CONGLOMERATES
GE - This is my safest bet.
GE was an under-performing large cap for a decade, but has turned the ship in recent years. With a solid balance sheet, strong cash flow, steady ROE and SALES goals, a history of steady dividend growth and diverse product lines (finance, media content, healthcare, industrial, infrastructure), GE can be a strong foundation to a portfolio. However, with continued global economic growth and the Beijing Olympics, they also have great growth opportunities ahead...infrastructure, nuclear/alternative energies in particular will drive revenue growth.

Industrial Goods
SWHC - While admittedly biased as an owner of a Smith & Wesson Sigma Series 9mm pistol, I was hot for the stock at $15/share a few months ago and sit here in regret watching the stock run through $20. Even so, if the stock were to correct to 18, I'd still consider buying as a prime growth opportunity.
The company floundered for decades, its market share wasting away until it had hit bottom with 5-10% of pistol market. However, with top notch branding power and made-in-America appeal still intact, new management set a comeback course whose success may have been foreshadowed by recent awards for best handgun (MP-45) and manufacturer of the year.
Aside from the America's growth into a police state and global policeman, Smith & Wesson adds further promise to growth prospects by harnessing its name recognition into licensing opportunities with various products such as smokers, lighters, bikes and clothing. They have also bowed to consumer demands by entering the long-gun market as well.

TOL - Value play! The homebuilders have been punished severely and such industry-wide sell-offs are a great lesson in the herd-mentality and lagging tendencies of markets. Many have been bearish on the housing markets for years, selling out at the top while the dumb-money laughed, slapped more lipstick on the hooker, and kept on chasing. It took a few quarters of economic news and quarterly disappointments, but eventually the facts were undeniable and everyone was selling. Now these stocks are beginning to look interesting again and a contrarian purchase today may end up a Buffet steal for the next housing boom.

I like TOLL Bros because of their focus on the luxury market. This niche protects them from sub-prime exposure and I believe the luxury market is less susceptible to economic cycles....the rich always have money! Their target consumer is the empty nesters and "move-up" buyers....considering the retirement of the baby boomers and the number of current first-time buyers, this strategy should pay dividends in the next housing cycle. With a healthy balance sheet and cash flow resulting from options leveraging and subcontracting labor, I think TOL can wheather the storm better than most.

TECHNOLOGY
GRMN - Another stock which may have left us behind. I've been a fan of this since we started in February, but at $50, I was afraid to make a push, hoping for a correction to $40. Instead, the stock has raced to over $100. Given the narrow economic moat of its technology, the fickle nature of auto manufacturers, and the threat of an economic slowdown, I certainly dont want to risk a late entry.

NVDA - Ahhhh...if only Stephen's sales pitch were as solid as his instincts!!
That said, upon reviewing the financials and business for myself, I've also become a fan and the smart money sees plenty of upside despite the recent surge. Any correction in the stock would be a nice time to reconsider!

SERVICES
EBAY - A MASSIVE economic moat...and when the market expressed concerns about the inevitability of slowing growth in the auction business, EBAY responded with some interesting expansion/acquisitions...PAYPAL, SKYPE AND STUBHUB in particular. The internet services industry is still in growth phase as high-speed networks penetrate lower/middle classes and expand globally, so there is great upside for big players to move into new opportunities.

SONC - Have you eaten there?
A unique, interesting menu and fast, friendly service sets Sonic above the general fast food players. With healthy margins, good cash flow and stunning ROE, Sonic is a solid investment AND a possible buyout target.

HEALTHCARE
PFE - Im a fine of valuing stocks by cash flow rather than earnings and Pfizer boasts one of the most gaudy cash flow statements a stockholder could dream of. Their position in the industry epitomized the "wide economic moat" theory and seemingly perpetuates a cycle of competitive advantage allowing greater R&D budgets, stronger drug pipelines and on and on. Considering the recent market volatility, defensive stocks with excellent dividend histories, strong cash flows and solid balance sheets are likely to see an influx of institutional funds. Solid technical support is $22/share, so with the huge dividend and financial stability, I believe $25 and below is a decent entry point.

BASIC MATERIALS
If there were one sector in which to be overweight, it would be Basic Materials/Energy. The continued global growth and higher standards of living in developing economies has created a supply/demand strain on traditional energy sources while providing a catalyst for alternative energy.

ARLP - I've generally liked the prospects of coal given its' abundance in China and the United States and the advancement of clean-coal technology. However, stocks like ACI, BTU and ARLP, which had appreciated 30%+ since the beginning of 2007, have come back to earth and with the uncertain political prospects of a new President and the short term bad press of stranded miners, I'd be wary of the industry's short term prospects. That said, given the long-term dependence on coal as a national-security, domestic energy source, I'd look for an opportunistic buy of an oversold stock..especially one with a strong dividend policy such as ARLP!

CCJ - I DO like the long-term prospects of CAMECO as a main player in nuclear energy industry. Given its vertically integrated operations and advantages of scale, I'm watching CCJ closely. Short term struggles due to the Cigar Lake mine flood have resulted in a fire sale on an otherwise popular stock. The long-term prospects of nuclear energy are apparent in the uranium futures markets, the growing licensing requests for new facilities and the general clamor for reduced carbon emissions. At the right price, CCJ's short term stumble may provide a great long-term investment opportunity.

ADM - My research over the last 2 years has left me disillusioned with solar power and ethanol...restricting my investment considerations to diversified companies like Archer Daniels Midland (ADM) and secondary beneficiaries such as fertilizer manufacturer Terra Nitrogen Co. (TNH). ADM is worth watching due to its business in oil-seeds processing and food products which serves global demand as living standards rise. Economies of scale and vertical integration leave ADM far less exposed to corn-price volatility than pure-play ethanol producers, while allowing easier entry to bio-diesel opportunities. Financial fundamentals are solid with excellent dividend history, but a disciplined entry price is critical for this investment to pay off.

ZHA CAI ROUSI MIAN (Pork & Noodle Soup)

4-6 ounces pork shoulder or pork loin (cut into thin strips) 1 teaspoon cornstarch 1 teaspoon vegetable oil 1 teaspoon Shaoxing wine 1 teasp...