The Finance Wonk

Mid Week Funnies

2007-05-22T18:00:00.001-07:00

Time for our weekly review of news from around the world in the form of editorial cartoons!

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The administration seems to have been able to ignore all the losses in Iraq until the recent political losses.

Meanwhile Karl Rove has been trying to spin the war by pulling everyone into political maneuvering. Even many Republicans are pushing back.
Jerry Falwell passed away this week, in case you hadn't heard.

More revelations of colleges working with loan companies to their mutual profit and student detriment seem to be coming out weekly. I can't say that I'm surprised. Advertising and bribery are separated by a thin line at times.

Mid-Week Funnies

2007-05-16T10:42:00.000-07:00

The president, already suffering in approval due to his handling of Iraq, fed the flames surrounding his party even more by using only his second veto ever to deny a budget requiring metrics and reports on progress. (First veto was the one on stem cell medical research.)

In case you missed it, there has been a video making the rounds from the recent Republican debates. The moderator asks who among them doesn't believe in evolution and three candidates raised their hands. All three immediately plummeted in approval rankings, which is a nice statement for those of us who would like the USA to be part of the age of reason and science.

Weekly look ahead

2007-05-13T22:57:00.000-07:00

The recent roaring climb on wall street has some people opening up champagne.

Iran is still building nukes, but wall street doesn't care.

Economic growth is at its slowest in 4 years while earnings growth is at a 3.5 year low -- and yet the stocks are climbing. Home prices are expected to see their first year-over-year price drop ever, but stocks are climbing.

This is it, the capitulation where everybody who was still holding cash decides they have to get in on the roaring market. Everyone has heard the truism about how the market climbs a "wall of worry", and traders know that when the worry goes away the last money is entering the market and the drop is ahead.

Guess when the last time was that the markets climbed for this long? That would be roaring 1929, right before the great collapse. There shouldn't be a collapse this time (we don't have as much leverage and the fed policies are now countercyclic instead of procyclic), but the landing could still be harsh due to the hedge funds.

Hold fast to your cash reserves and be very conservative. I have only about 15% in stocks right now (all in the Finance Wonk Portfolio stocks)

Capitulation means this is "panic buying" an odd phenomena made of individual investors who suddenly think risk is gone and fund advisers getting yelled at because they aren't paid to manage cash. One can't predict when the madness will end, but we know how -- the market will drop. Now is NOT the time to buy.

Firday Tech Files

2007-05-10T21:37:00.000-07:00

== Vudu Box is Netflix without the mail ==

This new box from Vudu Labs is probably worth watching. It downloads movies off the web so that you can watch them on TV. That's a similar notion to the Apple TV box but Vudu has deals with 7 movie studios already, making their online offerings potentially larger than either Apple or the paltry online Netflix catalog.

It looks like this year is really setting up to be the year of net-to-TV gadgets. The trend could be trouble for Netflix. Netflix has publicly stated that they don't want to be a trailblazer in the field which has been "supposedly hot" since about 1995. Netflix has started an online program but it offers only a small set of movies and still hinges on viewers watching through their computer in a web browser, with the typical issues involved. As far as I can tell Netflix dosen't even offer a fullscreen version for playing through a media PC to fill up a widescreen television.

Netflix stock has analysts predicting 31% growth indefinitely, and I calculate that the net present value has that growth rate already priced in. I would say that NFLX is overpriced for a company determined NOT to be the vanguard of a new technology that will be getting into homes in the next few years.

== Microsoft goes for another vowel with the oPhone ==
== (or do they) ==

Okay, fine, so it's actually a comedy skit produced internally at Microsoft for fun, but this video is pretty funny and seems to be making the rounds. Check it out:

== Make the perfect Cocktails ==

What could be more of a required skill for the budding investment banker or wall street rainmaker than being able to handle liquor. Recently I stumbled across these nice folks and their books. Get some of their books today and become a dab hand at mixology.

Mid Week Funnies

2007-05-09T00:22:00.000-07:00

At this point I don't think anybody in Washington can complain about others making political hay out of Iraq. Has anybody NOT used that for political gain yet?

Four years after George Bush unveiled the "Mission Accomplished" banner, some jokes at his expense were pretty inevitable.
In George Tenet's new book he says that when he was running the CIA the administration was uninterested in facts and just wanted justification for war. I don't really see how that exonerates Tenet though, since he obviously went along with them.
The massive pet food recall continues to grow. In case you haven't heard the current theory is that a bunch of Chinese suppliers figured out they would score higher on protein tests and get paid more if they dumped furniture chemicals into their foodstuffs. Welcome to capitalism!

Weekly look ahead

2007-05-06T20:49:00.000-07:00

Charts are below. My apologies but no analysis right now, as I am dealing with an ongoing medical problem.

Mid Week Funnies

2007-05-01T21:52:00.000-07:00

Time for our weekly review of non-financial news in the form of editorial cartoons from around the country.

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Bush has had some unfortunate timing lately, extending troop tours the same week he railed against how democrats unacceptably wanted to do the same thing, and fighting against a budget passed by both the congress and senate.

The scandal regarding the firing of US attorneys seems to have all the major elements now: white house involvement, a trail of political motivation, and details of how several of the fired attorneys were investigating key republicans for corruption. The real trick is that nobody can seem to find any laws being broken!

Weekly Look Ahead

2007-04-29T15:37:00.000-07:00

Last week saw strong market gains despite surprising and negative economic information. This makes it hard to predict what will happen next.

There is a lot of economic news coming out this week and a fair amount of it is likely to be negative. Investors will get readings on construction spending, pending home sales, factory orders, the manufacturing and services sectors, and personal income and spending (see chart for details).

With more than 2.3rds of the S&P having reported earnings it looks like earnings growth will come in around 6.8%, a serious decline from the last few years. Despite the negative news investors have priced in assumptions that the economy, while slowing, will not go into recession. At some point that sentiment should change... although possibly not for a few more quarters.

One thing is certain though. Based on a hard value analysis point of view the lower growth rates are making stocks seem more expensive. Rising stock prices and declining growth can only go on for a limited time.

Economic Poker

2007-04-27T09:29:00.000-07:00

The recent run-up in the market has had me questioning my judgment that cash is the best place to be right now (review: cash accounts currently pay just over 5% risk free).

The stock market used to be a great indicator of economic health, showing the collective guesses of millions of people on profits and growth. This is why the stock market is part of the Conference Board’s index of leading indicators. And yet over the last 3 months the leading indicators have declined (on a year-to-year basis) while the market climbs -- basically most of the economic indicators except the stock market show weakness.

David Rosenberg, chief North American economist at Merrill Lynch & Co., thinks there is a "disconnect between how the economy is doing and the way the equity market is doing." The U.S. economy has just completed four quarters of annualized growth below 3%, which has never happened in 60 years without being followed by recession.

This morning first quarter GDP was reported at 1.3%, below even the pessimistic predictions of 1.5%. Trade and inventories reduced growth significantly, business and government spending growth was tiny – almost all the growth was driven by consumer spending. Consumer spending, however, seems to be giving mixed signals. Reuters and the University of Michigan reported their consumer sentiment index came in at 87.1 at the end of April, compared with readings of 85.3 midmonth and 88.4 at the end of March.

So what does this mean for the future? The quote above from David Rosenberg shows one economists view. Meanwhile Ed Hyman, chief economist at ISI Group, a New York investment dealer expects economic growth to slow further -- to an annual rate of 1.5% in the last nine months of this year -- and the Fed to cut short-term interest rates by three-quarters of a percentage point. But then says “The boost to stocks from lower rates should more than offset the drag from weaker growth and profits”. So this investment dealer says growth will weaken but you should buy stocks anyway.

The Hyman argument bothers me. It suggests he believes stock prices will go up because the returns from cash and bonds will be low, forcing people to buy stocks if they want returns. But this sort of logic ignores profits and stock values completely. Personally I am a fan of rock solid value investing using present value analysis. And it works! My buy list of value stocks blasted market returns last year, and they’ve been climbing like rockets this year too.

I still hold my buy list stocks (this is a real money portfolio after all), but I also still think that cash is a better place for money not specifically in a target stock. I believe the indexes will not outpace current 5% cash returns during this year. It’s stressful to be holding cash while the market climbs, but will feel good during the drop.

Mid-Week Funnies (a day late)

2007-04-25T21:38:00.000-07:00

Sorry this is late, I was traveling for business and the airlines failed me. Here are the mid-week funnies from around the country! As always click on any image to view a larger version.

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I have little left to say on Iraq. At this point staying seems to involve vast party-line political considerations. Just as "only Nixon could go to China" we may have "only Democrats can leave Iraq".

In case you missed it the newly conservative supreme court last week decided to uphold a particular form of abortion ban. Many people are making an issue out of it although I think more out of a slippery-slope concern than real impact. The procedure in question is rare.

I had to print this one after the Virginia Tech event for the harsh light on our mercantile culture versus public safety. Ouch.
The situation with Gonzales firing 8 US attorneys, apparently for political reasons, took several ugly turns recently. Not only did the Attorney general say basically nothing in his testimony (such that even Republicans were angry at him), but it is being revealed that many of the attorneys he fired were pursuing fraud cases against Republicans. That's not going to be good for public sentiment.

Weekly look ahead

2007-04-22T20:44:00.000-07:00

Good grief! 35 percent of the S&P 500 reports earnings this week. So far earnings growth has been about 5%, not nearly enough to justify the cost of half the stocks on the S&P (based on Net Present Value). Meanwhile the market has been roaring ahead as people are happy that earnings growth has been above the 3.3% projections. Beating projections is nice but growth needs to be high enough to support market value or it's all for nothing.

Given recent sentiment the dow may reach new highs this week again, but it will be interesting to see how long it takes for people to realize that 5% growth can be had with CASH these days, so stocks with 5% earnings growth are not necessarily worth high P/E ratios.

Friday Tech Files

2007-04-19T16:08:00.000-07:00

Travel Passes Go Live

Rejoice frequent travelers! The Fast Pass for airport security is now here. You can go here and start the enrollment process, which involves giving up a bunch of privacy for faster trips through airports. Some of us (like myself) who are already under a microscope due to our work shouldn't mind this a bit.

For enrollment they first take:

Driver's license number
Previous home addresses for the past five years
Social Security number
Alien registration number (permanent foreign residents only)
A current credit card

And then when you visit in person they check your ID and take your fingerprints and iris photos. The cost is currently about $100 per year.

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E-Ink Watch

E-Ink showed up in the Sony E-book (revealed here September of last year) and now the E-ink concept watch has become real. The above is a women's watch with either an "efficient" setting in which the time is shown in clear numerals or an "elegant" setting (shown) in which the time is somewhat hidden in delicate curls by the high resolution of E-ink. Right now it's still being used as a lure for the lux, as this watch costs $2,000 to buy, but we all know how technology goes so look for this to drop in price over the next few years.

Market Tidbits Today

2007-04-18T21:09:00.000-07:00

Greg Zuckerman says the $25 billion proposed buyout of Sallie Mae has more specialists in the private equity industry thinking that the financial-services industry, once considered off limits for buyouts, might be ripe for others. “Among those that could be takeover bait are Countrywide Financial Corp., CIT Group Inc. and iStar Financial Inc., according to some traders and analysts. The fact that Blackstone Group also vied for Sallie Mae suggests that other private-equity firms could be eager for these kinds of deals,” he writes in today’s Wall Street Journal.

David Rosenberg, Merrill Lynch economist, sees current market activity as the reverse of the events of late 2002 and early 2003. “Back then, the equity market just kept on slip-sliding away even as the economic data was turning up in fits and starts and we were moving further out of recession-mode – which had actually ended more than a year earlier,” he writes. “Fast-forward to today and we see the exact opposite – the data have weakened sharply for a few quarters now, no sign of a turnaround in growth, and equities are hitting new highs.”

Henry Blodget thinks the idea that Time Warner could end up spinning off its cable businesses to focus elsewhere is a bit off-kilter. “The theory behind the strategy, apparently, is that cable will become increasingly commoditized and less relevant in a world with the Internet and Internet TV, etc,” he writes. “It was, of course, exactly this sort of thinking that led to the “transformative” AOL-Time Warner merger in the first place.”

George Gutowski, the Financial Skeptic, takes Jefferies to task for its earnings release. “Jefferies is playing a dangerous game. They know most investors and financial media will not listen to and or read the conference call transcript,” he writes. “The press release has such poor disclosure that it will be ignored and viewed as useless by investors.”

Robert Doll, global chief investment officer at BlackRock, says economic softness may last for a couple more quarters, but says equities should hang in there. “We believe the conditions for a bear market simply do not exist, given solid stock valuations, a market that is no longer overbought from a technical perspective and continued high levels of public and private buyout and merger-and-acquisition activity,” he writes in a quarterly update. “Additionally, we would point out that although earnings growth is slowing, we are not expecting any sort of profits recession.

Vinny Catalano writes of how a virtuous cycle of investment, profits and economic growth can break down based on certain economic events or shocks to the system. “It’s easy to see how a serious contraction of U.S. consumer spending can break the virtuous circle – lower U.S. consumer spending begets lower capital flows to emerging economies and oil-exporting countries, which lead to fewer recycled capital into debt instruments, which puts upward pressure on rates, which impacts the borrowing availability to U.S. consumers. And so it goes,” he writes.

Herb Greenberg says executives at Netflix who believe Blockbuster won’t be able to maintain the low prices that are hurting Netflix’s bottom line are smoking something. “Customers are no dummies. They obviously like the combination and flexibility of mixing bricks-and-mortar with online,” he writes. “More importantly, they have now proven that if service and selection are similar, they’ll go with the company that offers the lowest price, margins be damned.”

Mid Week Funnies

2007-04-17T21:31:00.000-07:00

Hello folks! Time for our weekly review of news from around the nation in editorial cartoon format.

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Much of the discussion of global warming impact has been industrial growth measured against drawbacks. Recently some protests have focussed on the fact that much of the worst impact will be against those who benefit least from industry. In the worst scenarios the future could be pretty grim, but I bet we all remember the dystopian future scenarios of the 80s. Remember "Road Warrior" ? We were all supposed to be living in a wasteland already and instead we have eBay and the internet.
I like this cartoon not only for the humor but also because of the subtle reference to the corn/oil political maneuvering. Please read here for a VERY neat article on the surprise brilliance of the Bush administrations ethanol policy.

Weekly look ahead

2007-04-15T20:25:00.000-07:00

This week will see the avalanche of quarterly earnings start in earnest. It will be interesting to see how investors react: S&P 500 growth in the first quarter is currently forecast at 3.3 percent, according to Thomson Financial. That's the worst its been in 3-1/2 years and far below the historic average. Even if they come in around 6% (which I consider more likely), investors may start to feel the cold reality that the rapid economic expansion is cresting.

Either way it seems safe to observe that stock valuations should face rough seas in the next 6 months as people used to 12-14% constant growth start to see 6% and less. Some observers have argues that cash flows demonstrate there is still money on the sidelines waiting to be invested (like much of mine) but I would caution that getting in at the top is not a wise thing to do. Even if the market goes up a few percent, I expect that a good cash account (returning about 5%) is a better place for your money than the market over the next year or so.

The Oil / Ethanol connection - Pure Genius

2007-04-11T21:43:00.000-07:00

Generally I have not been impressed with the strategic moves made by the Bush administration. I'm not talking about Iraq at all here. No, I judge strategic intelligence more on how well America is outmaneuvering others in political and trade areas, and we haven't been doing very well the last few years. For example: by all appearances we can't get a grip on Iran while they show excellent diplomatic manipulations -- kidnapping and then returning some British soldiers right when they were supposed to be castigated about nukes was genius.

Recently I have been watching some events unfold in the global oil struggle that have left me thinking that the white house may be quite clever.

The problem America faced was that Americans spend a disproportionate amount of their income on driving. Increased oil prices were hitting Americans particularly hard with substantial fallout for consumer spending and especially the American auto companies.

Meanwhile the rest of the world (think China & India especially) uses far less oil per citizen. They were not particularly enthusiastic about trying to pressure for lower oil prices. I imagine they may even have had a private smile at the discomfort of America. Buying their political support with "aid" payments (a common strategy) would have been unacceptably costly.

So what did the administration do? They started promoting ethanol production from American corn. On the face of it this may even be scientifically silly with little distribution infrastructure, difficult production versus sugar cane ethanol, and questionable economics.

And yet the move was brilliant! The cost to the government is less than any conceivable diplomatic aid package and stays inside the US (buying corn belt votes for the Republicans, not incidentally). Meanwhile the ethanol boost has raised global food prices significantly as corn gets rerouted into ethanol production. Americans may spend more on oil, but developing countries spend more on food. American food inflation has risen just 1% to about 3%. In China food inflation has jumped to 6% - hitting every family hard and putting massive pressure on the Chinese government. Chinese food reserves are estimated to be near all-time lows. In some parts of Europe food inflation has reached 13%!

Meanwhile the cost of food just keeps going up. In 2006 16% of the grain harvest in the US went to Ethanol production, by 2008 that number is predicted to reach 30%. Among hedge funds grain is the new copper, a hot commodity for trading. Corn is used for feed leading to dairy and meat products and to make the ubiquitous corn-syrup used to sweeten most foods so the impact is universal.

Suddenly India, China, and the rest of the world are interested in lowering the price of oil to reduce the "global fuel emergency." The new political pressure is being felt by producers and oil prices have seen declines recently and estimates are that gasoline in the US will be crest about 11 cents cheaper than last year - putting $33 billion or so back into consumers pockets. This means that the ethanol programs of the US government are already profitable from a political and strategic standpoint.

I have to admit it, the administration has pulled off a brilliant move on ethanol. Assuming all this was on purpose, of course. It would be great if corn ethanol actually makes it as a fuel but even if the programs are cut in failure in a year or two America will come out ahead.

Invest Well,

FW

Mid Week Funnies

2007-04-10T22:52:00.000-07:00

Time for the weekly review of news in the form of editorial cartoons.

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Despite a scathing electoral rebuke showing that the voters really do care about Iraq, many republicans continue to unpleasantly politicize the war.

Meanwhile Iran pulled off a brilliant diplomatic move by inciting an incident and then diplomatically defusing it right as they declare violation of UN nuclear requirements. This move not only changed a lot of headlines and took control of the news situation, but by ending it peacefully and showing lots of video of humane confinement Iran made it politically much harder for anyone to move from diplomacy to force against them.

The Supreme Court ruled that the EPA can regulate greenhouse gases, which should force the administration to at least establish a policy instead of just saying it's out of government hands.

Meanwhile in Washington a surprising amount of fallout continues to follow the Attorney General after his political purge of US Attorneys.

Weekly Look Ahead

2007-04-08T21:08:00.000-07:00

The big news looking forward will be the market's response to last Friday's surprisingly strong jobs report.

Many pundits are saying that the strong jobs report will reassure investors about the economy and consumer spending. I would offer the counter-point that in recent weeks investors have been less sensitive about the economy and more worried about inflation, and strong jobs are more an indicator of inflation.

Investors, however, have had a long weekend to absorb the news and that may leave them more inclined to bolster the market by considering strong jobs as good news.

Those who are thinking more critically will note that business spending has been pulling back and that jobs growth is a lagging, not a leading, indicator which peaks after the economy does. Combine that with the impending earnings season set to show weakened growth and I would say that despite any pop this week, markets face troubled times in the next couple months.

Invest well,

FW

More on Asta Funding (ASFI)

2007-04-04T18:46:00.000-07:00

If you bought Asta Funding [ASFI] when I called it a buy in November you've gained 30% in 5 months. Not bad for a company specializing in distressed debt recovery which should do great even if the economy goes down.

Then in February I did an analysis after they revealed a very large purchase of distressed debt at higher than average prices and determined it was still a keeper even though I had questions about the large tranche of debt they had purchased.

Well, March 9th Asta had a special call to talk about their strategy and update investors (I LOVE companies that think like that). My questions were answered and I reiterate my belief that this is a good stock.

Management called the purchase of $6.9 billion (face value) debt for $300 million "one of the larger purchases in the marketplace ever." And this was certainly true. Most debt handlers buy that much debt every 24 months, total.

On the call, management identified several reasons why this pool of debt is not merely bigger, but also of higher quality than the average portfolio.

First, the bulk of the portfolio is credit card debt, which is Asta's most familiar territory. This is also excellent space to be working in due to the new Bankruptcy Abuse Prevention and Consumer Protection Act which makes it much more likely to collect on credit card debt.

Second, the geographic mix of the receivables is more favorable than normal -- fewer Texans (notoriously uncollectable), more New Yorkers (amazingly collectable - theories as to why are welcome :) ).

Third, and most important, $1.1 billion of assets in the pool have gone through litigation, and judgments have already been awarded. That means increased returns for Asta. Another "significant" portion of the receivables are what management calls "sue-able." This means that judgment against those customers should be swift and predictable. And again due to the new credit card law that debt is worth a whole lot more than it would have been a few years ago.

In fact I would say that Asta looks likely to increase their margins on this batch of debt and I'm very happy management looked at the situation, analyzed it, and was willing to go to a 2:1 debt to equity position to buy this new collection of debt. This is an example of exactly what you want to see: management using its knowledge of the business to maneuver profitably!

Others are starting to get the picture. Asta has been seeing major institutional buying recently and this should continue. Over on Motley Fool 73 out of 75 "All-Star" investors give ASFI the thumbs up as well, pushing ASFI to the top of the CAPS list.

An additional interesting point is that this stock is heavily short sold. The stock has short sales against it equal to 45% of the outstanding stock and regularly appears on the SHO list, which means that the short sellers aren't delivering the stock they are required by law to deliver. I hate that these things continue and dearly wish the SEC would crack down on those folks who are essentially counterfeiting shares, but the upshot is that with ASFI doing so well those shorts will have to buy shares to cover at some point and that spring loads ASFI shares for dramatic upswings.

We should all be owning ASFI because it's a long term good business, but the potential for a short squeeze is still interesting. If the squeeze hits and the stock shoots up I will need to do another analysis to see if it's gone beyond where it should be. Then it may be time to get out and wait for it to settle down (or just sell some calls.. although I never actually recommend that move since it's a highly personal decision for skilled investors only).

My history with Asta:

Asta Funding - ASFI - BUY called at $33.82
---Called: November 06, 2006
---Analysis on lowered analyst ranking Dec 18th 2006
---Update on debt costs and whether to hold, Feb 12th 2007

Mid Week Funnies

2007-04-02T20:57:00.000-07:00

This week has shortened trading due to Good Friday, so let's go ahead and call this an early mid-week and hit it with our weekly review of the news in editorial cartoons.

As always: click on a cartoon to enlarge if, like me, you sometimes want bigger type :)

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The US Attorney purge currently rocking Washington seems to have deep resonance with the people. I have to admit there are some areas of life I would prefer not to see politics invade.

Congress and (somewhat more surprisingly) the Senate both approved a budget that included time limits for Iraq. This has made some people angry...
Meanwhile Al Gore put on a fine show under harsh questioning from global warming unfriendly lawmakers.

Weekly Look Ahead

2007-04-01T21:44:00.000-07:00

This week is the same scenario as last week.

Earnings aren't here yet but are generally expected to be rough when they start later this month.

Next week will have an array of economic announcements, some of which will probably be good and some bad.

Markets may go up and down a bit but I believe the next 12 months will see the market doing worse than a good cash account. Analysis here.

If the market reacts like last week there will be some relief that inflation is not here but trading would be dominated by considerations of a softening economy. Last week the same scenario led to a down week.

IPS up $10 in one day

2007-03-29T09:58:00.000-07:00

IPSCo (a finance wonk portfolio stock) is up more than ten dollars this morning after one of its competitors was bought out for $2.1 billion. A quick review of the buy analysis on this stock, however, indicates the stock is still priced cheaply.

So I'm staying put and holding it. Just thought I would give an update for those who hold the portfolio and might be wondering whether to try to cash in.

Market moves on Bernanke

2007-03-28T20:19:00.000-07:00

Today the Fed Chairman gave a speech that was completely empty of surprises to anyone who reads this site. Apparently investors were surprised though, as the notion that we have inflation and a slowing economy seemed to shock them. Of course this is exactly the situation noted here March 18th.

The market reacted with a rush into negative territory continuing this weeks trend to actually accept bad news as signs of slowing, rather than medicine to keep away inflation.

This exact market behavior has happened before, and recently!

Looking back to Feb 26th I wrote:
"Recently the market has been gaining on news of slowing growth (due to contained inflation) and going nowhere when growth is strong. Today actually saw profit taking and people discussing the possibility of recession."

That day I urged people to switch to cash:
"I'm certainly keeping a chunk of change on the sidelines, and I recommend you do too. Nothing hurts like holding cash while the market goes up... except holding all stocks when it goes down!"

Within a week the market had dropped 4%.

This behavior has recently preceded negative turns in the market. Hold fast on the sidelines, that's what I'm doing.

Mid-Week Funnies

2007-03-27T23:43:00.000-07:00

Time for our weekly review of news through editorial cartoons from around the country. Keep in mind you can always enlarge them by clicking.

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The US war in Iraq is now entering its fifth year, significantly longer than WWII. Meanwhile even the administrations staunchest supporters have to admit that the calls of "any discussion of Iraq weakens our position" are getting old.

Now, as a business type with board experience I see Halliburton's move to Dubai as a purely business move. But the poor PR timing on it has certainly generated some funny cartoons...

Meanwhile the auto industry lobbyists continue to fight against even drastically reduced targets.

And housing seems to have just begun to crack.

See you all tomorrow! Invest well,

FW

Market Tidbits

2007-03-26T23:10:00.000-07:00

After something like four straight days of mega market analysis today is just going to be some interesting market tidbits....

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Noriel Roubini's blog (which I was pointed to by reader Ramesh Shankar) had an interesting take on todays extreme weakness in new housing purchase rates, which fell so far they are back to the levels of August 2000! Noriel makes an excellent point that new home purchases are more important to the GDP than existing home purchases since they indicate new value being created rather than existing money changing hands.

Additionally we should be watching prices at least as much as volume, since many markets will hold up volume by changing prices. Homes are a classic inelastic asset: you typically sell for reasons that leave you little choice but to take the price you can get. Home prices (also in decline) are a better general indicator of consumer wealth. But the data has to be investigated closely! For example today's depressing report mentioned that average home prices for February were up 7.5%, which sounds great until you read that the median is only up 0.3%. How can that be possible? It points out that tightening lending standards have hit the lower end homes harder than the upper end... which means that if you care about what's in Joe Sixpack's wallet the numbers are actually bad.

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On wsj.com David Geffen posts that "Bianco Research models suggest financial stocks lead bonds by about two months, and they were rallying about two months ago, putting the 10-year note at risk of rising higher. It suggests to them that the market sees the Federal Reserve willing to tolerate higher inflation than in the past. That may help the market rally for a time, but it’s not a good thing if it results in a broader inflation problem."

That's interesting. I'll keep an eye on it, but this week most market interest rates went UP, which is the opposite of what would be projected. We shall see.

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Richard Kang is starting to wonder about all the ETFs rolling around out there. “Only now am I beginning to question the value of new ETFs coming on line. In the past, there were a few ETFs that occasionally would give me reason to question their purpose,” he writes in his blog, Beta Brief. “However, most have done well in terms of asset growth and trading volumes. I have greater reservations now about certain ETFs coming out now.”

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Are the days of easy credit for buyouts coming to an end just as Blackstone Group prepares to sell shares to the public? Could be, writse Henny Sender and Serena Ng in today’s Wall Street Journal. “Sme early signs are emerging that credit markets are becoming less forgiving. That could mean the fortunes of Blackstone and other private-equity firms, which buy businesses on behalf of their investors and hold them privately before selling them once again — may be reaching a plateau,” they write.

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Chad Brand, the Peridot Capitalist, argues that if Blackstone Group is offering shares to the public, it’s time to run. “Companies sell stock when demand for shares is high, and they buy stock when interest is lacking. If things are going great, demand will be high and an IPO is the preferred way to cash in. The ’smart money’ as it’s called, sells to the dumb money,” he writes. “Well, guess what? Steve Schwarzman and the rest of the Blackstone Group gang is very ’smart’ money. If they want to sell a piece of their management company to you, it’s probably for a good reason. If they thought the bull market in private equity had a few more years left in the tank, they certainly wouldn’t choose to sell now.”

Weekly Look Ahead

2007-03-25T22:23:00.000-07:00

Last Friday I replaced my usual Friday Tech Files with a deeper analysis of where the market is headed. Short version: markets may go up and down a bit but I believe the next 12 months will see the market doing worse than a good cash account.

Then I spent the weekend rooting around in data. I came up with plenty more details: the subprime fallout has not yet shown up in housing reports and will probably be deeper than the most reported projects, for example. Generally I am comfortable with my call and my position in largely cash (except for holding the Finance Wonk Portfolio).

Since the analysis was posted friday there is not a whole lot more to say now. This week will see one of two things: either bad news will be seen as moderating inflation and boost the market (most likely), or we will see more jitters and the market will drop (less likely, but more significant).

Prediction for the Market

2007-03-22T23:09:00.000-07:00

Hi all.

Normally it would be time for Friday Tech Files but in these turbulent market times I wanted to spend my time today analyzing the recent market activity. Regular readers will know that I called the market drop just a couple days in advance and moved everything not in the finance wonk portfolio to cash - so what do we do now that the market has bounced? (for more on a review of my results see my shameless "I was right" post)

Well, there are two things I'm looking at right now: imputed volatility and investor behavior. Imputed volatility (measured numerically in indexes like the VIX index) is a neat measurement derived from options pricing of the expected market volatility implied in the prices people are trading options at. It represents the markets current thinking about volatility. A couple years ago I did a historical study (20 pages and unfortunately not something I can publish as it contains proprietary data) on implied volatility.

Turns out high VIX scores precede jumps UP in the markets, but not drops. That is to say that the whole market feels the positive glow as people decide a slump is over and start to invest, but that right up until a drop everyone is predicting things are fine. During this last week runup the VIX dropped off a cliff as investors shut their eyes to risk and jumped in the market. That's actually a bad sign.

The second thing I'm watching is investor behavior. During the last 4 months or so of climb before the drop we saw a pattern where investors would have little response to bad news, then pump up shares when anything could be interpreted as reducing the risk of inflation. Clearly nobody felt a downturn was a threat and inflation was the only concern.

The drop hit shortly after the first serious concerns about recession surfaced (link to post of mine just before drop). It was these concerns which drove the market down.

This week investors returned to the thought that inflation was the only risk. The Federal reserve altered their language and specifically acknowledged that the economy faces risks and yet the market went up. Meanwhile the implied volatility guages dropped, showing that investors were looking at this recent drop as a chance to throw their money in the market and look smart... a sure sign we're near the top.

Meanwhile the next few quarters will see reduced earnings growth, much of the subprime market failures effect on the economy has yet to unwind (KB homes profit down 84% already!), and commodity and labor inflation will be squeezing prices. At some point all these chickens have to come home to roost.

In my usual fashion I'm going to bravely and uncertainly call the future and invite your feedback: I believe that a year from now the market will be less than 5% above where it is now - possibly FAR below that. Why is this an important point? Because you can make 5% risk free in a good bank account (like at E-trade) so anything lower from the market means holding cash is smarter.

The market may go up a bit from here as you get a rush of the "last in" people piling into the market, and there will be downdrafts from hedgies unwinding their leverage, but ultimately I'm keeping my pile of cash.

Mid-Week funnies

2007-03-20T18:44:00.000-07:00

Time for our weekly roundup of news in the form of editorial cartoons from around the country.

====

The firings of US Attorneys for allegedly "not prosecuting enough Democrats" is still roiling Washington. After the mini-scandal where it turned out that the prerequisites for choice state department gigs was voting republican and hating abortion, this shouldn't be so surprising. Seems like every time the Democrats are in power for too long they wind up going nuts on spending and every time the Republicans are in power for too long we wind up with graft and cronyism. Regular elections and changes in power are SUCH a good idea!

The buzz around Washington is that Scooter Libby is a shoe-in for a pardon, but that he has to wait until the "politically appropriate" moment. Since he won't be sent to jail until after his appeals, it seems unlikely anyone in the administration will face any fallout for scuttling an intelligence asset. And we wonder why the CIA can't recruit the best people??

Democrats in Washington are finding it hard to deliver on the expectations they face after their recent electoral victories.
Meanwhile the continuing credit implosion is causing ample concerns about effects on the broader economy.

Weekly Look Ahead

2007-03-18T19:16:00.000-07:00

Some people missed it but last week had some of the worst news possible. Both producer and consumer pricing showed rising inflation while manufacturing and retail sales showed a slowdown.

In the coming week investors will be looking at the two day Federal Reserve policy meeting ending Wednesday to see what the Fed has to say about inflation. It's a foregone conclusion that rates will stay steady at 5.25%, and I don't imagine the Fed statement will get more aggressive. The folks at the fed must be getting pretty scared though, the one thing they fear most is inflation coupled with a stagnating economy (the dreaded "stagflation").

We aren't there yet and we don't have reason to be concerned right now, but it must be on the Fed's mind. They may want to try to get ahead of such a problem by moving early and thus they may see the recent reports and stock activity as signs of weakness and lower rates this year, but we won't see that move for a while.

Helping promote the idea that things are weakening, many experts are predicting the fallout from the subprime loan implosion will cook the buying power of low-income consumers.

I was right

2007-03-14T22:31:00.000-07:00

Since this blog is published anonymously (oh, if only you knew who I was) I don’t have much to boost my stature here in the great wide internet. So forgive me for taking this time to review my predictions and note that they have been borne out by reality. You can check the old articles and use google with the cache function to make sure I haven’t modified any retroactively so you can verify it’s all true. Today’s entry is shamelessly dedicated to crying out “I was right!”.

== Stock Picking ==

Forgive me for being so blunt about being right but I take quite a beating in reviews sometimes, and it feels good to stand proud. I know I’m not as flashy as those guys who post three stock picks a week. And some days my posts are just the daily events I find most worth your attention. My stock picks, however, perform very well. A recent analysis of results showed my buy calls returning a whopping 22-26% over the average 6 month holding time (depending on how you do the calculations).

I’m not selling the Finance Wonk Portfolio stocks even now as they are chosen for the long term and should handle the slump just fine. You don’t have to take my word for it though, go to the Portfolio page (link) and read the call on each stock to see my exact analysis – I put everything in the open here and demand a serious present value discount.

(Special note on the Portfolio: AAPL stock has a special place on that portfolio as the “risky, volatile” member of the gang – holding all but that one is fine.)

== Market Drop ==

On February 26^th I recited my market concerns and said “I'm certainly keeping a chunk of change on the sidelines, and I recommend you do too. Nothing hurts like holding cash while the market goes up... except holding all stocks when it goes down!”

I moved 75% of my money, basically everything not in the Finance Wonk Portfolio, to cash that day and the next (and announced it here). That was less than 24 hours before the 400 point drop that started the recent market drop. My average exit price was 2-3% above closing prices today, and 3-4% above recent lows. You did the same if you have been following along. I report my moves here and invest real money according to my calls, so this place keeps me disciplined and honest.

== Mortgage Company Meltdowns ==

A lot of people were blindsided by the recent total meltdown in the mortgage industry. Not my readers.

Early last month a couple small sub-prime mortgage companies had problems and the market went back to normal after deciding that the problems wouldn’t spread. To the contrary, I said on February 22^nd, “I would like to make special note that the bloodletting in the mortgage industry continues to grow” (bold from the original).

I even laid out the scenario by which the failures happen, with sudden loan calls based on financial covenants. That’s exactly what happened to New Century in the last few days that blew the once huge company all the way off the New York Stock Exchange and onto the Pink Sheets where it trades amongst people assuming it will declare bankruptcy.

== So what’s next? ==

I really don’t believe the market drop is over. Pundits are blaming this weeks drops on the mortgage company crashes, just like they blamed last week on Asia. These are just excuses that avoid confronting the fact that the market has been moving down.

There are other factors that can continue to press down on the market. Big players are going to be unwinding their leverage and expecting more risk premium – lowering stock prices. Housing has another couple gut punches to take from the mortgage shakeout and increased lending costs. All the bad news may even be enough to effect the consumer, in which case we could be in for some real hurt.

If you got out when I said you can't really go much wrong at this point. You could buy any time now and outperform the market by 3% for the year with your eyes closed. I think that holding significant cash is still a good idea, though, and I continue to recommend it.

Invest Well,

Mid-Week Funnies

2007-03-13T22:49:00.000-07:00

Blogger keeps going down (Apache error that takes out the posting page)... but here we go..

Time for the mid-week funnies.

====

The media is getting in a frenzy over Bush's decision to fire a whole gaggle of US Attorneys who would not serve his political desires. For those who don't know the firings appear to be completely legal, but it seems many Americans would debate the morality of it. People are sensitive about their jobs, after all.

"Scooter" Libby (who was thoughtful enough to have his jail nickname pre-picked) was convicted of lying to investigators. From the information at trial the more interesting thing is that it seems clear that the administration willfully leaked the identity of a CIA agent to try to confuse things about her husband's politics. For anyone wondering why the leaker was not prosecuted -- the way the law is worded the leaking of classified secrets is only a crime if the President doesn't approve of it. Seriously, go look it up! The law was made that way in the Reagan administration.
The Walter Reed veteran's hospital "scandal" is the lousy conditions. Anybody who has been to a big bureaucratically run organizational facility probably isn't surprised. Administrators tend to fix their own air conditioning first, after all. I hardly see it as a specific problem, but the timing was certainly bad and somebody had to be used to generate headlines.

I'm going to do a review of the market drop factors tomorrow, but so far my calls have been pretty spot on recently. And I'll tell you I don't think it's over.

Weekly Look Ahead

2007-03-11T21:55:00.000-07:00

Two weeks ago my call to take money off the table turned prescient as the market dropped 400 points in a day. Last week my call to keep it off the table resulted in emails asking what went wrong when the market went up a little bit during the week.

It will take months for the real trends to develop, and I still don't think it will be good. Last week saw a jobs report that seemed to confirm moderate growth and inflation worries. Next week we'll see reports on retail sales, consumer and producer prices, as well as manufacturing and business inventories. (See graphic below)

Look for some downbeat news, but don't be surprised if the market rallies a bit by taking it as a sign of reduced inflation. The truth is that the increased costs at the start of the production process (labor, materials) are going to be running into weakening consumers and/or inflation. Either way that is bad news for both profits and the economy.

Most first quarter results will have to wait another month (and this is where the bad news may really hit the fan). For the coming week though a few big names are reporting (see chart below). Goldman Sachs draws my eye; the investment bank has been on a tear the last few years and I expect them to stumble in the next twelve months -- possibly starting now. Mark my words!

Friday tech files

2007-03-08T22:10:00.000-08:00

== Yacht / submarine combo special==

The image above is the Proteus, a fully submersible yacht/submarine combination. It has seating toward the rear for 14 passengers that is exposed, so that's where you seat the divers before submerging. Meanwhile 8 people can sit in the pressurized dry cabin to watch the action.

The link will send you to a place to buy this baby if you have the disposable income, but keep in mind you will not have the biggest sub in the marina. Oh no.. keep reading.

More established private submarine player U.S. Subamarines offers the Phoenix 1000. 213 feet long, the Phoenix 1000 has 5000 square feet of interior space, the luxury of a live-aboard mega-yacht, and can dive to 300 meters for those days when you just decide you don't want to deal with customs!

(click photo for larger image)

Perhaps most cool about such a craft is the amazing versatility. You would never fear a storm again, it's sure to be calm a few hundred feet below the surface after all.

Price and availability: built to request, price is only $78 million :)

If you prefer something more utilitarian you can get a used 48 passenger tourist submarine for about $2 million.

If that's still too much maybe you should consider a small two person fun-sub.

Mid Week Funnies

2007-03-06T23:45:00.000-08:00

Time for our weekly review of news in editorial cartoons from around the nation.
====

Hillary Clinton has been seeing difficulties from her voting record on Iraq.

Meanwhile the Bush administration has been citing the need for a surge in troop levels to make progress while simultaneously calling the British withdrawal a "sign of progress".
The taliban has started becoming more active again in Afghanistan.

Market trails... continued

2007-03-05T20:22:00.000-08:00

The market had a bad day
(some quotes and notes borrowed from Chris Bain and David Gaffen)

Last week I called for exiting the broad market and sold my holdings in the DIA dow etf. Over the weekend I predicted more market softening. Today most of the major market indexes (S&P 500, Nasqaq, and the Russell 2000 pictured above) closed within one point of their lows. That suggests a broad softening and selling that only stopped because the day came to an end.

One indicator that the market may remain weak for a while? Some of “the biggest money managers and strategists on Wall Street are standing their ground,” write Michael Tsang and Daniel Hauck of Bloomberg News. “Putnam Investments, which oversees one of the best-performing U.S. equity funds, and BlackRock Inc., the second- largest publicly traded U.S. money manager, say stocks are cheap. Citigroup Inc. and UBS AG are telling investors to add to their U.S. holdings. All 15 strategists tracked by Bloomberg were sticking with their forecasts as of March 2. ”

When investment managers are firmly standing their ground its a sign of impending weakness. Oddly enough when the investment managers are worrying is when the market is most likely to climb.

All that being said I'm sure the market is going to bounce around quite a bit. After hours trading today saw some strong buying, for example, and the market could open higher. Additionally I have done a lot of historic analysis of volatility indicators and the pattern today of low volatility jumping up only AFTER the market declined tends to preclude a recovery followed months later by a fall.

David Geffen, writing for WSJ.com, notes: Commercial hedgers, colloquially known as the “smart money,” were net short nearly 41,000 Dow industrials contracts, a high for the past 52 weeks, according to the Commodity Futures Trading Commission. Meanwhile, their counterparts, the speculators, were holding their longest position in the past 52 weeks of nearly 25,000 contracts. Speculators are often caught going the wrong direction when the market turns, and they’ve held a very long position for several weeks now in the Dow futures.

What does it all mean? I'm sitting out and holding only the Finance Wonk Buy stocks for now. Those are good long term holdings and the rest of my money is out of the market for a bit. The DOW is solidly down 300 points plus since I sold, so that puts readers here almost 3% ahead of the market for the month :)

Invest well,

FW

====

Michele Leder, writing at Footnoted.org, points out that excecutives at HSBC — which this morning reported a 36% jump in the cost to cover bad debts, thanks mainly to the subprime-lending meltdown — pays some healthy housing perks to some of its executives. “Now, when you’re making $700k a year in base salary,” she writes, “and still need help paying for a place to live, is it really any wonder that HSBC seems to ahve missed some of the signals that they were over-exposed in the subprime housing market, whether or not the loans were made to ‘trailer park’ people?”

Dan Carty says the move in the yen was surprising in some ways, not because of the recent strength in the currency, but the weakness that preceded it. He expected the yen to strengthen a couple of weeks ago, but instead, “it was blasted lower and weaker against the major currencies. This took many traders and funds by surprise and they added shorts on the Yen, instead of longs as it moved towards 122,” he writes. “Then a bounce followed, following comments from some BoJ members, from the same support where I thought the Yen would remain ’stable.’ This caused a bunch of new shorts to cover and pushed in the pent-up demand for the Yen among the bulls.”

Weekly Look Ahead

2007-03-04T09:59:00.000-08:00

Last week was a very rough one in the market, with a 4.2% drop in the dow and most other indices. If you followed my lead and sold your broad market holdings when I said to you wound up 2-4% ahead of the market for the week (personally my average sell price put me ahead 2%).

I still recommend holding most of the Finance Wonk Portfolio (with the possible exception of AAPL, depending on your tastes for volatility), as those stocks are picked to profit over a full economic cycle.

Everybody wants to know where the market will go this coming week. As usual I am going to put my opinion on the line in no uncertain terms: I believe the market will go down.

Why do I think this? I have been crunching numbers like mad and let me first tell you what will not be at fault. Earnings are not crashing any faster than expected, although next quarter should see much lower growth than before. The market P/E ratio is not completely out of control, only about 16, versus 24-50 at the height of the last bubble depending on how you sample and calculate. [As a note for us hardcore value analysts a 16 P/E on the market is actually rather high for current growth projections - so this must dampen the market in the longer term.]

Inflation has not yet exploded, although there was disturbing data last week that suggested inflation was going up. Consumer sentiment was also down.

So what is the main issue I see damping the market? Declining Liquidity.

Hedge funds and various investing pools have been borrowing money like mad recently in the low interest rate environment and investing it to juice returns (see for example the carry trade primer in Bond Investing 101). The main enemy of this sort of leverage is volatility and last week saw major volatility indexes jump up 50% or more. Shortly thereafter the Japanese yen exchange rate with the dollar went nuts as hedge funds tried to unwind their carry trades. With lots of hedge funds deciding risk has returned to the market something like $ 100-500 Billion could be pulled out of the market, which is equivalent to all the upward buy side that one might expect during a trading week. That is why I expect at least another week of declines.

To quote James Awad, of Awad Capital Management; "What you're having is a reality check. The market is being fueled by liquidity and some of the liquidity is drying up. Fear is in the marketplace. You're probably going to have a noticeable correction."

For the longer term we'll have to see how the market adapts to lower growth.

Friday Tech Files

2007-03-01T21:03:00.000-08:00

== RFID Staples ==

Swingline has floated an idea for RFID staples. RFID tags have become about the size of salt crystals (really, I've seen the new chips under a microscope). So the natural idea is how to get these everywhere.

So imagine it. Every time you staple something you get the opportunity to enter data on what the document is, then you can use an RF wand to track everything in a box or pile of paper. Soon you could google search and have it tell you where your records and documents are; "Shelf 2, Box 3". Many of us are getting along fine with just paper but 20 years from now maybe we won't know how people lived without this. Maybe your stapler will have a scanner and image the paper too so you have a thumbnail to search...

Status: concept

== For $60 you can be a hacker ==

This product should strike fear into the hearts of IT managers everywhere. Recently released by Solid Oak Software this little USB stick is a memory drive and much more. After configuring the special software it dumps a snoop program on any computer you plug it into. The snoop software allows you to view, recorded or in real time, all website acess, emails, and IM conversations.

Just keep in mind that there are very limited circumstances in which this is actually legal. Using it to snoop on your kids is fine and probably you could use it on employees work computers if your policies are worded right. Co-workers and other adults would probably result in you heading to jail.

If the logo is a bit obvious for you I bet you could try the now well known sugar trick to remove it. I love instructables.

Status: Available for $60 (link in the article)

== Perfect for the plane ==

Recently a few purchases have really made my work travel easier. One was the new Bose Quiet Comfort 3 headphones, which make for the quietest and more comfortable plane ride ever. Another was my IPod Nano which I typically plug the Bose headphones into. Now Logisys has a new widget that I am eager to try. It's the business end of an optical mouse on a finger harness with the optics replaced to let you use any handy surface to mouse on.

This is such a good idea I don't know why nobody did it before now!

Status: $19.99 and available now (linkage)

Market drop buzz

2007-02-28T23:08:00.000-08:00

What some notables are saying about the drop and rebound:

“From what I can tell, today’s bounce has an obligatory feel to it, with tech and financials begrudgingly higher,” wrote Todd Harrison of Minyanville.com. “The initial (out of the gate) probe lower was intuitive after yesterday’s carnage and, perhaps, this bounce is equally anticipated.”

"The selloff demonstrates somewhat starkly the inter-connectedness of stock markets around the world," said Hugh Johnson, chief strategist at ThomasLloyd Global Asset Management.

"I honestly think it's a tad of an overreaction to China and a tad of an overreaction to what happened to the U.S. durable goods orders," Hans Kunnen, at Colonial First State in Sydney, told Reuters.

From Bill King of Ramsey King Securities, who believes the market is headed lower: “You will hear ‘the economy remains healthy’ mantra often in the coming weeks,” he writes. “It always occurs after notable market declines. Sometimes this trite affirmation is correct. When it is wrong it’s very costly.”

Greg Ip, writing in the Wall Street Journal, notes the Street’s inability to leave behind Alan Greenspan, who some cited as one of the catalysts for the decline. “His comments appeared more aimed at questioning the conviction of many investors that because each of the last two expansions lasted a decade, this one, now five years old, will, too,”

This decline hasn’t even hit what investment strategist Ed Yardeni calls a “garden-variety correction,” which would be to drop back to the 200-day moving averages for the major indexes. (The Dow’s 200-day moving average sits at about 11800, so the index is about 3.5% above that level; the S&P 500 is about 3.8% above that average.) “If dropping back to the 200-dma is the worst case for the market from here, that’s not too bad,” he notes.

Mid Week Funnies

2007-02-27T22:01:00.000-08:00

Before we start our weekly review of news in editorial cartoons from around the nation I want to emphasize my call yesterday (and last friday) to take a defensive position in the market. I have held onto the stocks from the Finance Wonk Buy List because those are good businesses for the long term, but moved my other assets from a market ETF to cash. I did this after writing my article yesterday and am already very glad. I urge you to position yourself with a lot in cash as well, there is a good chance things may get worse.

====

Britain took some of the Wind out of president Bush's sails for his "surge" when they announced a pullout that will just about cancel the added American troops.

Meanwhile the administration continues to talk tough about Iran, even though they are finding little support at home.

Some in the media are finally beginning to review their own complicity in the run-up to Iraq...

..and yet it seems difficult to believe that the only shenanigans in the run-up that will see the light of day might be the Libby trial.

One powerful candidate is seeing some blowback from following the political surveys of pre-Iraq voting.

Market tidbits

2007-02-26T21:47:00.000-08:00

My main thought today was concern. Recently the market has been gaining on news of slowing growth (due to contained inflation) and going nowhere when growth is strong. Today actually saw profit taking and people discussing the possibility of recession (with some blaming statements made by former Fed Chief Alan Greenspan about a recession this year).

Is reality setting in? Could be. If the market gets more conservative we could see a lot of rotation out of the recent hi-fliers and into staid old industrials and even bonds.

Meanwhile, unless something very bad happens to the few companies left to report, this will be the record 14th consecutive quarter for double-digit earnings growth, according to Thomson Financial. On average, companies are reporting earnings 5.4% above the consensus, above the long-term historical average of 3.3% and the 4.2% average from the previous eight quarters. A total of 67% of S&P names that have reported have pulled an upside surprise, in-line with the past eight quarters, and overall growth is clocking in at 11.2%.

If we see continued market softening in the face of such good results, it will indicate a true turn in sentiment.

Contrasting this: Bearish sentiment among small investors as measured by the AAII poll fell to 20%, lowest since Jan. 2006, according to Michael Panzner, author and trader. He wonders if they’re finally throwing in the towel, that is, plunking their last bits into equity investments. The classic thinking says the last step before a market fall is when the small investors finally give up on holding cash and go "all in" because the market just keeps climbing!

I'm certainly keeping a chunk of change on the sidelines, and I recommend you do too. Nothing hurts like holding cash while the market goes up... except holding all stocks when it goes down!

====
Blog Roll [via WSJ.COM]

Chris Perruna is concerned with what he’s been seeing in stocks lately. “The Nasdaq is currently 25% higher than it was in July 2006 and is trading in new high territory (the highest level in six years),” he writes. “Historically, markets retreat after making a 30% gain from one year to another and we must be on the lookout for a signal or a combination of signals and red flags that could lead to a correction or downtrend.”

Fund manager Tom Brown, generally no fan of Bank of America’s management, disagrees with the bank’s critics on the company’s plan to issue credit cards to illegal immigrants. “Bank of America is not — and should not be — in the business of enforcing federal immigration law. That’s the federal government’s job. BofA’s job, rather, is to do everything it can to maximize value for its shareholders within. Assuming its new card plan does that, the company should pursue it,” he writes.

Weekly look ahead

2007-02-25T21:26:00.000-08:00

This week will probably be all about signs of slowing growth, which has better than even odds of boosting the markets as it allays concerns of rate increases.

Yes, the upside down market continues. We have seen for months now that slowing earnings are nowhere near as scary to the market as inflation and interest rate increases. This weak should help reduce signs of inflation significantly. We should see a downward revision in 4th quarter GDP growth, lower consumer spending (after adjusting for the effect of gift cards moving spending from Dec to Jan), and all the housing and construction reports.

Frankly, if housing continues to be weak the fed seems unlikely to boost rates. My contacts in the industry tell me there still may be 6 more months (+/-) of mortgage agencies losing money and tightening loan requirements -- which will dry up the number of buyers even further than it has already. So housing should stay down and the fed won't have too much reason to raise rates.

Market tidbits

2007-02-22T22:47:00.000-08:00

The market had an odd tilt today as the Dow Jones dropped an appreciable .41% while the Nasdaq was up .26%. Still, the Nasdaq only today reached a value equal to half its highest point during the boom -- showing just how long and deep the tech crash has been.

====

I would like to make special note that the bloodletting in the mortgage industry continues to grow. More and more small lenders are seeing massive demands that they repurchase questionable loans made at the height of the housing craze. Many of these small lenders, who are required by contract to take back sour loans, will quickly fall into violation of their own loan covenants and wind up in positions of extreme weakness.

In a typical example a small regional bank might be operating on loans from a large national bank which become immediately due if the smaller bank is not profitable for two straight quarters. An astonishing number of smaller loan operations are now coasting into their second quarter of losses and so will soon be technically insolvent, dependent on the forgiveness of the big players like Merril Lynch and HSBC to continue operating.

The result of all this? It's getting hard to get loans and the housing market will be facing yet another force dragging it down.

====

(from Worth Civils via WSJ.com)

One of the seven deadly sins, greed, is taking over on Wall Street, pushing aside any fear in the market. That’s according to the Fear & Greed Index, which recently hit an all-time high — suggesting, like many other indicators, that investors are getting a little overexcited.

The F&G index, compiled by Dresdner Kleinwort, is a risk-adjusted price momentum measure comparing global equities (as gauged by the MSCI World Index) to global bonds (represented by J.P. Morgan Chase’s index). The gauge has typically traded between +1 and -2 since its inception in 1986 — but was as low as -3 just four years ago, a sign that “the end of the world is nigh,” and therefore a time to buy stocks and sell bonds. But as the market has turned upward in recent years, the index has shot up above +2 into the “irrational exuberance” area, a sign to sell equities and buy bonds.

James Montier, research analyst at Dresdner Kleinwort in London, explained in a recent report that the F&G Index hitting an all-time high is yet more evidence that ” investors’ euphoria is truly out of control.” Of course, he wryly adds, “this warning is likely to be about as effective as yelling ‘cliff-edge’ to a herd of thundering lemmings.”

Still, he suggests that “the prudent investor should be shipping out beta and junk, and buying quality defensives.” Even better, Mr. Montier says, “holding cash seems like a good idea,” noting that U.S. mutual funds currently have a mere 3% to 4% in cash. To paraphrase Warren Buffett, he says, “holding cash is painful, but not as painful as doing something stupid.”

Performance of Finance Wonk Stock Portfolio

2007-02-21T13:36:00.000-08:00

In my relentless pursuit of the best possible conclusions I have always been willing to change my opinions and accept new data. Sometimes it's embarrassing but the ultimate goal is the right answer to make money. (It helps that I maintain some anonymity so as not to embarrass any of the corporations whose boards I have been on/am on now.)

It is with great pride that I announce the results of the last year of the Finance Wonk Stock Picks. As of now if you are following my picks you have made money on every single stock pick. The picks that were sold made money on average too, although one of them did lose money by itself (RRPIX, our inflation hedge).

The current Finance Wonk Portfolio with date and price entered and gain to date (close of market today). The picks here have blasted past the market returns.

The results are even more amazing when you consider that many of them were bought late in last year. If we leave the November buy (ASFI) out of the average then the average gain is 26% in an average of about 6 months! Stock Picks and follow up analysis is linked from the Finance Wonk Buy page, which is always accessible from the front page. You can go there to read the analysis on individual stocks.

Compare that to market returns of about 15% over the last 6 months and year periods and you will see that we here at the Finance wonk are beating the market by somewhere between 7 and 11% per year.

Obviously it would be hard to imagine such a success rate continuing indefinitely. Our goal here is to profit from hardcore analysis and information combined with zero ego and a willingness to accept correction from the community, and it is working great. I also want to thank the posters and people who have emailed me with thoughts and comments. The advertising revenue from this site is very small, but the investing returns based on the discipline imposed by having so many people review the ideas have been great.

In truth the returns have been even better than the 26% mentioned above because I advised getting out of Apple or selling calls just days before it started dropping from it's height, and similarly have advised such strategies at other times. I don't take credit for those returns though because I refrain from advising specific option trades. (Why: options can be tricky and dangerous for the neophyte and some options trade so few that I would ruin the very trades I advised if lots of people tried to do it.)

Mid-week funnies

2007-02-20T22:57:00.000-08:00

Time for our weekly review of news in cartoon editorials from around the nation.

====

The squabbling in Washington is starting to make Iraq look good...

Meanwhile the administrations comments about Iran are starting to sound very familiar.
Bush's budget had some cuts that were inconsistent with his "support the troops" rhetoric.
Bushes various forays with North Korea have led back to a familiar path...

And Dick Cheney's request that people leave his daughters homosexuality private seems to be the opposite of what his party wants to do with everyone else's sexuality.Speaking of sexuality, one recent study may prompt more men to do housework.

Weekly Look Ahead

2007-02-18T13:27:00.000-08:00

(US markets will be closed Monday for President's day)

Last week went mostly according to Finance Wonk expectation. There was strength in the markets based on some weakening inflation indicators but the Fed indicated in speeches that they were ready to act quickly if needed. Fed Chief Bernanke seemed fairly rosy on the economy, commenting that "the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes."

This week on Wednesday the minutes from the January Fed meeting will be released, and thoroughly parsed by the market. Assuming no surprises there is no reason the market cannot continue its slow upward drift.

A handful of "name" companies are scheduled to report earnings this week. The market should be more resilient to earnings weakness now than it will be sensitive to inflation data. Weakness at Wal-Mart, for example, might be seen as less of a threat to growth than a weakness in inflation and should not cause undue hysteria.

Weekly funnies

2007-02-15T19:27:00.000-08:00

Time for the weekly review of news in editorial cartoons.

====

More and more people are questioning how a 15% increase in troop strength will solve anything in Iraq..

Meanwhile the president's saber rattling on Iran is inspiring shock from some and disbelief from others.Global warming was obvious to most scientists ten years ago. Even Washington is finally starting (starting!) to receive the message.

Meanwhile the President's new budget had a number of questionable assumptions

Update on Asta Funding and Market tidbits

2007-02-12T21:22:00.000-08:00

Today Finance Wonk buy company Asta Funding (ASFI) went up 10.45%. The market was apparently surprised at the strong earnings and business progress they are making. If you read my call on this stock last november you should have been expecting the results we saw in the report last night.

Asta Funding has been falling out of favor lately because the hedge fun fan-boys on Wall Street have seen hedge funds snapping up distressed debt. They see this as a challenge to ASFI and have issued numerous dire warnings that it will see increased costs acquiring debt.

Is this true? I'm more than willing to sell a stock if the business doesn't make sense anymore.

Asta announced a large new debt portfolio purchase at the same time they announced breakout earnings. The purchase is nominally a $6.9 billion debt portfolio bought for $300 million dollars. This amounts to 4.3 cents per dollar of debt purchased. If we go back to 2004 Asta was buying debt for 3.4 cents on the dollar, and in 2005 much debt was purchased for 2.8 cents on the dollar.

So there are indeed rising costs at the base of Asta's business. On the other hand the new Bankruptcy Abuse Prevention and Consumer Protection Act should increase collections significantly as well. That's one of the reasons we bought this stock.

Debt takes about 5 years to work its way through the Asta recovery process. We should have another 2-3 years of outsized returns and then a return to the stable long term earning that has powered this stock for years. The Net Present Value discount should be plenty to absorb this transition, and much cash will be generated along the way. If Asta can grow earnings at 7.8% annually for 10 years the net present value discount is a remarkable 20% -- currently the growth is almost 3 times that target!

A little math tells me that they should exceed my targets for at least another year, at which point they can grow at the sedate pace of the economy and still be a good investment.

My guess is that we will see enough rise in recoveries to justify the slightly higher price of debt and in the meantime Asta's old portfolios should generate the cash to attack the market. Management will surely exploit that. I also will look for a pop in the stock when buying distressed debt stops being a fad among hedge funds. When those hedge funds want out Asta should get any number of choice portfolios at discount prices using their cash reserves.

Warren Buffet always says to buy a business, not a stock. I like Asta as a business and a management team more than most of my stocks. I'm keeping my position in Asta, thank you very much.

Invest Well,

FW

== Market Tidbits ==
(via WSJ.com)

James Picerno of Capital Spectator doesn’t believe the inflation threat has been adequately doused, and believes current bond yields don’t reflect the risks. “By our reckoning, the bond market isn’t pricing in the longer-term threat of inflation,” he writes. “Maybe that’s because long yields are lower because of an excess of foreign purchases of Treasurys. Or maybe investors overall are overly focused on tomorrow vs. 10 years hence. Nonetheless, the inflation risks spawned by government spending are quite real, and strategic investors should pay heed.”

Chris Perruna has a few words on trading, and how emotions play into it. “As soon as money is involved in a transaction, whether it be the stock market, real estate, art work or antiques; emotions ultimately set the final price,” he writes. “Some investors have greater control over their emotions while other investors are destroyed by their emotional reactions to certain situations and events. One common trait many novice and advanced investors share, including me, is placing a position in a stock at the wrong time.”

Weekly look ahead

2007-02-11T16:50:00.000-08:00

The seasons earnings are tapering off this week, and profit growth has slowed but is still relatively healthy. Healthy enough that investors seem content that companies will continue to grow if left alone.

The healthy but moderating growth explains some of the strange recent market reactions. Week before last I predicted a huge upward jobs revision and also that it would drag the market down, not push it up (here, below the break). We have been seeing a market that wants the market to plod along without good or bad news, really. Good new sends the market down because it increases the risk of inflation and action from the Fed, bad news can send the market down if it suggests pain to corporate profits.

Unfortunately this week will be full of news (check out the economic calendar graphic below). Most certain to cause waves: Fed Chairman Ben Bernanke will be performing his semi-annual reports in front of the Senate (Wed) and House (Thu). Together will all the economic reports out this week Bernanke's testimony guarantees that investors will have a laser-like focus on inflation. Expect signs of inflation to invoke selloffs in the market.

Finally let me counter the general journalistic sentiment on what happened friday. I don't think the rise in oil had much to do with the market decline friday. I have been conducting analysis on this and for one thing the stocks that do well with increased gas prices did not rally at all. I believe friday was a general profit-taking which suggests people will have money in their wallets and be looking for openings to invest.

Friday Tech Files

2007-02-08T21:53:00.000-08:00

== Minority Report lives! ==

Remember that bit in the Tom Cruise movie Minority Report (which was adapted from a much better written work incidentally) where people were getting iris scanned wherever they went? Tom gets a new set of black-market eyes to hide his identity and when he goes into The GAP the computer snaps his picture and says something like "hello Mr. Kurosaka."

(Insert joke here about how The GAP really needs something like this to save them from bankruptcy)

Well, that day is coming. A new technology recently debuted called "Iris on the Move" from Sarnoff. It was actually announced (released) Back in 2005 but the product has been improving and advancing ever since. Currently they claim it can identify 20 people per minute at a normal walking pace. This gets the security people a step closer to their ultimate fantasy of being able to put up a system that gives a certain identification on everyone who walks past.

The system works through sunglasses, although it is still based on seeing the targets eyes so presumably a big hat and a gaze sternly leveled at ones own feet will prevent identification -- but that response will be pretty noticeable by guards stationed nearby.

I've done some work with the Defense Department before and always found Sarnoff to be very impressive. Too bad they aren't public!

== Bad Ideas Department # 6739 ==

Okay, just look at the picture for a second and tell me what isn't wrong with this product idea.

Yes, it's an automotive sun visor with a 7" LCD widescreen, DVD player, MP3 player, and TV tuner. It also includes a remote control, all for the low price of $300. Lest you think I am totally making this up you can follow this link to buy one.

Just keep in mind that when you get in an accident, the other guy can just show this thing in court and you will pretty much automatically lose your case.

== Fuel from Whatever ==

Like many cool technologies, this one is being funded by the US Military (who are, practically speaking, a stealth funding agency for our nations engineering universities). This is the so called "tactical biorefinery" being built by Purdue. It seems to be getting a lot of play on the techie blog circuit so please allow me to show that I have more information than anyone else...

The biorefinery (ignore the tactical part, that's for selling it to the military) takes any waste that you might consider putting in a compost pile and turns it into energy. The fuel (or Biomass) goes through two separate processing flows. On the one hand the sugars in the fuel are "digested" by bacteria, putting out burnable residues and sugary materials. On the other side a thermal process (similar to thermal depolymerization) puts out a primary natural gas that is burned with the residues of the sugar process and a "conditioned gas" which burns the sugars from the digestion side of the machine.

Together these two processes break down the trash, extracting more energy than it takes to get the process started. In theory the energy in a snickers bar, for example, could run a laptop for an hour or two. Multiply that by the output of the average military mess hall and latrines, and you have a significant bit of power.

The ultimate dream is to build devices on a scale appropriate to a municipal dump and/or sewage plant, where a lot of potential organic energy is going to waste. Imagine a day where the trash and sewage runs into a plant that supplies a portion of the cities power... with the outputs being clean water and fertilizer.

Some day.... some day...

Cheers and have a good weekend,

FW

Investment Bonds are not attractive right now

2007-02-07T22:24:00.000-08:00

Recently I wrote an article analyzing the case for bonds and promised to go find some good bonds to invest in. Here at the Finance Wonk I have taken the solemn oath that I would rather be embarrassed and admit to a mistake rather than continue with a bad conclusion. (It helps that I have maintained my anonymity).

Well, I have to tell you that I do not have bond recommendations for you. Quite to the contrary, the bond market is in a place I have never seen it before. It is almost impossible to get paid enough for investing in corporate debt these days.

Now, we here at the Finance Wonk are very well positioned for bond analysis. Using the Altman Z-Score allows one to typically analyze a companies financial solidity several years ahead of the ratings companies, for example (sounds complex but it's all in Bond Investing Strategies and Tips section). Put that together with lots of market access and friends and some interesting observations start to appear.

In my call for buying bonds I noted 5 potential market paths and the effects on bonds. Economic developments have made an inflation scenario more probably, which would be the worst outcome for bonds.

But the biggest issue is that cash is paying much better than it used to compared to bonds! Right now my brokers is paying me a bit over 5% on my cash. US government 2 and 10 year bonds are both below 5% and would drop if inflation hits. Investment grade bonds are yielding about 5.5% and high yield (a.k.a. junk bonds) are around 5.75 to barely into 6% for extreme risks. Think about that for a second, the risk premium you get for high risk is about 1% over the rate on cash! I was able to use Z-score and other analysis to find a couple companies that were yielding above their peers because they are stronger than most people seem to think, but it really doesn't matter. Fundamentally, even if you knew the companies would never fail a payment, the rate offered over a good cash account just isn't enough for the interest rate risk. I'd rather make 5.1% on a cash account and not have to worry about capital declines.

To place your safety bet these days I would actually recommend cash in a good 5%+ brokerage account. This marks the first time I have recommended cash.

Also I would like to point out that as I was composing this story the Wall Street Journal Beat me to it, posting a similar conclusion in an article called "Bond Boom's Thin Ice" (subscription may be required). Respect to them (especially after last year when they published an almost exact duplicate of one of my articles a month later). Seriously though, I love the WSJ guys and I know at least one of them reads my blog because he needled me when I dropped one of their quotes in here without citing it properly on a lazy day. Love ya!

[Personally I think my article gives more concrete advice, but that's probably just a style difference]

Invest Well,

FW

Mid Week funnies

2007-02-06T21:45:00.000-08:00

In Washington the congressional leaders have been making a big show of resisting the Troop Surge in Iraq. Oddly enough things are structured such that they can't make much of a difference this way.

And as George W Bush enjoys his executive power, he has been criticizing the power grab of Chavez in Venezuela. [Normally I resist sidenotes on funnies day, but I gotta say Chavez and Bush are Apples and Oranges.]

I think it's funny when reporters challenge whether there's a plan to invade Iran. Of course there's a plan! The military is always making plans! That doesn't mean anything will come of it though.

The budget that wasn't

2007-02-05T21:59:00.000-08:00

The president delivered his budget to lawmakers today and it would be silly to say it was anything but doomed as written. I would say not to base any decisions on what is publicized as being in the budget. What sort of things am I basing this on?

The Bush Budget proposes that people would get AMT relief for just one more year (conveniently into the next election) and then AMT would be left as it is, likely to hammer millions of Americans with higher tax rates and removed exemptions. Nobody really believes the Democratic majority will give Bush such a bit of free electioneering, or that they would let the AMT go unrepaired. As a yearly AMT victim, I wouldn't mind a major fix, but the chances are that any fix won't effect the somewhat more wealthy readers of this column
The budget also keeps the Bush Tax Cuts, sort of Mr. Bush's signature move of his presidency, and funds it by making cuts to lots of government agencies and raising the interest rates on student loans. This one is sort of a dare to the Democrats to raise taxes and make the Republicans look better. We'll see what happens there.
Finally and most notably much of the savings come from presumed cuts to sacred programs like Medicare and Medicaid, almost all slated to take place after President Bush is out of office. Yeah, right.

Meanwhile some other tidbits of interest:

Paul Kedrosky comments on the rising vacancy rate for residential real estate, a figure that has increased to its highest level in four decades. “One way to look at it is that, on average, if you wander around your neighborhood and knock on a random sample of 37 homes, one of them is likely to be empty … all the time,” he writes. “Another, and somewhat more serious way of looking at it, is that vacancies create a kind of pressure-cooker, with people increasingly eager to do something, anything to get a sale given that their home is otherwise sitting empty.” [via wsj.com]
According to Birinyi Associates, two of the most overbought stocks in the S&P 500 are two of the home builders — D.R. Horton and KB Home, and those two haven’t been more overbought in the last 200 days, a potential warning sign. [I say get out now if you are in these.] [via wsj.com]
Morgan Stanley now believes the Federal Reserve will be on hold throughout 2007, and its next move is as likely to be a rate increase as a rate decrease. “Despite our growing confidence in the sustainability of growth, we must acknowledge downside risks: A sizable jump in bond term premiums could make financial conditions more restrictive,” they write. “A significant backup in rates could weaken housing activity and potentially trigger business caution, stifle job growth and further depress housing prices.”
John Wasik tells readers how to navigate the unsteady waters of the U.S. real estate market. “Determining whether it’s safe to purchase in any given area is a tough call. Local economic conditions combined with mortgage rates and speculative trading make things complex,” he writes in Bloomberg News. “Yet by collecting information to make a matrix on foreclosures, property-loss risk and sales trends, you can get a reasonably good idea of which markets to avoid.”

Invest well,
FW

Weekly look ahead

2007-02-04T19:29:00.000-08:00

Last week was a good indicator of the market. It had a vast quantity of news that allowed us to see what the market seized on as important. Rebounding gas prices helped the Finance Wonk holding of IPSCo, but didn't really hurt the market. An upward revision in jobs (predicted here 6 months ago) was an inflation indicator that held the market down.

This is a trend we will likely see continue. The market has decided (possibly rightfully), that the main danger is inflation but that oil is not a threat. Expect to see the market continue to be nervous on inflation news.

Exactly as predicted

2007-02-02T10:23:00.000-08:00

This mornings job report is being reported as a surprise. Hardly. I had predicted 750k-1 million additional jobs in the benchmark revision (see below) and it came out at 754k for 3/06 and 933k for 12/06. Also just as predicted, the market softened on the news. For details and the prediction see post immediately preceding this one.

Combined post Friday

2007-02-01T22:11:00.000-08:00

Hi All, apparently some regions couldn't see the thursday post for some reason. So I'm leading with a Tech File entry and following up with economic analysis including expanding on some of thursdays concepts as well as some new notes. Make sure to scroll down for the market surprise.

== The Polaroid Returns ==

Possibly the only downside to the digital camera revolution has been the descent of the instant-print camera. They are still for sale, but as most stores eliminate the old film cameras they tend to eliminate the Polaroid type as well. Well, the Polaroid company has created a spinoff called "Zink" that is coming to market with the gadget shown above. It's a bluetooth gadget the size of a fairly flat but large cell-phone that can accept pictures from your phone or camera (via cable or bluetooth) and then print color glossies on the spot.

A few months ago I would have thought there was no market for this. Then I was at an event where someone brought the amazing HP A432 portable (no kidding, this thing is pretty small and cheap yet makes fairly good pictures). It was the complete hit of the party. Everyone was taking and printing pictures and playing with the multiprint settings. It even kept the kids busy while the adults talked. Now I'm convinced there is a large market for cheap, portable photo printers.

The Zink device also has another neat feature: no ink! The paper is the picture-in waiting and while the paper is sure to be pricey, at least you will know the price per image up front and you won't have to worry about the logistics of keeping both paper and ink packages handy. The Zink product could be the purse or backpack equivalent of the HP product linked above. Someone will throw it on the table at a coffee meet and people can send cute pictures to it. Sounds crazy, but unwrap an HP A432 at a party with some digital cameras and you'll be a believer.

====

The Jobs Surprise for Friday

Tomorrow mornings jobs report probably won't be a big shock, but the thing that news outlets are likely to pick up on will be the Labor Department's benchmark revisions, a wonky statistical revision that comes out only every year or so. It will attempt to show how many jobs were created between April 2005 and March 2006 that were NOT in the BLS jobs reports.

Follow that?

This is the report of jobs that were previously missed. And it should be HUGE. I'm guessing in the 750,000 to 1 million range. To put that in perspective that's about 6 months worth of jobs creation.

If you want to know why exactly the payroll surveys miss so many jobs you can review this article of mine from 2006, where I pointed out this was happening. As pointed out in the article even people like me (who do QUITE well, but who have their own business instead of working as an employee) are technically unemployed as far as the usual job reports are concerned.

Wait a minute? I wrote about this surprise back in mid 2006? Am I frustrated that it went unrecognized for so long? Not at all. Having a better grasp on the economy has made me, and anyone who bought into my portfolio calls, some nice money.

Back on topic, the market will probably be reading headlines tomorrow that some huge extra number of jobs was created. Unfortunately that isn't really good news for the market. The job growth happened through 2006, so the economic growth from those jobs has already shown up in earnings. The bad side of jobs growth, however, is wage inflation and then price inflation. The market will probably see the massive jobs boost as a dangerous sign of inflation, and recently inflation is one of the few things that can discourage the market.

====

For anyone thinking of an analyst position on Wall Street, read here for an all-to-true brief rundown of a typical work day for a Street analyst.
John Ogg, writing on 24/7 Wall Street, muses about a trade that could work — going long Dell and short Hewlett-Packard. “Your premise would hinge on the fact that the best part of a run has been seen in HPQ and most of the worst has been seen in DELL,” he writes. “So this is not without risk, but it looks much different compared to trying to do this a year ago or 6 months ago.” (via WSJ.com)
Nouriel Roubini notes the effects of an effective peg on the dollar maintained by Chinese banking authorities is having on that country’s assets. “With deposit rates so low and capital controls, the 50% of GDP savings of the Chinese needs to go somewhere. And increasingly, the liquidity created by the fixed exchange rate is now going into the stock market,” he writes. “So the fixed rate regime is an indirect cause, through liquidity and credit creation, of the equity market frenzy and bubble. And with deposits rates and sterilization bond rates being so low, increasingly the hot money — that is flowing into China because of the leaky capital controls on inflows — is going directly into the stock market, thus feeding the bubble frenzy.” (via WSJ.com)

Invest Well,
FW

Mid-week funnies

2007-01-30T22:29:00.000-08:00

Time for the weekly review of news in the form of editorial cartoons from around the nation.

====

President Bush gave his first State of the Union address since his party lost both the Senate and House to Democrats this week. As usual, there were many questions afterward.

Hillary Clinton officially joined the race for President in 2008 with a campaign account vastly larger than that of any of her opponents.
"Scooter" Libby, on trial for lying about revealing a CIA operative to political ends, said that the whole thing was planned by the white house.
Meanwhile Bush's "troop surge" is already resulting in military contracts.
And, of course, the increasingly extreme weather has even more people talking about global warming.

A market most boring

2007-01-29T22:31:00.000-08:00

I had to laugh today.

Yesterday I observed that with all the news out this week the market behavior might tell us how the market mood is. Today that mood was... boring? Perhaps a better word would be "uncertain" as the market did almost nothing. Apparently everyone is waiting to see what will happen, nobody wanting to move until they see what the herd is doing. That suggests that volatility could rise as investors clamor to get on whatever bandwagon forms next.

Guest commentators via WSJ

George Gutowski isn’t so thrilled with Mattel’s earnings report. “The provision for taxes dropped dramatically from $235 million to $91 million. I almost never believe huge drops in income tax when they happen and fully expect some restatement in the future,” he writes. “This low level of taxation will probably not hold in future quarters. Management essentially makes no comment about it in the press release and probably does not want to talk about it.”
Strategist Andrew Crowder is among those who believe a correction could be in the offing soon. “The bounce off of today’s intraday oversold reading was not nearly as powerful as what we have witnessed recently,” he writes. “This could be the initial signs of intermediate-term weakness going forward. The market is still in an uptrend so the bears should not yet rejoice, but a few more weak buying attempts off of oversold by the bulls could lead to a decent correction.”
Justin Lahart points out in Ahead of the Tape that the rise in corn prices due to a desire to find alternative energy sources could hurt consumers’ wallets anyway. “With Washington newly enamored with homegrown energy sources, despite the recent drop in oil prices, corn prices could head higher still. In time, this could push its way into food prices broadly,” he writes. [Note from FW: corn prices already rose after the ethanol craze started then started drooping as oil prices dropped and reduced the fuel value of ethanol]
Writing in TheStreet.com, Aaron Task points out the divergence between the Dow industrials and the Dow transports. “The Dow Jones Industrial Average slid Thursday, but even after a 100-plus-point drop it is less than 1% below its all-time closing high,” he writes. “That is why it’s more concerning to some market watchers that the Dow Jones transportation average, which fell 1.4% Thursday…is now 5.6% below its all-time high set in May.”
Mortgage broker Dan Green usually writes about economic issues on his Mortgage Reports blog. But with mortgage rates jumping dramatically recently, he takes some time to discuss what’s going on in his business, speaking of new clients who, for reasons he understands, couldn’t shake the impression he was trying to pull a fast one. “I watched their dollars just float away while they looked at me as if I were a high-pressure salesperson. It’s really a shame. I don’t know how else to say ‘YOU’RE MAKING A BAD DECISION BY WAITING’ other than to just say it,” he writes. “Can I blame the first-timers for not trusting me? It really does sound ‘high-pressure’ — regardless of the trust that we may have already built together. Sad, but true.”

Weekly look ahead

2007-01-28T21:51:00.000-08:00

Well, I'm back from my whirlwind trip visiting companies in the midwest. I have to say I saw some surprising things. It looks like construction and housing markets have farther to fall but that many industrial companies are enthusiastic and on an upswing. The consumer has been mixed, and it's not clear where spending is headed.

The upcoming week is completely packed with news. There's a Fed policy meeting, a monthly jobs report and earnings from a quarter of the 500 largest publicly-traded companies. There is also a huge pile of economic reports coming out.

Weeks like this have so much news that they actually help monitor the markets overall mood. There is so much for investors to grab onto to justify movement either up or down that the direction the market goes is actually a pretty good idea what the crowd it thinking.

I don't expect the Fed to budge (not for a while actually), they have solid information that the economy is growing and yet inflation is tame - they won't want to mess with that.

Tech files Friday

2007-01-25T19:31:00.000-08:00

I'm still traveling amongst companies and gathering information. While it cuts my postings at least it gives me cool info to spread around. For example if you read my post yesterday about housing you knew in advance what todays housing report would say :)

== Samsung claims thinnest phone title ==

The phone in the picture above is only 5.9mm thick and in person it feels even less. The phone has officially reached the point where it feels just thick enough to be stiff. You really wouldn't want it any thinner. This is the Samsung Ultra Edition 5.9; it has a 3.2 megapixel camera, Bluetooth, and 80 MB of onboard memory. Avail around March in Europe, US availability not announced.

====

Also, I have more information regarding last friday's post on "Iphone's Brother" from LG. Turns out the price is HIGHER than the iPhone at around $799 US. The object is a "designer branded" Prada phone that should be on the market later this year.

Some observations

2007-01-24T20:50:00.000-08:00

I'm on the road and meeting with people at big companies whose names you would recognize...

The liquidity in corporate america is very high and board members are feeling a lot of pressure to compete with private buyout results. The recent huge profits generated by private buyouts of fragments of Ford, Vivendi, and several other companies may finally spur managers to start spending some of their huge cash horde. This sort of action, with company spending from cash hordes, could replace some of the potential loss in market strength due to any lessening of debt action.
The housing market is continuing to get worse! The projections inside housing firms are amazingly bad. Many of them are even starting to mark down the accounting value of unbuilt land on the assumption they won't be able to profitably build houses anytime soon!!
The last few years we've seen stock declines in January as companies "talk down" projected results followed by better performance later in the year as companies beat those projections. Interesting possibilities and parallels for this year.
Economic growth rates outside the US are increasing while the US is slowing. That's unusual. Usually US slowdowns prompt slowdowns elsewhere. It could be that the US is decoupling somewhat from its role as the global economic engine, this would actually provide more resilience from financial slowdowns.

This is turning out to be an interesting trip. Some positive things are going on in corporate America. It could be that this year will be okay to "up" in the markets, in which case the Federal Reserve would have achieved a near perfect interest rate performance by preventing inflation without damping the economy.

So, not quite time to run for the hills yet. And if the debt market remains strong and companies start using some of those private equity tricks to extract value, stocks could go up a bit from here.

I'll keep you posted.

FW

Mid-Week Funnies

2007-01-24T08:50:00.000-08:00

Time for our weekly review of the news through editorial cartoons.

====

How China could sink Wall Street

2007-01-22T21:05:00.000-08:00

If you buy lots of things on credit but can pay your interest, your business will probably survive. But as soon as the bank decides they don’t want to lend you any more money, you have a problem. Other banks are likely to decide they don’t want to lend to you either and things can go from bad to worse in a hurry.

In November (the most recent numbers available) the United States had a trade deficit of $58.2 billion. That is to say that we received goods worth $58.2 billion more than we shipped out. That would be the buying more than you pay for part.

In November the net foreign acquisition of long maturity U.S. Securities measured $58 Billion. In other words the people we bought the goods from in other countries collectively turned around and cashed in their I.O.U.s for American Debt. That would be the part where our trade partners are lending us money.

So far so good, right?

Well, the tide may be turning. That $58 billion in November was down 23% in one month from $74.9 Billion in October. That would be the part where the banker is deciding they maybe don’t like lending to us anymore.

For the time being business (and buyouts in particular) have been riding the cheap loans available due to massive capital inflows from overseas. Buyouts today use far fewer junk bonds and far more bank lending, which is cheaper and made possible by combining bank lending into Collateralized Debt Obligations which in turn have been feeding overseas interest in investing in the US.

If the interest in buying our debt goes down the price of borrowing will rise as borrowers have to pay more interest to attract money. This would probably make leveraged buyouts less attractive while simultaneously raising the cost of doing business. Such a double whammy combined with slowing profit growth would probably hammer the markets.

Got it so far? Less desire for our debt equals higher interest on corporate loans plus higher business costs equals a declining market.

The logic is good, but what about counter-forces? The usual savior of a lively capitalist system is another mechanism taking up the slack. In this it might mean the Federal Reserve lowering interest rates to help business. Unfortunately one of the main reasons people are no longer buying as much US debt is that many of the other central banks around the world are raising interest rates, making it more profitable to buy their debt. In this particular case as the US lowers rates to help the economy, the loan market may get worse before it gets better.

For the moment there is still strong enough cash inflow to keep things going, especially in the private debt market, but this concern is one of the reasons the market has been dropping recently even as oil drops (the other reason the market is down would be weak earnings, but I’ve already written about that).

There are a number of potentially nasty scenarios out there, which led the World Economic Forum to argue in their 2007 report that people have fundamentally underestimated the risks in the world. Experts express that risks have been rising all across the 23 areas the group studies.

These world risks are NOT typically priced into the market right now, which suggests that when one or more shocks hit we could be in for a serious crash. This increased risk is also why I have not recommended any bond purchases yet. Right now I can get 5.05% on my cash holdings, and the only bonds paying more than that are too risky or too long to be worth it.

I realize I’m sounding like a broken record here, but I really can’t stress enough: Position yourself defensively. If you go through the archives you’ll see I’ve called a number of entry and exit points and a number of times when things wouldn’t happen (which is far harder to do as a writer, since it’s so boring).

Invest Well,

Weekly look ahead

2007-01-21T18:18:00.000-08:00

This week 23% of the S and P 500 companies report earnings, so most of the suspense on where earnings are going should be gone by the end of the week.

Last week saw a tumult of initial earnings as well as my early prediction that we would finally see year over year growth rates below 10%. So far with about 15% of the S and P 500 reporting Thomson Financial reports earnings growth is about 9.3%. Also note that more than half the results so far have been from financial companies, where profits have grown among the most of any sector. So we should expect change to the downside, not the upside, which could mean a dissapointed market moving forward.

Meanwhile a trend is emerging where companies report reasonable earnings and then warn about reduced growth in the future. Witness the recent report from Apple Inc and all the mayhem that followed. We may see more of this sort of announcement, so hold on to your hats and plan accordingly. (By plan accordingly I mean: make sure you have a cash position, sell your overpriced highflyers, and maybe sell covered calls if you use that strategy.)

Tech Files Friday

2007-01-18T23:28:00.000-08:00

== iPhone's brother? ==

The phone above isn't the iPhone, it's the KE850 from LG. Full touch screen interface like the iPhone (although without dual-touch technology) as well as a music player and other widgets. It won't run OS X like the iPhone manages to, and it probably won't be as slick or quite as cool but it will probably get some additional attention due to the iPhone and it should be cheaper. Word is it will also be able to accept a spare battery, unlike the current draft iPhone.

== Housing without workers ==

Much thanks to the Times Online (who also supply some of the live news feeds you see on this site) for this article on two teams vying to build automated systems that would drive to a worksite and build homes with few workers. One British team and one American team are both aiming for a system costing under $2 million that would be able to build homes quickly and cheaply.

The American approach is pictured above and they have a much more readable web site (Linkage). The system would be a version of automated fabrication that would build custom homes out of a concrete-like material complete with curves and customization.

Immediately after this hit the news people began bemoaning the loss of jobs it would cause. People aren't thinking ahead. As the baby boomers retire the American workforce will actually shrink for the first time in history (as far as I can tell, I don't actually have those numbers). We need a way to backfill some of the more menial jobs and move people into jobs with more impact. If you don't believe me about the effects of retiring boomers, believe Ben Bernanke. Soon we'll only have 2 workers supporting each retiree... very scary.

Even if the workforce weren't shrinking there would be nothing to be afraid of. Jobs types are constantly being replaced and altered and we adapt. Thirty years ago a "computer" was a person with an abacus or calculator and a sheet of paper to table sums on. And thirty years ago nobody would have any notion what a "search engine optimization consultant" would do for a living in the future. We adapt!

This whole thing is kind of assuming anybody wants a concrete house. Thomas Edison spent much of his life and fortune trying to encourage people to accept his concept for the concrete house, and it turns out he couldn't give them away. This article has lots of pictures, this one has more details but no pictures. It's an amazing story.

Don't invest in any concrete house builders until you see if they will sell. :)

Have a nice weekend,

FW

Riding the bouncing Apple

2007-01-17T19:26:00.000-08:00

(Note, this article was originally written with Apple at $95. Within 24 hours it had dropped 5%)

After my cautions last week on Apple stock having a high price I sold some covered calls on my position. That caution seems well placed today. The company reported a blowout quarter but tempered expectations for the future and the stock fell.

During the final three months of 2006, Apple said it earned $1 billion, or $1.14 per share, compared to $565 million, or 65 cents a share, in the year-ago period.

Revenue for the quarter hit a record, reaching $7.1 billion, up 24 percent from $5.7 billion the previous year.

Analysts, on average, were expecting earnings of 78 cents per share on sales of $6.42 billion, according to a Thomson Financial survey. That means Apple beat earnings targets by 46%. Much more importantly they reported profit margins of 14% versus 10.6% predicted (why, oh why doesn’t the financial press report these numbers).

The reasons for all those earnings were roughly in line with what was predicted here during initial stock coverage. In particular this was part of the original analysis: “Because Macs are still only 3% of the computer market, so if they grow to just 4% of the market it means growing 45% of Apple’s sales by 30% -- or an overall 13.5% sales growth right there.” Guess what? The IDC market research firm reported Wednesday that Apple's share of the PC market in the U.S. had grown to 4.7 percent in the quarter, up from 3.6 percent a year ago.

Despite all this I am calling the next six months for apple as “choppy and bouncy.”

Why? Well, for starters Apple forecast fiscal second-quarter revenue of $4.8 billion to $4.9 billion and earnings per share of 54 cents to 56 cents. Analysts had projected revenues of $5.22 billion and earnings per share of 60 cents, according to Thomson Financial. Lowered earnings will damp the stock upside in the immediate future.

In the intermediate term I think Apple TV has great promise and the iPhone could be the next iPod, but both are farther from profits than the market is pricing in right now (see here for a primer on net present value). The iPhone won’t even launch for 6 months and there are a number of issues that may prompt many people to wait until the second version comes out (example: many road warriors want a cell phone that accepts a spare battery).

All the good news is priced in. Potential bad news could come from the iPhone rollout (delays?) or the SEC investigation into Steve Jobs’ role in stock backdating, for example. Apple is one of the most volatile stocks around, so expect an appropriate ride.

That’s why I think Apple stock will be a rollercoaster for a while. If you bought when I called it near $50 you can sell and watch or ride the coaster, or try to make some money selling covered calls like I am. I’m not too worried about having the stock called away because I believe there will be buying opportunities as we move forward.

Invest Well,

Mid-week funnies

2007-01-16T19:16:00.000-08:00

Time again for our weekly parade of editorial cartoons from around the nation. The best way to get your news short of...um... actually reading the news?

====

You may not have heard of it with all the news on Iraq but global warming has officially started to displace people. Off India an island called Lohachara that used to have 10,000 residents is now permanently under water. Eight years ago the first formerly permanently above-water islands submerged in the Pacific atoll nation of Kiribati. Several low lying islands in Vanuatu (known to many Americans as the scene of a season of Survivor) have been abandoned. This is the first time in recorded history that a permanently occupied landmass has been submerged by rising oceans.

Many people have already begun questioning the President's plan to solve the Iraq situation by adding another 15% to the troops in Baghdad. Yes, that's what 20,000 works out as.

I thought this one was funny because of the comment on the right. The Republicans who altered the rules to remove power from minority faction lawmakers have suddenly found themselves the minority!

Weekly Look Ahead

2007-01-15T09:38:00.000-08:00

Hmm... blogger seems to be eating articles today. I'll pretend I had something brilliant to say in my previous version :)

Bottom line is this: we are headed into the busy economic and earnings season. Investors will be looking for hints on where the economy is going, especially given all the recent changes in the investing situation. The december shopping season was stronger than expected, but oil is dropping fast and much of the market earnings gains have been due to oil companies. We've enjoyed a market pop upward due to declining oil but now we face potentially lower earnings reports due to the same thing. Overall it's better for the economy if people aren't spening as much on oil, but in an uncertain environment lower earnings growth is likely to result in unhappy stockholders.

How bad will the earnings be? Current projections are that this will be the first quarter in a very long time with single digit growth in earnings (year over year basis). Looking back into my notes I see that the pundits have been warning about such an event for almost 2 years. This time I think they may be right.

Frankly, the lower earnings are what led me to my recent remarks on the new drive to invest in bonds. Unfortunately the changes in the market since that article (less than two weeks ago!) have made the situation far less clear. Bonds are also paying pretty lousy rates right now so it's hard to justify a somewhat risky 5.75% bond when I can leave money in my brokers super-savings account and get 5.05%.

Friday Tech files - CES special

2007-01-11T20:57:00.000-08:00

Like the swallows returning to Capistrano or the salmon returning to the spawning grounds of their youth, technical buyers descend on the CES conference in Las Vegas every year to see the newest gadgets. This year CES was deftly overshadowed in most of the press by the announcement of the iPhone, and presumably the techies get less spawning opportunities than salmon... but still here's a rundown of some gadgets that have a lot of people talking.

== Verizon TV service ==

That's not internet streaming video but actually a real, normal TV channel being shown through the Verizon MediaFLO service. MediaFlO is a fancy word for 20 channels of analog TV transmitting in the old UHF spectrum (no joke!) is what is reportedly good quality. The screen is much smaller than the iPhone screen, at least on the LG and Samsung phones shown so far. The phone above is the LG VX-9400, a 4 ounce VCast music phone with camera, MP3 player and memory slot.

I suppose the real questions will be how easy it is to watch TV on a 2 inch screen (iPhone has a 3.5 inch screen), and how good a job Verizon does of getting the signal into subways and elevators.

== The iRiver Unit 2 blows people away ==

IRiver has turned up on the Tech Files here a number of times and they are clearly a company to watch. The so called "Unit 2" was apparently a last minute addition to the CES lineup and since the company hadn't thought they were going to introduce it there is no official product name yet. "Unit 2" is just what everybody was calling it.

Surprise, it was a hit!

The base station plays CDs, DVDs (on the screen you see, which docks on the speakers), all sorts of multimedia files, and even television signals. The video screen pops off to become a portable media player at 800x480 resolution so you can take the video with you or do whatever you want.

As if that wasn't enough it has a remot, GPS, and it's a phone! It has 30 GB onboard to store your movies and photos (set it to slideshow when you're not using it and it can play background music and show photos until the phone rings).

As if that isn't enough it also has wi-Fi so it connects to the network in your house, network radio so you can listen to any radio station in the world over the internet, streaming and dowload services, and it can read SD memory to view pictures or transfer files.

Good grief! No wonder it drew a crowd. The slick design is pretty promising as well.

== Vista's overlooked feature ==

One often overlooked feature in Windows Vista is the poorly-named slideshow mode. In this mode the computer is in a powersaving state while still accepting limited inputs and providing video through the external monitor port.

As conceived the mode is for displays or presentations but Eleksen, the people behind the iPod Jacket and the rolling keyboard, have come up with a concept laptop bag with an external display and some fabric buttons.

In principle the screen could show you recent emails as they arrive (by wifi or cellular modem presumably) or could be the display of your music player program while you use the buttons for control.

Neat, but won't we all be using iPhones by next year ? :)

Have a good weekend,

FW

A rising Apple doesn't teach about gravity

2007-01-10T22:19:00.000-08:00

== Apple ==

I hope you bought Apple when I called it a buy last year in the fifties, and if so you can think of me as it approaches a hundred and smile!

I wouldn't buy more shares right now until we see more of how the iPhone shapes up. From early inspection I would say almost everyone will want one. Some people say the price is high but I carry an ipod, a cell phone, and a blackberry already. If the iPhone can truly replace all those while also offering GPS services and better usability it's basically free because of all the other gadgets I don't have to buy.

I think the iPhone should be a hit, and it could easily justify the current price spike, but the stock is pricing in a pretty successful future already and an economic downturn would hit the stock hard.

== Guest experts ==

A quick visit from guest experts today, courtesy of WSJ.com

This bit of advice from Henry Blodget, the former securities analyst for Merrill Lynch and a booster of Internet stocks during the dot-com boom of the late ’90s, might seem a bit odd: Don’t buy over-hyped stocks. Specifically, Mr. Blodget, who now can mostly be found posting entries on his Internet Outsider blog or writing columns for other publications (in this case Slate), is referring to those beginning-of-the-year “10 Stocks To Buy Now” articles found in magazines like Business Week, Fortune and Money.

“Whatever you do, do not buy the 10 Stocks To Buy Now, at least not because you read about them in some magazine,” he wrote on Slate. “If you want to buy the magazine, fine, just don’t buy the stocks.” He notes that magazines are no better at beating the market than anyone else — and in some cases worse.

Nouriel Roubini, who has been bearish for some time, points out the current state of affairs when it comes to riskier mortgages, and doesn’t like what he sees. “Calling this entire system an ‘unregulated scam’ is certainly excessive and exaggerated but the above metaphor captures some of the excesses of the last few years. And now this entire house of cards is coming down crashing,” he writes.

Stephen Vita, writing on Alchemy of Trading, says he probably should have bought shares of Apple, but doesn’t have too many regrets. “It’s ingrained in me to think that you shouldn’t do Breakout Trading in the 5th year of a cyclical bull market and, moreover, that the best time to practice that art is at the beginning of new advances, especially brand new advances coming out of bear markets,” he writes. “So I did quite a bit of that in 2003-2004 and I’m doing almost none of it now.”

====

Other blogs worth looking into:

Invest well,

FW

Mid Week funnies

2007-01-09T22:03:00.000-08:00

Time for our weekly review of news in the form of editorial reviews from around the nation.

====

Bush has announced that he intends to send more troops to Iraq. Rumors say it will happen soon, possibly within 3-4 weeks.

The hanging of Hussein took on more of a sectarian lynching atmosphere, further inflaming tensions in Iraq.

The iPhone cometh

2007-01-09T12:17:00.000-08:00

The iPhone was announced today

The front is a next gen multitouch screen (which I like)

(Go HERE for all the photos you want, must see!)

Some confirmed details about the iPhone:

* The phone is 11.6 millimeters thick with a 3.5-inch-wide touchscreen, a 2-megapixel camera, and integrates functions of Apple's popular iPod music and video players.

* The iPhone will cost $499 for a version with 4 gigabytes of flash memory, and $599 for an 8-gigabyte version. It will be available in the United States in June, in Europe in the fourth quarter, and in Asia in 2008.

* It runs a version of OS X, the same operating system that powers the company's Mac computers. It also has Apple's Safari browser for Internet surfing.

* The phone will operate exclusively in the United States on the network of AT&T's cellular unit, Cingular Wireless, as part of a multiyear agreement.

* The iPhone can also connect to the Internet using Wi-Fi wireless technology, and has Bluetooth, the short-range wireless technology used to support wireless headsets or link to other devices such as printers.

Top photo is an actual released iPhone image.

The second picture above is not a released iPhone image, it's a design study done last year by BenQ (see my article in October). BenQ is a design house currently in bankruptcy and, curiously, one group of investors trying to buy it out has Gil Amelio, Apple's last CEO, on the team. Combine that with the fact the above image is almost an exact match to the Apple iphone description as released. They are also the source of many of my comments about who would manufacture the phone, all of which turned out to be true.

A very nice article with more info: Link.

Important Changes for Market Watchers

2007-01-08T22:56:00.000-08:00

Several interesting things have developed in the last week, things that every investor should know about.

==== Congress restores 'pay as you go' rule ====

I remember around 1990 when voting for fiscal responsibility meant voting Republican. Back then the House put in place a rule where new spending and new revenues in any bill had to balance. In other words: the politicians couldn't spend money without figuring out where it would come from. That rule helped result in balanced budgets in the 1990s.

More recently with the Republicans in charge of everything in Washington the rule got scrapped and deficits skyrocketed. Okay, so it was important to pump up the economy to avoid recession but nonetheless it was a little disorienting friday to see the Democrats put back the 'pay as you go' rule.

This rule will make it harder for democrats to boost the programs they typically like to see grow and I give full credit for an impressive move of fiscal responsibility. (More at CNNMoney.com)

==== Oil & Gas ====

A government report Monday showed gas prices at the pump dropped to the lowest level in a while. The average national price over the last week was $2.31 per gallon, and last weeks dramatic oil price drop hasn't hit the pumps yet. Oil makes up about half the pump cost of gasoline so the 9% drop last week could take gas down another ten to eleven cents to around $2.20 per gallon.

If we plug some of these numbers together with monthly gasoline purchases we see that ten cents cheaper gas boosts the money in consumer wallets by about $770 million per month. That's almost $10 billion per year, totaling about 1/3rd of a percent of total consumer spending. Tiny, but magnified by the miracles of money velocity most economic models will tell you that could boost GDP growth by significantly more. Even half a percent of GDP at this particular moment could push the Fed into inflation concerns... so this is food for thought.

==== Minimum Wage Increases ====

This one is still unfolding. Congress is sure to be able to pass a wage increase, but the Senate and the President may require it to have some sort of tax relief for small businesses attached.

----

The change in minimum wages, oil and gas price changes, and changes to the federal budget rules comprise a shift in most of the major categories of economic modeling. It will take a while for people to come up with a solid idea of what to expect, and a while for the economy to pick a direction.

As unsatisfying as it is, I think my conclusion is that the market is going to wander for a while. Probably months, before choosing a direction.

There are still plenty of ways to make money off a wandering market. I will probably be selling covered calls on some of my market index baskets, for example. It also gives us time to build an understanding and a plan. Some people seem to think trading is a fast paced activity. In my experience the pace is quite slow and we rarely lack time to think and plan if we keep on top of things.

Invest well,

FW

Weekly Look Ahead

2007-01-07T19:39:00.000-08:00

Last week was more buoyant than most people expected for the first trading week of a new year. One would expect the unravelling of the "Santa Rally" caused by year-end portfolio dressing. Or maybe people noted that since 1939 the third year of any presidency has always been an up year for the market.

Look no further. The good news last week was dropping oil prices. Oil dropped about 9% within a week, constituting a veritable crash for leveraged commodities traders who were bidding up prices. Those of us here at the finance wonk with our eyes on production numbers and the arguments of the market were not surprised, having analyzed that peak oil is not a real argument and come to the conclusion oil was in a trading bubble.

Other than oil the news was mildy inflationary and the market responded with a decline by the end of the week. Big contributors included a suprisingly strong job report, and the apparent realization by many investors that the federal reserve is not going to have to lower rates anytime soon.

This is perfect for us. As people decide rates are not going up it is the perfect time to be finally shifting some money into bonds (that one's a timely read).

I will be moving some assets out of index funds and into a position to buy some bonds for the long run. For the immediate future though it's kind of unclear which will get more traction: stocks or bonds. After all there is that rule about the third year of a presidential term.

Of course, the fourth year of a presidential term hadn't shown a loss since 1969 -- then came 2000 and the big crash. Market rules are made to be broken.

Invest well,

FW

Friday Tech Files

2007-01-04T21:32:00.000-08:00

==== IRiver Clix player ====

The new Clix player, from iriver (not apple related, just starts with an "i"), isn't all that impressive when you read the specifications. It's your basic media player with a voice recorder and FM radio that comes in 2, 4, and 6-Gigabyte versions. The impressive thing is that it has a new technology active matrix organic light emitting display (or AMOLED, or OLED). These have been working their way out of the lab for several years and should provide much better battery life since they require less power.

Sony is also looking to use OLEDs in their next PDA (allegedly). Kodak is the most familiar name selling OLEDs, but the main tech player is probably Cambridge Display Technology, which trades on NASDAW under the ticker OLED. They are still tiny, with a market cap of 128 million, but I have been following them for about 5 years (including before they went public in 2004). I don't recommend companies without profits due to the risks, but if you like to hold a few high risk tiny tech plays, this could be a good one. Keep in mind the stock is currently priced well below it's 2004 IPO price, and anything could happen, the technology is pretty good but it's business models that make money.

==== The iPod that ate the skyline ====

You're not imagining things, that building model looks an awful lot like an iPod. The base even looks like a charger. Note the person in the picture for scale.

According to the press release this "iPod inspired" design will actually be built in Dubai by Omniyat Properties for $800 million. The building design was done by James Law Cybertecture International in Hong Kong.

Now keep in mind that many, many, MANY, buildings are announced in order to try to drum up investors and then scrapped if the money doesn't appear. So this may be just a publicity stunt (I would go so far as to rate this a "probably"). It is rather impressive that they build a model, though.

Can you imagine if it was really built? The iPod will no doubt change completely by the time this is finished. It would be like living in "Betamax Towers." How odd.

More pictures and details at Luxury Launches.

Bond for the New Year

2007-01-03T15:29:00.000-08:00

Why now is the time to buy (certain) bonds.

Most people know that a “balanced” portfolio includes both stock and bonds. I could happily debate modern portfolio design for hours (short version: due to recent breakdowns in classic correlation patterns, I think “modern portfolio design” understates risk and sets up users for rude surprises), but the important thing is that there are reasons and times to own bonds – and we are moving into a time when I believe it will make sense to own bonds.

Longtime readers will recall about a year ago I urged a bet AGAINST bonds due to inflation risks, and I put a chunk of money into that. By August it was clear that strong inflation was not materializing and we sold. Over that time the RRPIX rising rates fund (our anti-bond bet) went essentially nowhere but it did provide risk mitigation. If inflation had struck stocks would have gone down while RRPIX went up, effectively helping make our portfolio inflation resistant.

Now the risks have swung more toward economic weakness than inflation.

On Tuesday the Wall Street Journal published the results of a survey of 60 economists (Linkage: may require signup). The general sentiment was that the economy should do fairly well in 2007. The main quote: “The service sector should keep humming along as the recent weakness in housing and manufacturing abates and the Federal Reserve begins to reduce interest rates.”

Figure: current economic estimates suggest things should be okay but not spectacular in the coming year. (Source: Wall Street Journal)

Some people think you want to buy bonds when the stock market goes down, and that is sort of true. You really want to own bonds when interest rates go lower, and that typically happens during market slowdowns because the economy is weak at the same time.

So what are the possible scenarios and the outcomes relative to adding some bonds to your portfolio?

What if the economy skyrockets next year? Your bonds return only their fixed income percentage (call it 5-8%) and you’ll miss out a bit on the difference between the bond income and the market rise. Chances: Of the 60 economists the WSJ surveyed, 8 thought next year would have GDP growth over 3% in the first half, and the highest was 3.4%. That suggests the best scenario for stocks would be in the 10-12% gain range for the year, but that this is an unlikely scenario.

What if inflation jumps next year? This would hurt bonds badly. It would also hurt the stock market badly, although picking the right stocks can help you ride inflation to a certain degree. I dug through the raw data from the WSJ survey and out of 60 economists not a single one had any CPI guess above 3.5%. The Fed seems to have tamed inflation. Additionally, if this changes it should change slowly and give us time to get out.

What if the market continues to meander along next year? No problem, we would collect bond income and be well positioned and hedged for when the economy goes down. Most probable scenario and a fine time to own some bonds.

What if the economy slows down a little? No problem, an economic slowdown is the standard “ideal” time to own bonds because they continue to pay good income. Additionally if the Federal Reserve begins to lower rates bond holders will see some capital gains. Second most probably scenario and a fine time to own bonds.

What if the economy (and market) tank? In this unfortunate scenario you will definitely be glad you hold bonds. The bonds will rise in value and help offset stock losses, while paying income you can invest at the market lows. Fairly improbable but according to market forecasts this is more likely that #1 or 2.

I haven’t suggested bonds before now because we had a higher chance of stock market gains or inflation until now. The way the economy is shaping up now, though, it would be extremely hard for companies to continue their recent growth rate and inflation appears to be less of a threat.

What bonds to buy?

This article is already getting quite long and I’m going to have to ask you to bear with me while I continue my analysis. I’m looking at bonds like the Clear Channel 6.25% bonds due May 15, 2011 – non callable corporate bonds currently yielding 6.17% to maturity. I am going to continue to analyze corporate bonds and I will issue some buy calls soon. I will be using our secret weapons like the Z-score and bond analysis, but I won’t be rushing so it’s not ready now.

Invest well,
FW

Mid-week funnies

2007-01-02T20:01:00.000-08:00

Wow, wednesday already. Time for the weekly editorial cartoon review.

====

Early reports suggest that despite a war in Iraq that is now longer than WWII, most Americans were out consuming in force this holiday season.

The president has said we need to wait to hear his plan, but he has already been floating the plan of sending more troops. It remains to be seen how well that will go over.

Weekly Look Ahead

2007-01-01T20:55:00.000-08:00

This week is an odd one. Most markets in the US are closed tuesday (see below), making this the longest market break since the September 11th attacks of 2001.

Typically after a long break the market will swoon a bit as people unload positions they have had to sit on for a while. This time the long market break is combined with a recent end-of year runup and thin trading the previous week. A neutral market would decline under these conditions on Wednesday, if the market manages gains we have a suprising bit of strength.

This week should provide a good sentiment barometer, and much of that will come about on Wednesday at 2pm EST, the time the Federal Reserve will release the minutes of their last meeting.

A quiet market (if it happens) still does not mean little action. Huge economic tides are moving beneath the surface. I think that soon I will be making my first calls ever on bonds - the investment category everbody forgets about while the market is going up, then wishes they had bought before the fall. This is a big shift from early last year when I actually took a financial position against bonds. Stay tuned for a detailed discussion.

On vacation Christmas week

2006-12-25T19:48:00.000-08:00

Happy holidays to all. After a post every day for a long time I'm going on blog vacation for this week.

(Visitor counts suggest most people left the office starting last thursday.)

Tech files Friday

2006-12-21T21:53:00.000-08:00

Time for me to launch you into the weekend with entries from the tech files. If you are still looking for the coolest gifts of the season, see last weeks tech files.

== New York catches Japan of 4 years ago ==

Cingular is testing out a new service where you can use your phone to pay for things at those newfangled "paypass" non-contact credit card readers. If you have a phone that's capable of so called Near-Field-Communication you can tap the phone instead of the card after pressing one button on the phone. The big idea behind this is that a consumer wouldn't need a wallet if the retailers along the way have paypass readers. You could go jogging with just your phone (and an iPod presumably).

The big idea for the phone companies is that they get to muscle in on the credit card money pot. A little back of the envelope math on my part suggests they won't get more than a years worth of Wall Street's expected growth out of annexing credit transactions, but it's still worth billions. If you want to help try this out you have to be a Cingular customer in New York with a valid Citi Mastercard with PayPass - they supply the phone. You can go here to sign up if that describes you.

A related project is the Motorola M-Wallet (the link opens a Motorola pdf brochure directed at service providers). This sort of transaction should be pretty normal within a handful of years.

Combine that with cell phone music players and cameras, and it will get ever more difficult to explain to our grandchildren what it was like when we were kids.

== Sunglasses that will freak people out ==

Those aren't post-modern style dishes you see above. Those are disposable Bausch & Lomb / Nike soft lens in-eye sunglasses! Available in either high detail gray-green or motion-enhancing performance amber they apparently reduce glare and filter UV rays.

Not really mentioned in the advertising is that the green ones will make you look like a lizard-alien and the red ones are somwhat Satanic. At least with the red ones people who see pictures will assume its the camera's fault.

Yes, these are real and for sale.

== "In Russia, the shoes suck you" ==

Okay, who here is old enough to get that title joke? Ahem. These shoes are a design study by Electrolux in which the shoe soles contain small vacuums to clean the house as you walk around. I guess they probably clean small patches with each step, but it might be humorous to see a CLEAN path where people walk instead of the usual dark patches.

The cleaning heads would presumably be related to the miniaturized vacuum tech in an
iRobot Roomba, which sort of broke open the whole concept of a really functional tiny-vacuum-in-unusual-form.

Market Tidbits

2006-12-20T21:19:00.000-08:00

Today I'm going to clear out a few notes. Tomorrow will be more substantial, and visit counts suggest people really like Tidbits like these..

== Ford's new ride ==

Generally, investors are wary of companies that pile on debt, especially those already struggling with mountains of interest payments to begin with. Ford Motor is one of these companies. But after the auto maker sold more than $4.5 billion in convertible notes and secured the largest loan in Wall Street’s history at up to $18.5 billion — the kind of record you’d think Ford wouldn’t want to set right now — three analysts have upgraded the stock.

The jury is still out as far as the investing public is concerned. Shares are down 11% since the beginning of the month. But Merrill Lynch, Morgan Stanley and KeyBanc Capital Markets have all boosted their ratings on the stock, in part because of the added funds Ford has secured.

The changes represent the first real shift in the analyst community’s opinion on the stock in some time. According to Zacks Investment Research, prior to Merrill’s upgrade last week, there were seven “hold” ratings on the stock and six “sell” ratings. Now that Morgan has upgraded shares to “overweight,” the tally shows one “buy” rating, nine “hold” ratings, and four “sell” ratings.

But the reports are sort of damning with praise — KeyBanc says it’s upgrading the name “although fundamentals are unlikely to show any meaningful improvement in 2007.” It says the deterioration in earnings in 2006 “should begin to taper.” Morgan Stanley was more effusive, saying there was “ample liquidity” to turn the operation around, adding that the recent employee buyouts, dividend cut and change in CEO are signs that the company management “finally see the gravity of the situation.”

Perhaps they do — but investors aren’t convinced yet.

== Random News Bits ==

We’ve already missed the Santa Claus rally. Analysts at Birinyi Assoc. note that the seasonal patterns in the market — which indeed do exist — are moving up on the calendar. Going back to 1950, the poor performance in the summer traditionally bottomed out around July 30, but in the past five years, that’s moved up to around June 29. Meanwhile, they note the best three-month period for stocks used to begin around Oct. 28 — but over the past five years, it has begun around Oct. 9.

David Rosenberg, chief North American economist at Merrill Lynch, wonders about the wisdom of listening to the Federal Reserve as it continues to pound the table on inflation. The term “recession,” he notes, shows up in Fed-meeting minutes a total of four times in the August, October and November meetings in 2000 — but then is mentioned 31 times in December 2000, when policy makers finally got the hint.

Volatility is low, but this isn’t unprecedented, says Peter Polanskyj, derivatives strategist at Morgan Stanley. “The 1998-2002 period is a clear outlier in terms of high prevailing realized volatility levels,” he notes, pointing out that volatility was consistently lower than today’s level through most of the 1960s and the early 1970s.

== What folks are talking about ==

It’s not surprising that the Chinese yuan is appreciating against the dollar, however slowly. But Menzie Chinn of Econbrowser points out, through the help of a few charts, that the currency is doing well against others, too. “Interestingly, the pace of appreciation against the currencies of China’s trading partners is roughly the same as that against the dollar, over the past 16 months. That is something that is not often heard,” he writes.

Yaser Anwar, in a lengthy post, explains why he likes Apple Computer’s stock right now. “While other PC OEMs [original equipment manufacturers] have struggled with running their own retail operations, AAPL stores have been highly successful and their productivity has been nothing short of stunning,” he writes. “AAPL has devised a retail strategy that uniquely complements the company’s strengths in product innovation and marketing, making it a model not imitable by other PC OEMs.”

John Austin smiles at the attempt by Express Scripts to one-up CVS in bidding for Caremark Rx. “Just as was the case with last year’s Boston Scientific acquisition of Guidant, the winners here are current Caremark shareholders,” he writes. “If CVS wins the bidding, they will likely overpay. If Express Scripts wins, they will likely be burdened with a significant debt load. Sit back, pop some popcorn, and watch the bullets fly.”

Mid-Week Funnies

2006-12-19T18:58:00.000-08:00

Now time for everyone's favorite, the mid-week funnies. A review of some non-financial news items you might have missed - in editorial cartoon form.

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After pushing hard for electronic voting, and handing the contract for voting machines to a hefty Republican contributor, some Republicans actually grumbled that perhaps the electronic voting machines unfairly removed them from office!

In Russia these days the despotic actions of Putin have started to look like the Lenin days all over again. The choice seems to be remain silent while rights disappear or speak out and be mysteriously killed....

Well, cell phones may not cause cancer, but please watch the road.

This one is called "The American Consumer."

Update on ASFI and IPS

2006-12-18T20:34:00.000-08:00

I've had a couple letters asking about Finance Wonk Buys ASFI and IPS from people who have noted news articles and some negative stock action.

== Asta Funding ==

David Batten asks if I have "any new thoughts on asfi after the earnings announcement and correction"?

The answer is that i have been watching ASFI like a hawk and pored over the new annual report as soon as it was filed. There appear to be several things leading to stock sales:

1) Ryan, Beck & Co lowered ratings on ASFI from outperform to market perform. This does concern me a little since James O'Brien (the R,B & C analyst on ASFI) has been doing reasonably well predicting it. But in this case he's predicting a short term reduction in growth rate that is well within our buy window. This brings us to #2...

2) The recent annual report showed higher interest costs and administrative costs. This drew my attention so I rolled around in the details. It looks like management found a lot of troubled debt they thought was worth owning this year. Don't forget the business of ASFI is buying bad debt at 2.9 cents on the dollar and collecting an average of 4.3 cents on the dollar. Finding good debt to buy is the primary business and I'm glad management wasn't worried about smoothing earnings and took advantage of an opportunity to buy well priced debt. The increased inventory raised administrative costs and interest payments, which in turn will push down growth a little this year, but this is exactly what the company should be doing to keep the business healthy. If we still believe in the business and the management, we should be glad to see them working.

3) There has been a dark cloud over mortgage companies recently, and it has lowered the shares of many consumer lenders. Recent numbers suggest and amazing 30-40% of mortgages in the last year were "creative" option loans, and a tremendous number of those have so called "silent seconds" over them. Several prominent mortgage companies have gone out of business in the last few weeks and people are avoiding consumer debt companies. This is pretty much what I predicted in May (this post) where I observed that we would start to see increasing mortgage failures due to rising fed rates. Historically this also correlates with market corrections (at some point, not necessarily right now). But since we predicted the trend we stayed out of mortgages and stuck with ASFI - which takes advantage of direct consumer lending and the new bankruptcy laws.

Numbers 1&2 just adjust a small percentage of profit growth outward into the future a little farther in return for a stronger company, number 3 is irrelevant because we avoided that mess already. I'm holding on ASFI.

== IPsco Steel ==

If you bought with me you are probably smarting from the 15% decline since then (versus much larger rises for FW buys AAPL, ARW, NOW, and LECO, so we're still solidly ahead).

The drop has been about $5 in the last week. Two reasons on this one:

1) Oil prices have trended lower. This includes a statement by OPEC that they intend to cut production (which may or may not happen, but needs months after an announcement to happen so they had to get in front of it). Since IPS sells mostly steel tubulars into the oil business the stock has declined along with the other oil support industries. Not to worry, the price is still plenty high enough to justify investment in the areas where IPS is strong and IPS is still sold out for the forseeable future. The cuts by OPEC are designed to keep prices elevated, which is to the advantage of IPS as their market is booming from high oil prices.

2) The US has lowered tariffs designed to keep foreign steelmakers from dumping steel into the US market. Specifically the auto makers lobbied congress to get them to eliminate tariffs that were costing detroit millions. This came as a surprise so the market went nuts and steel producers dropped like a rock recently. Now listen carefully: IT DOESN'T APPLY TO IPS. Yes, you heard me, energy tubulars are not effected by the legal change and defensive tariffs still apply there. If anything this will lower the costs for IPS' raw materials. The possibility always exists that congress may further alter the laws in a way that would hurt IPS, although it is doubtful that a powerful lobby is pushing for energy tubulars since it is a local business where tariffs don't have as much impact.

Now would be the wrong time to sell IPS. I am holding, with real money, so you know what I think.

====

In general both these companies are experiencing bumps that are within the range of what I envisioned when buying them. We don't expect a perfect ride, or for stocks to only go up. Keep in mind that we required a net present value discount of 15% before buying these stocks so even choppy news should not deter us. For example, the average 12 month analyst price target on ASFI is $53, an 85% gain from current pricing. Hardly a picture of a "bad stock".

Weekly Look Ahead

2006-12-17T17:21:00.000-08:00

The pulse of wall street was pounding by the end of last week with a new Dow record reached and traders treating almost all news as good news. The Market appears poised for a strong end of the year which means that people will be looking to get into winning market positions before the end of the year.

Combine that with the hesitation people have for selling now and taking a tax hit in 2006 that can be put off to 2007 with just a few weeks delay and you have a recipe for a strong market stretch.

There is plenty of news coming out in the next week, but the mechanics of the market leave us in a strong position toward gains.

Friday Tech Files

2006-12-14T22:27:00.000-08:00

It is rapidly becoming time for holiday gift giving. Stop reading blogs and go buy something outside the norm for that hard-to-shop for someone! To get you started, a couple fun things:

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This, good readers, is the 7-inch long Pico Z X-Rotor (not a typo) from Radio Shack. At $40 it's clearly intended as a kids toy but I can hear the cubicle warriors of the world wishing for them right now. They even come with three control channels so you and two buddies can have aerial helicopter dogfights in the cafeteria! You know everyone will be jealous! I suggest you buy some spraypaint to so you can "pimp" them (and tell them apart). Good news: they come with spare rotors in case of collisions. Here's a link: Silverlit PicooZ RC Micro Helicopter

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It looks like a backpack and works like a backpack, but it's really the hippest new ipod accessory for the school-going types. The Nike C.O.R.E. Audio iPod backpack fits an ipod safely inside away from harm while providing controls in the shoulder strap and a connector for headphones. There's also a padded laptop compartment and a ready-access organizer for mobile phones or PDAs. Priced at $40, it's a quick way to seem cool to the teens on your list. This should be a link to that item: Nike C.O.R.E. Large Backpack

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Some other hot items this christmas (you'll note I love linking to Amazon, it saves me all sorts of time :) )

The JVC HANC80 Folding Noise Cancelling Headphone for those who like to block out the outside world.

LEGO Mindstorms Robotic Invention 2.0 for that nephew or son who is a total robot/computer lover.

And for those who can't stand toys but still love computers, the Logitech MX Revolution Cordless Laser Mouse is taking the computer world by storm. The free wheel scroller and solid feel along with coherent light source make it miles above an ordinary mouse. I've used them and they're great. The only reason I don't have one myself is that I actually use the computer so much I'm ambi, I actually switch my mouse left to right handed every few hours to ease up on my wrists. One thing this mouse ISN'T is hand switchable.

Reading for the day

2006-12-13T22:05:00.000-08:00

Things are slowing down around here as Xmas approaches.

Henry Blodget likes Google’s new option program. “If anyone has figured out the drawbacks of Google’s new transferable option plan, please weigh in, because at first glance it looks like a win all around,” he writes on his blog.

George Gutowski, the Financial Skeptic, is a bit pessimistic on Goldman Sachs, hard as it may be. “Goldman Sachs has been like a really great party, no one wants to go home. We all think we want another round of drinks. But the stock is trading close to its 52 week high. The results are really good but how do they continue at this torrid pace?” Mr. Gutowski writes that the “short interest spiked from just under 2.25% to just under 3.00% in mid Oct, before settling down to just over 2.25% in mid Nov. Momentum maybe is weakening.”

Other fun financial blogs to add to your Bookmarks:

Finally let me suggest everyone read through the Finance Wonk Buy list and check out the analysis. I wrote them and I still go back to them for interesting walthroughs. Any comments you leave on any analysis gets sent straight to me and you might get named a Wonk of the Day if you come up with something clever. Feel free to put that on your resume :)

Invest Well,

FW

Mid-Week Funnies

2006-12-12T22:59:00.000-08:00

Time again for that mid-week ritual of reviewing the non-financial news in editorial comic form.

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Bob Gates sailed through his confirmation hearings to become US Secretary of Defense based on one core asset: who he isn't!

Market Tidbits

2006-12-11T22:35:00.000-08:00

The National Association of Realtors has earned a real reputation around here for releasing housing sales numbers that are more marketing than honest data.

As far back as August we here at the Finance Wonk caught them changing the previous years numbers to report a price rise rather than a decline (link, see 3rd item).

This year they have steadfastly reported as housing declined that we were "at the bottom" and everybody should buy now before prices go back up. Well, today they finally threw in the towel on that idea and admitted prices have continued downward and that they probably would for at least the first half of 2007 as well (linkage). To keep their practices from imploding though they added that they see a recovery late in 2007 so that home sales should be higher by the end of 2007.

Frankly I think one can only realistically intepret news from NAR in the most unfavorable light these days :).

====

We have a reader comment recently from Ramesh Shankar who asked for more buy/sell recommendations.

I understand completely.

Unfortunately if you've been reading here you know that I think the market is near a top, which makes it hard to find safe investments. I have tried to compensate by listing some stocks I almost picked and by calling out option selling/buying opportunities when I buy them. Meanwhile the recent ASFI call is an excellent defensive move.

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This should be a very merry week on Wall Street, the New York Post points out, as bankers will learn just how massive their 2006 bonus checks will be. According to estimates, the low end of the scale, given to newbie associates, will be the merely jaw-dropping sum of $250,000, while masters of the universe could rake in $25 million.

I'm in the wrong business...

====

Raymond James strategist Jeffrey Saut writes in his weekly commentary that someone recently teasingly called him “Dr. Doom” for his relative bearishness on stocks in the face of a runaway rally (”in this business, if you are not forecasting ‘Dow 20,000,’ you are deemed a ‘bear,’ he observes). But he continues to believe the market has behaved unnaturally of late and lists a series of mysterious occurrences that have helped stoked the rally in recent months.

Weekly look ahead

2006-12-10T21:59:00.000-08:00

This week will probably be all about the Fed meeting announcement Tuesday, even though it shouldn't be. I'd bet money (and effectively I have in my market positions) that the Fed will not ease interest rates this soon, or even indicate they might, for fear of igniting inflation. Right now the economy is in that happy medium the Fed loves dearly where companies aren't suffering and inflation isn't roaring.

In the future we're likely to see a softening economy and lowering rates. Probably not before next year though. We could see some selling from people who might have expected some sort of Fed softening.

Fun Tech Files for the Weekend

2006-12-07T18:45:00.000-08:00

Tech files on fridays have been seeing a lot more reading than when I put them on Tuesday for some reason so who am I to fight it? (Although I did like the alliteration in "Tech Tuesdays")

== The VM Flybook ==

The name may be a bit silly but I want this laptop!! The positioning would be so much more convenient either at a desk or on a plane. I almost can't imagine how nice it would be to actually be able to see my screen when the guy ahead of me inevitably reclines.

This product is from Dialogue, a neat little upstart Taiwanese company that's had a number of firsts in laptop design recently. A team to watch. Photos of the laptop open on a plane.

== Smell-vertising ==

For years advertising has been about getting attention. Recent innovations have included assvertising, that's putting advertising on attractive people's rear ends, and bumvertising, or having homeless vagrants hold up your message. Just when it seemed it couldn't get any stranger Madison avenue trotted out smellvertising. The image above is from a bus station in San Francisco, CA where the panel to the left emits a dense "fresh baked cookies" smell to make people think about milk.

The basic idea isn't all that bad. Smell is well known as the sense having the strongest tie to memory. Perhaps that's one of the things that led to so many complaints the city took them down. Or perhaps it was the added humiliation of arriving at work on the bus AND smelling like cookies.

== Quick: name this item ==

While we're talking about advertising, quick, come up with your best name for the toaster shown above. Bread rolls in from one side and toast comes out the other. It's the... Rollertoaster! It's still just a prototype, and perhaps justly so. It seems like it would require a lot of handling and leave you with toast cold at one end. Think of the advantage though: you could toast bread of arbitrary length!

And with that, I bid you good weekend...

FW

Daily Tidbits

2006-12-06T22:26:00.000-08:00

The market backed off today after a two-day rally that pulled the Dow industrials within a few points of an all-time closing high. Investors are starting to think about what Friday’s report on the November employment situation will bring, and a few individual stocks dragged the 30-stock average lower in trading today. Personally I've sold some more covered calls on the DOW index, so I'm not expecting much gain for the next few weeks.

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General Motors was taken down in tandem with Ford Motor, after the latter increased the size of its convertible debt offering to $4.5 billion from $3 billion. Ford, which is struggling to stay afloat through a gigantic offering of nearly $23 billion in debt, lost 4.2% on the day. GM lost 2.6%.

Bond investors haven’t been all that worried about the added debt — better in the red than dead, they say, as bonds were barely changed, according to MarketAxess — but equity investors were. Ford was the most actively traded name on the Big Board today, while Oracle dominated trading on the Nasdaq, as the software giant lost 5% after analysts expressed concern about fourth-quarter earnings, scheduled for release on Dec. 18.

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Michelle Leder points out on the Footnoted blog that the Securities and Exchange Commission has made it easier to find comment letters, sent to companies, on its Web site. This doesn’t mean anything for a company in dire straits like Ford Motor, which acknowledged the receipt of such letters. “A quick check of a far more healthier company like IBM shows that the company has received two comment letters this year. Yet a quick search of IBM’s filings shows that the company never disclosed the existence of those letters in any of its other filings,” she notes. “Ditto for Apple Computer, which has received two SEC comment letters since August, but hasn’t disclosed either of those in its filings based on a quick search of its other filings.”

Yaser Anwar has some thoughts on Wal-Mart Stores, breaking it down into helpful bullet-points. “WMT continues to struggle on the top line as weakness in fashion apparel and home offset better performance in food, electronics, and pharmacy,” he writes. “Investors should expect near-term sales to be pressured by weaker apparel sales and difficult comps related to last year’s hurricanes. Look for sales trends to improve in the spring when new merchandise is offered and hurricane comparisons ease.”

Mid Week Funnies

2006-12-05T21:33:00.000-08:00

Here it comes, our weekly review of non-financial news in the form of editorial cartoons.

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The Pope traveled to Turkey to try to mend the rift between the Catholic Church and Muslims... which had been caused by the Pope making inflammatory statements a few months ago.
In case you hadn't heard, the war in Iraq is now longer than World War Two! (Funny linkage).

Custom Inflation Number Crunching

2006-12-04T17:56:00.000-08:00

Which industry should we invest in now and how long will the economy hold up? Inflation holds the answers to both, read on...

It can be hard to get the straight story on inflation. Most of the talking heads associated with banks or investment houses know perfectly well that they stand to profit if things go a particular way, and that inflation is susceptible to expectations of the crowds. So it is only sensible that these "experts" tend to advocate the future scenario that benefits their organization.

An unintentionally humorous study a few decades back looked into the opinions of bankers on the advisory commitee to the Federal Reserve. It found that these bankers advised raising rates fully twice as frequently as economists, and often all the way into recession. Why? Banks make more money when rates go up.

So how do we get the straight dope? Well, that's where we have to dig into the numbers. The Finance Wonk (that's me) only makes money by getting it right in the market. So I set out to draw information out of the recent inflation data.

One little appreciated detail of inflation is that typically it has both winners and losers. If housing prices are rising but food prices are dropping people in the housing industry will be getting raises and seeing a good economy, while those who make food will see decreasing money amid rising house prices and will lose out. This push-and-pull is what makes it so hard for the government to set inflation rates, they essentially have to decide when the situation is unfair enough to warrant restraining the economy and forcing losers to get hurt more.

This next plot, although it looks like a mess. Is a simplified plot of inflation data back to November of 2005, separated out by sector. I have removed energy, transport, apparel, and a few other wildly chaotic traces that don't contribute much information. (Inflation data is CPI from Bureau of Labor Statistics, gathered and processed by the Finance Wonk.)

Plot of CPI monthly inflation percent from November 2005 to the present. Wildly varying lines (energy, apparel, transport) have been removed. The dot-dashed yellow line is a smoothed average of core inflation. The clear winner is medical care (light blue line) which has been steadily above the average. Most of the others do not appear to be gaining advantage during this economic cycle.

The line for Medical spending (light blue) is consistantly above the core average, which tells us that medical industries are able to charge steadily more and have had strong pricing power for over a year. So this could be a promising sector in which to ride out any downturn (I will be looking there for investments shortly).

The dash-dotted yellow line shows a moving three month average of core inflation. The fact that this has slowly reversed and turned downward over the last year is important. It indicates that either inflation is remarkably tame in a growing environment, or that the economy is slowing down. To determine which of these directions things are trending in we can look at the ISM manufacturing indexes to see how industry is doing.

The ISM numbers are really quite frightening. They collect surveys among industry to gather 11 index values that measure how production is doing in the U.S. After 41 consecutive months of growth, 8 of the 11 indexes are showing a contracting economy and the remaining three are slowing down towards a contraction. It's really amazing, you can see all the data at this link. Keep in mind that for 41 months in a row (until now) those indicators were positive!

When they asked their survey questions here are some of the comments they got:

"Sales have leveled off, but we will have a record year. Second [year] in a row." (Computer & Electronic Products)
"Business has softened in the past 60 days. Down about 20 percent." (Fabricated Metal Products)
"Housing market slowed down." (Furniture & Related Products)
"We have hit another slow period in receiving new contracts. Quoting activity is fair." (Machinery)
"We are still trying to hire new maintenance techs, but find it difficult to find qualified people." (Nonmetallic Mineral Products)

This is all very concrete data, unlike the wishful thinking you hear from the folks on TV. None of these data sources stand to gain from this data.

I have solidified in my view that we are closer to the top than the next market bottom, but there may still be some sentiment-driven rise left. Defensive moves are advisable.

Invest well,

Weekly Look Ahead

2006-12-03T20:48:00.000-08:00

The four month rally was powered by merger news, strong earnings, and an influx of money that had been waiting on the sidelines.

Last week people got a taste of some less than optimistic news and the market took quite a beating. The real question now is how much longer the market can stay afloat before negative sentiment sets in.

My opinion on the matter is that there is still plenty of money on the sidelines and earnings probably aren't about to crash, so the market could hold up for quite a while. I do think, however, that we are closer to the top than we are to the next bear bottom. I continue to advise people to react conservatively. Pick stocks (like those on my buy list) that have very strong fundamentals, and put aside some cash for when things go down.

If payrolls and unemployment reports out this week are as positive as projected (see chart below), the market could recover a bit this week. On the flip side, market valuations currently have a very rosy future built into their pricing. Ask yourself this, could profits double from here in the next few years before a pullback? Seems unlikely, but unless that happens there is little point buying many stocks right now. Overall I think the market is likely to be turbulent for a while then move into a bear market -- although that might be as much as a year away.

Tech Files for the weekend

2006-11-30T20:36:00.000-08:00

Isn't that a one cool monitor? Investment bankers may go home with lots of money but no-one gets to play with better gadgets than engineers! The monitor above is 8 LCDs in one and is typically used for industrial applications like managing power plants or global communications systems. Still, put it on the list for outfitting your subterranean lair before James Bond gets there to blow it up. On a more reasonable note, here is a version you can actually buy for your home.

In the battle to claim the biggest display, the Siemens megamonitor is claiming victory at 60 million pixels. Ridiculous! The US. Air Force has a simulator made by Evans & Sutherland with 160 million pixels. It's the so called 20/20 system, so named because with perfect 20/20 vision the system fills a round room around the user with continuous pixels below the resolution limit, which means the simulation is as perfect as you can see all the way around. I've seen it, but I don't have really good link. The actual name is the M2DART system and it is publicly revealed (lousy link that wants money for a govt report).

[Important note: if you are actually going to build a secret fortress from which to rule the world please invite me to the grand opening and don't forget to review the evil overlord to-do list so you don't forget anything.]

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Now these are gadgets my wife will appreciate. See those art images above? Those are the speakers! See here for a more coverage, they are made by SoundArt - a British company. While they aren't a completely new concept, the execution seems quite good. When the HDTV DVD format wars die down and I set up a new HD system at home I'm sure the wife will want a set of these for the sound. The only discussion from me will be what image to put on them.

Have a good weekend,

FW.

Economic winds blow both ways

2006-11-29T19:34:00.000-08:00

Lots of contradicting newson the economy this week.

The Commerce Department said GDP increased at a 2.2% annual rate from July to September, in its first revision of third-quarter GDP estimates. That's good growth. The government initially estimated growth at 1.6%. Wall Street expected that figure to be revised to 1.8% growth.
Third-quarter inflation estimates were lowered. The price index for personal consumption increased 2.4%, lower than the previously estimated 2.5% and below the second quarter's 4.0% rise. The PCE price gauge excluding food and energy -- closely watched by the Fed -- increased 2.2%, lower than the previously estimated 2.3% climb and below the second quarter's 2.7% rise. (Together with the last item, these two were mostly responsible for todays market upswing.)
Wednesday, the Commerce Department said median price of a new home sold in October was $248,500, up 1.9% from the same month a year ago. Meanwhile, the National Association of Realtors said that the median price of a home sold in October was $221,000, the same as in September, but down 3.5 percent from October 2005. That's right, the commerce department says housing is up 1.9% and the NEAR says its down 3.5% (biggest drop ever). I would guess the commerce department data is better, actually, based on the way the data is collected. I say that even though rising housing prices conflict with my expectations.
Both sources of data agree home sales (number of houses sold) are down 20-35%
The Fed's beige-book survey on regional economic activity showed that U.S. economic growth was mostly moderate in the early part of the fourth quarter, as consumer spending grew and labor markets remained tight despite further cooling of the housing market and slower auto sales. The economy doesn't need inflation to make it roll over into a slowdown, this is worth watching.

So far this week has been turbulent and sentiment-driven, as I predicted Sunday :)

Invest Well,

FW

Weekly funnies

2006-11-28T17:38:00.000-08:00

Time again for our weekly review of nonfinancial news in the form of editorial comics.

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Russia is gaining importance in international politics again, but this time instead of threatening the world with nuclear weapons, the influence is arising from oil wealth.
Democrats taking over key ethics and investigation commitees have been warned that the Republicans don't have much in the way of records to turn over after their 12 years in power.

The Bush administration has appointed a head of Family Planning who is against birth control. I guess they wanted to stake out the "stuck in the 1950s" political postition early before the next election...

Kaboom!

2006-11-27T19:46:00.000-08:00

Markets have reopened and the sentiment was resoundingly negative! Today ended a 94 day streak in which the S&P 500 had never dropped more than 1% (the longest streak since 1995).

Expect to see some profit-taking for a bit, although if it stays as bad as today for several days in a row it may be time to step away. Sectors that have been leading the market higher led the decline today: the Philadelphia Stock Exchange Semiconductor Index lost 2.3% after gaining 19% since Aug. 1, while the Amex Airline Index dropped 4.6% after gaining 24.4% in that time. “A lot of the weakest sectors are the ones that made some of the biggest moves as well — so it does smell like profit-taking,” says Jim Paulsen, chief investment strategist at Wells Capital Management.

Brokerages were hit hard, with Goldman Sachs losing 4.2%; the big exchanges were lousy as well — NYSE Group fell 6.6%. Few sectors were spared, as even the oil stocks ended lower despite a 1% gain in crude-oil futures. Just three stocks from the Dow Jones Industrial Average ended the day higher, and only by a few pennies. The chief culprits in the Dow’s 158-point drop were Intel, which fell 2.6%; Boeing, which lost 2.7%; and Wal-Mart, which also dropped 2.7%.

Weekly Look Ahead

2006-11-26T20:36:00.000-08:00

Most of Wall Street will be back after a long 4 day weekend, still groggy from too much turkey and eggnog and staring bleary eyed at the shopping results from the weekend.

Friday night initial reports showed rather weak consumer sales that would have been scary for the upcoming week, but the final results for the weekend were very strong. Average sales per shopper over the Thanksgiving shopping weekend was $360.15, up 18.9% from last year. Current projections are for a gain of about 6% in total sales over last year. More details from CNN here. Original data is from ShopperTrak, see here.

The shopping news is certainly enough to brighten up the prospects for investors, but it is largely priced into stocks already. In fact numerous worrywarts on the street are concerned that the recent market surge leaves stocks priced for the brightest possible future. That very concern may mean the bull market has a bit of steam left in it though, as typically the market doesn't roll over into a bear until everyone has become optimistic and puts their money in.

For those who believe the market has some sanity to it, however, there is plenty of news coming out this week. If economists are right the durable orders data on Tuesday could be quite a splash of cold water as the predictions call for a decline in orders. Last month would have had a decline if not for massive military and jet orders piling up in that report. Construction spending will also probably be down this week. There are plenty of things that could be seen as bad news this week, it just remains to be seen whether people will instead see them as inflation preventers and thus potential good news. My prediction is that this week will be about market Psychology.

Happy Thanksgiving, no update

2006-11-23T22:09:00.000-08:00

In honor of the holiday the Finance Wonk will be taking one day off. To most timezones of readers that means no column friday. "The Week Ahead" will be back Sunday night.

Happy Thanksgiving!!!

2006-11-22T18:58:00.000-08:00

Wednesday's meager market action showed that much of Wall Street probably went home early to get a start on the US Thanksgiving holiday. There is no trading Thursday, and Friday is a partial day of trading.

Friday is also "Black Friday" in the US. That's the day most retailers move into profits for the year and the heaviest shopping day of the year. By next week select retailers like Wal-Mart will already be reporting their take on the economy based on Friday's shopping.

Guest Expert Commentary: Housing sector and the Economy

Stone & McCarthy analysts estimate it’ll last at least until the middle of next year. “The housing-related drag is likely to be more severe on both GDP and employment than generally thought,” they wrote in commentary today.

Ray Stone, economist at Stone & McCarthy, estimated the normal relationship between housing starts and housing sales, and concluded that, based on more than six months of inventory on the market, housing’s adjustment period will last until 2007. “It is clear that the recent level of new-home inventories has simply been too high, and that these inventories should be pared by at least 200,000 units before a rebalancing of inventories is re-established,” he writes.

However, the decline in construction will hurt GDP through most of 2007, he writes, saying it should subtract about 1.5% from GDP over the next year, “with the drag becoming increasingly pronounced into Q2-07.”