Archive for August, 2006

2006-08-11 :: Manny: 07-29-96 to 08-07-06

Friday, August 11th, 2006

For those of you that know me pretty well, you also knew Manny, my 10 year-old Black Lab.

Manny became ill in May of a disease named Blastomycosis, a fungal disease that attacked his lungs.  He was a big dog, 90 lbs more or less, prior to his illness.  At his death, he weighed a bit over 60 lbs.

I know this has nothing to do with investment discussions, but this has been a particularly difficult week so for me the best way to end it is to pay tribute to Manny.

For all of you pet owners reading this, Blasto is a terrible disease.  It has a 65% survival rate for four-year-old dogs.  Clearly much less for 10 year-old dogs.  Dogs (and people) contract Blasto by breathing in fungal spores.  Being a Lab, he loved to be in the roam through the trees and roll around in the dust and dirt.  The vet said that this was likely how he contracted it, by stirring up some dust that had the spores in it, and breathing them in.  It is becoming much more prevalent in Champaign/Urbana, as the vet says he sees it prety frequently these days.

The treatment is an expensive anti-fungal drug.  In four-year-old dogs, the drug should start to work in a couple of weeks, then the course of treatment would continue for several weeks longer.  It just didn’t work for Manny.

So, spend some time with your pets this weekend, and leave me to worry about the currently illogical nature of the markets.

More later!

Mark

2006-08-10 :: European Terror Plot Hits Markets

Thursday, August 10th, 2006
Below is a story that will likely have an impact on the markets today, giving the traders in New York one more thing to worry about. 

News story from CBS Marketwatch…

European markets sharply lower on terror concerns

Airlines, travel stocks hit by renewed terror fears

LONDON (MarketWatch) — European markets traded sharply lower on Thursday, as renewed terrorist fears hit airline stocks in a market already under pressure from an overnight sell-off in the U.S. equity markets and some poorly received earnings news from Deutsche Telekom.
The U.K. FTSE 100 index (UK:UKX: news, chart, profile) lost 1.3% at 5,784, the German DAX Xetra 30 index (DX:1876534: news, chart, profile) declined 1.9% at 5,593 and the French CAC-40 index (FR:1804546: news, chart, profile) fell 1.4% at 4,955.
The pan-European Dow Jones Stoxx 600 index (ST:SXXP: news, chart, profile) dropped 1.2% at 322.56, with travel and telecom stocks leading decliners as both sectors dropped more than 2% in the index.
London-listed airlines lost ground, with British Airlines (BAB :
British Airways Plc ImageBAB73.33, +1.47, +2.0% ) (UK:BAY: news, chart, profile) down 4%, EasyJet (UK:EZJ: news, chart, profile) 2.5% lower and Ryanair (UK:RYA: news, chart, profile) (RYAAY :ryanair hldgs plc sponsored adrRYAAY54.50, -2.06, -3.6% ) down 3.9% after U.K. authorities said that they arrested at least 25 people in a plot to blow up as many as 6 airplanes flying between the U.K. and the U.S., according to media reports:
 

“It’s undoubtedly caught people off guard, everyone’s looking at the airlines of course,” said Mark Tinker, head of strategy at brokerage Execution,.
He added that the market has generally been lacking in confidence and news such as Thursday’s provides an excuse to stay away.
The travel sector rout spilled over to the Continent, with Spanish construction group Ferrovial (ES:016260101: news, chart, profile) , which has agreed to buy Heathrow and Gatwick airport operator BAA, down 1.9% and German airline Deutsche Lufthansa (DE:823212: news, chart, profile) down 4.7%.
Travel company TUI (DE:TUAG00: news, chart, profile) lost 6% and Air France-KLM (AKH :
air france klm sponsored adr  AKH25.24, -0.03, -0.1% ) (FR:003112: news, chart, profile) declined 4.1%. Both companies also updated investors on progress Thursday.

Traders said that Thursday’s European moves were a combination of the new terror fears and technical factors.

2006-08-09 :: The Fed Pauses – Or Does It?

Wednesday, August 9th, 2006

When is a pause not a pause?  That’s what the investment markets were trying to figure out yesterday as the broader markets headed down in spite of the Fed not raising rates.

The big disaster was Chairman Bernanke’s statement, which was clear as mud.  Here is a paraphrase of it from Cody Willard that summed it up pretty good:  “We’re not raising rates today, but inflation has been creeping up and might continue to creep, but we think it won’t creep too much so we might not raise rates — but we still might.”

Based upon this lack of definitive direction, the markets will likely continue in turmoil for the forseeable future.

The Asian markets (Hong Kong and Japan) advanced over night on the potential turn in liquidity from a US end to interest rate hikes, so US markets may follow suit today.

Its frustrating playing the waiting game, but its all part of investing in equitites.

More later!

Mark

2006-08-07 :: The Fed

Monday, August 7th, 2006

An article in Investors Business Daily noted that The Federal Reserve has enginered the economy so that the economic cycles are much more investor-friendly.  “Business cycles,” they wrote, “have become far more stable, with long economic expansions and short, mild recessions.”   This is the premise that former Fed Chairman Greenspan used to describe as the result of his Fed’s monetary policy activity.

This is a very investor-friendly because economic expansions translate into earnings growth, primarily for the cyclical companies whose earnings are tied to a growing economy.

With the Fed’s evolution into a body that principally uses interest rate changes to tweak monetary policy and who no longer makes changes in the money supply, we have a situation where the US economy is experiencing fairly stable growth.   As the growth starts to heat up, the Fed raises interest rates until the growth is knocked back a bit.  They have been able to guide the economy into the soft landing and avoid the deep cyclical recessions of the past by allowing the money supply to expand even as interest rates have moved up.

Our investment strategy is built around this Fed evolution, and generally avoids the “defensive” companies that sell toothpaste, sodapop and diapers.  The last time that the defensive stocks led the market was during the 2001 recession, and they led for nine months.  The 2001 recession was quite mild and barely missed the soft landing.  The cyclicals have dominated the market since then, with earnings growth benefiting from the economic expansion; the defensive stocks have been mostly flat.

This cycle, there are no current predictions that the US economy will drop into recessionary territory.  Yes, the defensive stocks that make up such a big portion of the major indices are performing better than the cyclicals at the moment.  They are up a couple of percentage points on the year and the cyclicals are flat to down a bit.  This doesn’t worry me, in fact, its part of a healthy market.

As we approach tomorrow’s Fed meeting we should see the beginning of a change in Fed interest rate policy.  They should announce that they are pausing their interest rate increases as the signs that the economy has slowed are becoming more prevalent.  Over the coming months, we will see signs that either the soft landing has been achieved or that a mild recession is in the cards (right now, the least likely scenario).   Either way, the cyclicals are poised to start leading the market once again once the economic signs are in place.

Investment returns are never a straight arrow up. There are times when strategies, like index investing, out performs active investment management.  Under the Fed’s evolution, those times will be fewer and fewer.  The smart money will pick an investment strategy based upon owning companies with growing earnings tied to a growing economy.  That’s what we’ve done and I see no reason to change that strategy unless the Fed becomes uber-bearish on the inflation prospects and severely restricts the money supply, completly changing the way that Chairman Greenspan ran the organization.  Until that happens, expect that Investors Business Daily has it correct and that the business cycle has evolved into a much more friendly place for investors.

More later!

Mark
 

2006-08-03 :: Surprise Rate Hike in London

Thursday, August 3rd, 2006

The Bank of England (the Federal Reserve’s British counterpart) raised rates today in a surprise move that sent European stocks down.  Some early earnings reports are mixed here in the states (energy and metals earnings are reported higher than expected at Rio Tinto, Kerr-McGee and Penn Virginia; weaker than expected earnings in consumer-centric stocks like Prudential, Starbucks, and Sprint-Nextel).

My guess is that the market will open lower today based upon fears that the Fed will follow BoE in surprising everyone with higher than expected rate hikes, plus oil is trading higher which should fuel inflation fears.

Hopefully, we’ll see the energy  and metals sectors higher based on earnings growth.

Another day of market turmoil as we head toward the August 8th rate hike.

More later!

Mark

2006-08-02 :: Energy Continues Climb

Wednesday, August 2nd, 2006

Yesterday was a generally down day for stocks as August, the worst month for stocks over the last 15 years, opened in typical fashion.  The bright spot was that energy stocks were up fairly uniformly across the board, particulary companies that specialize in Natural Gas.

Traders seemed to be fretting about the Fed ahead of the Aug 8 meeting.  My thoughts are that we will still see a quarter point increase then an announcement that they have finished raising rates at the present time.   The announcement may come in the form of a “pause” to see the impact of prior cuts (its pretty clear that the economy is slowing, from earnings reports by UPS and Fed Ex, two of my favorite leading indicators of economic activity); or it may come in the form a a “change in bias” to a neutral stance.  Either should be, at least initially, positive for stocks.

Then, we will have the traders fretting about whether the Fed has gone too far and that the economy is slowing too much.  Any negatives after the 8th that push the market down will come from this mindset.

The earnings in the energy sector will continue to drive those shares as people see that a slowing US economy has little impact upon the earnings of companies in an industry whose prices are being set by the 11% GDP growth in China and 8% GDP growth in India (forces of increasing  demand) and geopolitical unrest – Nigerian rebels, unrest in Middle East, Russia’s moves away from democratic governance ( forces negatively impacting supply).  The earnings in the metals sector will continue to be impacted by demand growth as well.

Our biggest sector having issues at the moment is the infrastructure sector.  In spite of earnings reports showing that the US economic slowdown has not impacted these global companies, their stock prices are down.  We have been using this as an opportunity to buy more shares in companies that we have faith in.   They are negatively impacting the portfolios in the short-term, but will have positive impact once the market sees that the Fed has turned the corner, and particularly when he market begins to anticipate interest rate cuts.    “Buy low, sell high” is an old maxim in the investment world; buying these companies now when they are at temporary lows the contrarian act that can be tough to initiate, but that pays off.  The only reason it works is because the earnings growth says this sector is undervalued and will eventually pay us back in a big way.

More later!

Mark