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| Friday, May 09, 2008 |
| A Black Swan Market |
| By Brandon Clay |
4:22 pm Central Time  One of our subscribers recently asked our opinion on the market -- where we thought it was heading. He's been watching stocks for 50 years and commented he'd never seen an environment like this. I would agree. If it were that easy, everyone would be making money. Every market is different. Though there are similarities between them, each time period carries with it a set of different assumptions, new players, and veterans. More importantly, major events occur that are completely unforeseen except by esoteric prognosticators on late night talk radio. It is these sorts of events I want to highlight. Because this is the stuff of which volatility is made. For those unfamiliar with the term, "The Black Swan" occasionally flies onto the scene. Taken from the book by the same name, Nassim Nicholas Taleb explains that a Black Swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. For example, the attacks on September 11, 2001, is considered a Black Swan event. It had enormous military, cultural, and economic ramifications, yet the event itself was completely unexpected. For those interested in the term, real black swans were completely unknown to ancient westerners. The aphorism "all swans are white" came from this notion. However, in the 1600s, black swans were discovered in Australia, thus destroying the widespread disbelief in non-white swans. In the case of black swans, the discovery was a minor inconvenience. Textbooks were amended and arrogant professors humbled. But when black swans alight in other disciplines, the results can be catastrophic. Black Swans wreak havoc in the markets. In 1987, the interplay between derivatives and stock prices became toxic. That, alongside unforeseen problems with computerized trading caused a -22.6% meltdown in one day. This was a unwelcome Black Swan. In 2000, once people stopped believing certain DotCom's with 23 year-old CEO's and cobbled-together business plans were worth $25 a share, the Tech Bust commenced. Yet another Black Swan. Last summer, subprime mortgage-backed securities problems came to light on Wall Street. Since October, the broad stock market has dropped over -10%. Today, we're still dealing with the effects of this issue. This morning, Citigroup announced plans to unwind $400 billion of assets over the next 3 years. The net effect: Citi will no longer be the largest bank in the U.S. -- if they stick around at all. The Subprime Black Swan is enjoying its leisurely float in the markets for now. One day he'll fly away. But will it be after another -10% decline in the market? Who knows? As for our subscriber's original question: where do we think the market's heading? We're cautiously optimistic. Our model strategies are 100% invested in areas of strength in the market, but our Free Market Leadership Strategy is still holding 50% cash. Barring additional Black Swans flying into the scene, we continue to expect pockets of rallies. We believe we're well-positioned to profit from this unusual market. Have a great weekend. |
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| Thursday, May 08, 2008 |
| Let The Sun Shine In |
| By Patrick Watson |
5:12 pm Central Time  Stocks tumbled on Wednesday, led by the financial services sector and even more specifically the brokerage stocks. Not coincidentally, the sell-off ensued as SEC Chairman Christopher Cox said his agency will soon require investment banks to publicly disclose their capital and liquidity levels. Mr. Cox believes the lack of such disclosure contributed to the recent collapse of venerable Bear Stearns (BSC), which is now being assimilated into JPMorgan Chase (JPM) with a little help from the Federal Reserve.
The question we find interesting is why this news was considered (pardon the pun) "bearish" for the brokerage industry. Analysts seem less concerned about the existence of these facts than their disclosure. In other words, Wall Street is perfectly willing to accept that some of its members are undercapitalized as long as the public does not know about it. When everyone knows you have a shaky foundation, it is harder to entice customers into the store. For our part, we think sunshine is the best disinfectant. Wall Street could surely use a little more of it. Meanwhile, a strategist at Societe Generale today issued a report saying "... we are on the cusp of an equity meltdown that will slash and shred portfolios like Freddie Krueger." This evocative forecast is a little less frightening if you know that SocGen has been generally bearish on equities for many years. For this reason we are not yet heading for the hills. We will concede, however, that the technology sector is not moving up quite as quickly as we thought it would a week or two ago. Energy and basic materials have been surprisingly resilient and are probably drawing away some of the global "hot money" that follows short-term momentum. Even so, technology is not far behind and on a risk-adjusted basis is probably the better value right now. |
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| Wednesday, May 07, 2008 |
| A Tech Idea for You |
| By John Schloegel |
5:15PM Central Time
One week ago, the Fed reduced interest rates across the board in a continued effort to jump-start the economy and reduce the pain of the credit crunch. But something strange happened. The dollar rallied, metals and mining shares were crushed, and gold declined substantially. The market began to build an expectation that the Fed is done cutting rates, and perhaps the dollar stands to benefit as the economy climbs out of the cellar. The anti-dollar bets had folks long energy, materials, commodities, mining, and metals shares, and now some question if that is a crowded trade. In fact, the Nasdaq Composite caught a bid and it's clear a sector rotation into technology has begun. One way to diversify your quite possible over-weighted commodity and energy exposure is to buy IGM -- the iShares Technology ETF. Want a Who's Who of technology heavyweights? This fund is for you. The top ten holdings in this portfolio contain many companies that recently reported blow out earnings results. There isn't a recessionary blip in these tech titans. The price action of the fund over the past few months leads us to believe it has plenty of mojo behind it. Significantly higher prices are not far in the future. We had a first quarter decline and a basing period off the March 17th lows, with a new uptrend emerging in mid-April. As many investors are heavily involved in the energy and commodity sectors, you can be on the leading edge of the rotation and catch these shares before others arrive at the party. Buy IGM and get onboard technology. Top Holdings *(Daily) as of 5/6/2008 | | | | | | | | INTL BUSINESS MACHINES CORP | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Tuesday, May 06, 2008 |
| Like Buffett, Like Son |
| By Brandon Clay |
3:44 pm Central Time
 Last weekend, Berkshire Hathaway held its annual shareholder's meeting. A popular venue, some shareholders stand in line for hours to grab a seat close to the Oracle, hoping to capture wisdom emanating from his presence. Rubbing shoulders with Charlie Munger, Bill Gates, et al, is not something most people get to do very often. The legendary chairman, himself, presented. True to form, he did not disappoint. Speaking to 30,000 adoring fans, Warren Buffett reminded shareholders of his underlying philosophy. In his characteristic manner, he traversed, investing, economics, politics, and administrative categories. He reassured Berkshire investors of a smooth transition given his age and touched on other related issues. But of all the lessons gleaned from the meeting, one message stands out. According to Buffett, "diversification is for the know-nothing investor." The juxtaposition between Buffett and the mainstream financial press is stark indeed. On the one hand, we have the perennial "Buy & Hold" crowd. This group chairs the majority of anchor seats at financial networks, news columns in business publications, and professorships at leading finance schools. They shout from the rooftops about the benefits of diversification and strategic asset allocation. Talk about buying gold to one of these professional advisors and they might flash a condescending sneer in your direction. On the other hand, there's Warren Buffett and those like him. With almost a disdain for diversification, the Buffetts of the world only want a few solid stocks to carry their portfolios to new heights. These investors probably don't spend their day parsing newswires. Instead, they're busy researching fewer, stronger picks that are not dispersed like fee-weighted index funds. And still, the same "Buy & Hold" investment gurus proclaim Warren Buffet as the greatest investor in the world. Dedicating magazine issues, articles, and television programs to Buffett, you would think the mainstream financial press believes everything that falls from his lips. Recently, re-named the richest man in the world, Buffett deserves the accolades. Still, those visibly praising Buffett rarely follow his investment advice, at least not in public. Investors who listen to Berkshire's chairman are pleased with the results. Not only are shareholders happy, others agree too. Those concentrated in Resources and Energy over the past year, concur with Buffett's assessment on diversification. They've been enjoying the benefits. The broad-based Materials SPDR XLB is up over +10% since last May. Energy's XLE is up over +30%. Bear in mind, this is measured against a stock market that that is down -6% at the same time. Concentrating in these two sectors would have given you more clubhouse fodder than the typical investor married to the indexes. No doubt, energy will fall from its lofty perch...but not today. Crude Oil futures traded over $122/barrel. Just a few months ago, Oil struggled to settle above $100/barrel. Where it stops nobody knows. Until it does, we'll be riding the wave. Like Buffett, we think diversification is for the know-nothing investor. We know something, and we're not afraid to bank on it. All the best on your investing success. |
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informational purpose only. Nothing provided in this blog constitutes a
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