Harry Newton's Technology Investor - 8:30 AM Tuesday, June 25, New York: You must read this column completely. It will make you more money than you've ever dreamed.
Introduction and Heart Warmer: Stockmarkets don't go straight down. They have little rallies, like we had yesterday. If you are short stocks, these rallies can freak you. At one point during the day, many of my gains of the last few days nearly evaporated. These "rallies" are called "bear traps," "suckers' rallies" or "short-covering rallies." The decline from 5000 on the Nasdaq to today's 1460 has seen many of these rallies, some of which lasted several days and some of which went up strongly.
Fact is as the market declines, a bunch of otherwise intelligent people throw a little money at the notion that the market has reached bottom and that they can temporarily squeeze the shorts...now is the time to buy.... and bingo, the idea becomes contagious." My trading friends told me that this is what happened yesterday. They noted "little real buying."
Briefing.com's Robert Walberg wrote this morning, "The Nasdaq fell to within 27 points of its post-9/11 low in early trading Monday, before buyers stepped in and stopped the bleeding... Unfortunately, much of the buying was related to short-covering... Given scope of recent decline, and fact that index was nearing influential support, Briefing.com was not surprised to see short sellers secure some profits... However, as we have seen repeatedly over the past few months, the index failed to sustain upward momentum into the close due to a lack of real buying interest. Assuming the current rebound is nothing more than a technical bounce from oversold territory, investors should look for the advance to start running out of gas in the 1540-1550 area.."
In short, I'm staying short. And so should you.
How to find stocks to short? The absolute best short-term method is my "Cockroach Theory." This states that if out-of-the-ordinary, bad news starts, there'll be more and more and more. Just as when you spy one cockroach, you know there are more and more and more and they'll all appear in coming days. Cockroaches are not loners. Nor is bad, out-of-the-ordinary news. It keeps coming, just like the cockroaches.
Over the months, the Cockroach Theory has worked with so many companies I've mentioned here -- from Vivendi to AOL, from Tyco to IBM, from Lucent to Matha Stewart Living Omnimedia (MSO), from Omnicom (OMC) to International Rectifier (IRF).
In today's market, my Cockroach Theory has proven a positively perfect way of making easy money. today's shorts on this theory would be Omnicom (OMC), International Rectifier (IRF), AOL and Vivendi.
There is another technique for making money -- that is shorting stocks below $5. There's something magical about $5. When stocks hit $5 something happens in institutions' tiny brains. They seem to think the stock has suddenly turned to a gigantic piece of do-do. Moreover, stocks below $5 are not easily marginable. Today's "Below $5 Short" is Level 3. it's a telecom company that's got too much debt, and too few customers, isn't doing that well....and you know the rest of the story.
By the way Juniper (JNPR) is $6.81 but it's about to join the "Below $5 Club." Read about its travails and challenges in the latest issue of Business Week. Click here.
As I wrote yesterday I am not enjoying being The Prophet of Doom and Gloom. But the good news is my shorts are working and working well. Two of the best recent shorts: International Rectifier (IRF) dropped $9.85 on Friday -- 26.4%. Black Box (BBOX) dropped dropped $3.84 on Friday -- 8.5%. and they stayed down yesterday. I mentioned these because many readers are emailing me "What's your best short?" And my answer is there is no "best" short. You have to buy a "portfolio" of shorts and play them. Just as you spread your risk in a portfolio of longs, so you spread your risk in a portfolio of shorts. I have, however, highlighted a few in yellow. they're the ones I really like to dislike. They're my favorite shorts.
IBM is almost following the Cockroach Theory. PC Magazine's John Dvorak writes in the latest issue of PC Mgazine, "If IBM goes through with its layoff plan whereby 8,000 to 20,000 workers will lose their jobs, could unionism be far behind?..."
Here's my latest list of Harry's favorite shorts. Note that I've added a few new ones. But I didn't get the time to add Vivendi, Omnimedia and Omnicom to my table.
click here to see Harry's list technologyinvestor.com
How goes with the housing market? Today's Wall Street Journal has this story, "Harvard Housing Study Predicts
Continued Industry Prosperity.
For some time now, economists have wondered whether the nation's housing market is a bubble waiting to pop. Commanding their attention: annual price-gain percentages in the double-digits, for at least the past five years, in many locations. Now, the Joint Center for Housing Studies of Harvard University suggests that while a reversal in home prices is possible, it would probably be short-lived.
The Harvard center's report offers a demographic look at household creation, a high level of which is vital for the health of the housing market. The center's yearly "State of the Nation's Housing" report, scheduled for release Tuesday, predicts that the number of U.S. households will increase 22.6% to 129 million in the next 20 years. That translates into about 1.19 million new households a year, only slightly lower than the 1.26 million new households created a year in the 1990s, a great decade for housing that included several years of record sales.
Although it is possible there could be a hiccup in the housing market in the short run, "it is clear that the underlying demographics will undergird the housing market" over the next decade and beyond, says Nicolas Retsinas, director of the Harvard housing center.
Some economists have warned that the pace of household creation will slow sharply in the years ahead, as baby boomers age and settle permanently into their homes. That, so far, has proved to be a misplaced fear, as boomers instead have opted to trade up to pricier houses and snap up second and third homes for vacations. Meanwhile, a surge of immigrant buyers over the past five years, made possible by easier mortgage terms, has made up for any shortfall.
The Harvard study expects these trends to continue and says tight supply should further support home-price growth. Builders, the report says, will need to add 1.7 million new homes and apartments a year to keep up with the demand. (The number is greater than the annual rate of household formation because it includes replacements for old homes that are destroyed, as well as demand for vacation homes.) In the past three years, builders have been adding only about 1.6 million new homes a year, in part because of constraints on land use that have made it harder to find places to build.
To be sure, some factors could change the optimistic outlook. One is the uncertainty surrounding the manufactured-housing industry, which fell apart at the end of the 1990s amid a wave of foreclosures. Long term, some analysts expect these sales to pick up as lower-income families buy homes rather than rent apartments. If they do, "it will come primarily out of the hide of the single-family market," reducing the demand for traditional homes, says Mark Zandi, an economist at Economy.com in West Chester, Pa.
Affordability is also a big issue, even though the cost of owning a home actually decreased last year because of low mortgage rates, the Harvard report says. With rates falling to 30-year lows in the fall, the monthly after-tax cost for a buyer of a typical home last year fell $22 to $821. But consumer-debt levels remain extremely high, and the low rates may have only temporarily masked high prices. If mortgage rates go up substantially in the next few years -- perhaps above 9%, from below 6.75% for the 30-year fixed mortgage rate now -- giant portions of the population could find themselves unable to afford housing.
Finally, it's unclear whether the immigration boom will continue, especially if the U.S. tightens its borders further in response to terrorist threats. But the Harvard study argues that a sizable drop in immigration might not affect the market for a long time, since there is usually a long lag between the time immigrants arrive and when they achieve the economic stability to buy a home.
The Harvard report also highlights a surprising occurrence in last year's market specifically: Sales in the Midwest were stronger than the rest of the country, offsetting weaker growth or outright declines in states along the two coasts. Mr. Retsinas says that is partly because many Midwestern states weren't hit as hard by recession as New York and Northern California.
The Harvard center's report was funded by the Ford Foundation, as well as numerous housing-related companies and trade associations, including Fannie Mae, the National Association of Realtors and the Mortgage Bankers Association of America.
To repeat: Everyone must read Jim Cramer's book "Confessions of a Street Addict." Whether you think the man is a boorish lout is irrelevant. Whether you agree with his politics is irrelevant. Fact is the man spent a lifetime on Wall Street, successfully making millions of dollars. Fact is the man can write. He was a trained journalist before forming a very successful hedge fund. And he's very bright. (He graduated from Harvard Law.)
I'm only 140 pages into the book. But if I ever thought of investing in a mutual fund.... if I ever thought of having someone manage my money for a fee....If I ever thought of giving my money to Goldman Sachs.... If I ever thought that investing was a trivial pursuit.... More tomorrow. To buy this engrossing book at a discount from Amazon, click here, and search for Cramer.
For weeks I have worried about a cataclysmic crash. I can smell it coming. Investor confidence is low and falling rapidly. No one reading this column should be long in equities of any kind.
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