VERY good commentary from a great newsletter -->
May 28, 2001
Tonight's Commentary:
Friday morning we all sat with the proverbial "baited breath" as we
pondered how far the GDP would get revised. Well when the number hit at
1.3% (down from 2%) there was a collective sigh you could almost "feel".
To be honest we thought it would get revised further than that, maybe to
0.8/1% or so. So, although the number is a bit suspect, (considering the
huge trade gap situation) we will accept it and the market did too. So we
weathered that storm, and then went into wait mode for the Michigan
sentiment numbers and the Durable goods orders due out at 10.
In the meantime we all discussed the comments that Chairman Greenspan had
made the previous evening at the economic club speech he attended along
with a thousand "movers and shakers" from the investment community. There
was a whole plethora of thoughts concerning what he had said. I watched
small groups of "investors" debating the meaning of several items
Greenspan had mentioned, but the one that made the biggest impact on me
was this quote " The period of sub - par growth is not over and the risk
of continued weakness is greater than previously expected" Then he said
that the FED is prepared to change monetary policy as necessary to make
sure we get back on track.
So, the morning's discussions were all about Alan. Was he going to cut?
How much? 50? 25? Are we sliding further? Is the second half recovery
still coming? Is the worst over? Etc. Etc. The same conversations I heard
being tossed around the Hilton Lounge the night before. Interestingly the
futures were "frozen" ahead of the open, not willing to move very much.
Then we opened and it was "boring" city. We were stuck waiting for the
Michigan survey, Durable goods, and existing home sales.
They hit at 10. Consumer sentiment rose nicely from 88 to 92. But Durable
goods orders fell 5% and existing home sales were weak. Finally the market
reacted a bit and we pulled back 70 on the DOW and 30 on the NASDAQ. Sure
some of it was low volumes, but some of it was the 'hopes" wearing
thinner. As the day wore on (and I mean wore) we kept sliding until we
ended the day down 117 on the DOW and 30 on the NASDAQ.
So now we get to chat a bit about all of this. Its been no secret that I
have not been one screaming that great days were coming. I have actually
been warning that the global/overall economy is walking that proverbial
tightrope between recovery and disaster and I still can't figure out which
one wins. Although I catch some hell for sounding "pessimistic", I am
really not being a pessimist, I am being a realist, and the numbers bear
me out. Think about this for a second, I have been calling our run up a
"mindless hope rally" right? Well interestingly the only number that was
up this week was the Michigan consumer sentiment. Do you know what that
really is? It is a survey that literally asks people how they "feel" about
the future. Well they "feel" better. The jawboning by everyone saying how
great things will be worked some magic. The market moving higher also gave
them some breathing room.
But the numbers bear out a different story. Jobless claims were really
screwed up. Often I remark about how they "sharpen their pencils" when
letting out numbers and the initial jobless claims were a perfect example.
Last week we saw a tremendous drop in initial claims and everyone got
excited. But this week they revised those numbers from a big drop to a big
increase! Then the new numbers exceeded estimates by over 5,000! The
average is moving along at "recession' levels. Manufacturing is in the
depths of a recession. New home sales, the biggest driver of the economy
fell 9.5% the biggest drop in 4 years. Durable goods down 5%, existing
home sales down 4.2%. Auto sales down. Aircraft down. You name it, it was
down.
The common wisdom has been telling us that the second half was going to
heat up. Unless I am reading the calendar wrong, the second half starts in
about 30 days or so. We haven't seen one single improvement yet. The only
thing that improved was "hope". Then as if the news wasn't bad enough we
got the Senate debacle this week. With the shift in power at the Senate
level, most are saying it isn't that important. We will still get the tax
cuts and all that will happen is "gridlock" in Government. I disagree.
Republicans are indeed "pro business" and they are into letting business
grow without all the gazillions of dollars worth of "red tape" necessary
to do anything in this day and age. The Democrats will hinder all that. So
the reason this is important is that Companies who may have felt
comfortable building a new plant because the Government would be
sympathetic to them could go back on hold. This economy doesn't need hold,
it needs growth.
Taxes? Sure it won't hinder the tax cuts proposed now, but forget capital
gains cuts. They will put a halt to that. Responsible oil/gas exploration?
Forget it. They will kill it. Yes indeed we will be faced with Gridlock
and that stinks. We need some pro business initiatives, and we need solid
answers to the power problems. Telling me to drive 55 again is swell, but
hey, increasing domestic production should have been in place for 30
years. Depending on OPEC is still a recipe for disaster.
So, all in all, I don't think things look so swell and Greenspan himself
admitted to the same. After 5 rate cuts he is still willing to slash
further along with the behind the scenes things he is doing with monetary
(M1 - M3) supply, not to mention big "repo's" and urging looser lending.
Oh, did I mention the IMF had to bail out Argentina? Brazil has a power
shortage similar to California? Europe is watching the Euro fall to new
lows? production in Germany is at almost a 15 year low? Gasoline futures
hit an all-time high? California thinks its going to avert some outages
because snow cap melt is increasing hydro power, but its all fantasy.
Blackouts are coming and new figures show companies are figuring their
losses in "billions". They (California) make up about 1/6th of our
economy. Agricultural products are rising because oil, and nitrates for
fertilizer are rising. I don't have a lot of reasons to be "optimistic"
just realistic!
The common wisdom say this : "You're right Bob, things are bleak, that's
why we are so optimistic about the future, these things will improve".
Well I generally buy the concept that yes indeed good times often follow
bad times. This one is no different really in that respect. My question
has a lot more to do with "when" the good times show up and what happens
between now and then. Our mythical consumer "Mr. Jones" is slowly bleeding
now. He is getting tapped out, and all the cheap credit in the world won't
help him much if he doesn't have a job. When you see auto's falling, and
durable goods falling that isn't good. Short term auto credit is as low as
it gets, sometimes free! (There are literally 0% loans on our local TV
every day) If free interest can't get Mr. Jones to buy it means he can't
make the principle loan number. He is reaching critical mass. Without him,
you can forget this second half recovery scenario.
So here is the deal folks. We have been in a Hope rally that took us over
11K on the DOW and over 2250 on the NASDQ. Moves of 40% were common and
quite a few stocks made 100%+ moves. All of that buying was in
anticipation of a big recovery coming and they wanted to get in ahead of
it. Our feeling was that it would keep going either until the GDP revision
scared them, or if that didn't do it, the earnings warnings that will be
starting in a week or so, would be the event that shakes their belief. The
way we look at it is something like this: If we have been moving up in
anticipation of good news to come, how long can we move up if the good
news doesn't come this earnings season? Or, better yet, if it is clear
they see no real improvement yet, do we "hold tight" where we are or do
the markets take a wicked plunge?
I don't have a lot of faith that many companies are going to be saying
"great things". Sure we will get some that say they "hear the order phone
ringing once in a while now" which is much better than dead silence! But
will it be enough to keep us going? I really don't think so. I think that
at the least they are going to pull in their bull horns and re assess
things. At worst? Don't ask! So, our plan was to play the mindless rally
until the music stops and now the only question is when is that? Was the
bad reaction Friday morning to the economic numbers just a low volume
Holiday trading normality, or was it the start of some real caution? That
is very hard to tell.
One the bright side we had the lowest volume of the year and we only
really pulled back to the magic numbers 11005 on the DOW keeps us above
the breakout and 2251 keeps us 1 point above the important 2250 line. On
the darker side, there really isn't anything to make us move up except
more hope, and that appears to be running thin. So what's it going to be?
As much as I hesitate to say this, I suspect they will forget Greenspan,
the Senator, the housing numbers and everything else and try and bounce us
off these levels. If the volume had been greater I would have been
shouting "run for the hills" but it was the lowest of the year. That tells
me most weren't selling, they were locked on the NJ Turnpike trying to get
away. No buyers always equals a dripping market. I suspect dip buyers will
step in as long as we don't violate 11K on the DOW and 2250 on the NASDAQ
for a whole day. If we just dip under t and bounce that would be okay.
Although I think they are going to buy "em" up again, it is time to start
being cautious. We could see the madness continue for another week or so,
ignoring everything, but they can't ignore earnings warnings again and
they are indeed coming. If Friday starts to snowball and we start sliding
in earnest, obviously its time to change tactics and focus on shorts/puts.
But for now I "think" the upswing is intact. But one thing is for sure, I
will NOT be buying anything until I see it!
PS> I hope you are having a wonderful Holiday!!!!!!!!!!!!!
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Split Announcements:
Friday morning brought us news of a great split as Lowe's (LOW) came out
to announce a 2 for 1!
Lowe's (LOW) announced a 2 for 1 split Friday morning before the open.
Lowe's Companies, Inc. is the second largest retailer of home improvement
products in the world, with specific emphasis on retail do-it-yourself
(DIY) and commercial business customers. This competitor to Home Depot
trades about 3.4 million shares a day, and recently we have made some
great profits trading them. They ended Friday up 6 cents in a horrible
market. time to get in again? Soon, if the rally heats up. I they can
clear 72.50 we may take a shot at them.
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Split Runners:
A split runner is a stock that may follow a fairly common pattern. That
pattern is that approximately twelve trading days before a stock executes
its split, it usually begins a run up into that split and sometimes these
runs can be very powerful. For the short term trader, no other short term
hold has as much potential to put money in your account. BUT remember,
when the market tanks, split runners will tank also. When the market is
flat to rising, they usually outperform the market.
NOTE>> Even stocks heading into a split get smacked when the overall
market is in the toilet folks. Do not let the market take your money. If
the stock is weak...don't buy it.
May 31, 2001 (splits the evening of the 30th)
Baxter International (BAX) is doing a 2 for 1 split and Baxter
International Inc. engages in the worldwide development, manufacture and
distribution of a diversified line of products, systems and services used
primarily in the healthcare field. They trade about 1.4 million shares a
day and they reside in a lot of fund managers portfolios. Recently they
have been challenging a triple top and they actually got through it for a
while and we bought into them. After a decent move higher, they have been
dripping backwards and its getting critical here. Although still above the
95 breakout level, they are back to 96.82 after being up around 98. We
will sell them if they fail 96. Granted they could hit 95 and bounce, we
don't want to sell 'dead even and will take the buck. Remember the split
is just two days away and more pressure could come.
BJ Services (BJS) is doing a 2 for 1 split and BJ Services Company is a
provider of pressure pumping and other oilfield services serving the
worldwide petroleum industry. The Company's pressure pumping services
consist of cementing and stimulation services used in the completion of
new oil and natural gas wells and in remedial work on existing wells, both
onshore and offshore. They trade 1.5 million shares a day and recently
have made some powerful moves. We saw them get really volatile for a while,
But recently they had "regrouped" and we bought into them as they looked
like they would break that stubborn 80 level. Well we had to bail out as
it was falling, taking a tiny profit. Friday they managed to bounce off
what has become support and ended at 76.66. Now do we want to go back?
Maybe. but they split in just a few days so it would be a quick trade. If
they can clear 77.50 we may go in, but we would bail quickly if it
reverses.
Quest Diagnostics (DGX) is doing a 2 for 1 split and Quest Diagnostics,
Inc., together with its subsidiaries, is a provider of diagnostic testing,
information and services. It offers a broad range of clinical laboratory
testing services used by physicians in the detection, diagnosis,
evaluation, monitoring and treatment of diseases and other medical
conditions. they trade in the 345K share a day range. After a run up that
took them from about 90 to 120, they had pulled back and we suggested
getting in them if they could settle in at the 114 area. Well they did and
started moving higher again which attracted us to the play. we went in at
116.75 and they ran to 129 for us. Then they backed up quite a bit and
over the past few days have "consolidated" a bit. Now with the split just
a couple days away, we think we will wait for the split to take place and
see if we can catch them on the post split move up.
June 4th, 2001(splits the evening of the 1st)
WholeFoods (WFMI) is doing a 2 for 1 ratio split and Whole Foods Market,
Inc. owns and operates a chain of natural foods supermarkets. The Company
opened its first store in Austin, Texas in 1980 and, as of September 24,
2000, operated 117 stores in 22 states plus the District of Columbia.
Trading in the 550K share a day range, WFMI has the volume to make good
moves when investors are hot on them. We had placed a buy on them if they
could cross 52.50 and we got into them at 54.00 which was after a big gap
type day. But it worked and we were able to capture some nice profits
before they started sliding back. Will they make one last move with the
split nearing? Maybe. But we aren't convinced we would buy into it. They
have a lot of resistance at 57.50 and with Friday's close at 56.30 I'd
need to see them clear it before getting involved again.
Perkin Elmer (PKI) is doing a 2 for 1 split the same evening and
PerkinElmer, Inc. is a global technology company that provides products
and systems to the telecom, pharmaceutical, chemical, semiconductor,
medical, aerospace and photographic markets. Trading approx. 660K shares a
day, and the last month has seen them do very very well. From 42 to 75 in
a little over a month, PKI can sure move when they are hot. Even on a
terrible day, PKI added 59 cents to 72.39 Friday. We think PKI is going to
try and make a run here and we will enter if they can clear 73 on Tuesday.
Universal Health (UHS) is doing a 2 for 1 and Universal Health Services,
Inc.'s principal business is owning and operating acute-care hospitals,
behavioral health centers, ambulatory surgery centers, radiation oncology
centers and women's centers. They typically trade 345K or so shares per
day, but they have been really choppy lately. Looking at the chart shows
they may be bouncing off a low set back in January, but they don't look
great. They did have a nice day Friday and "maybe" this is indeed the
start of something so we will take a shot at them if they can clear 81.50
for a day.
Genzyme (GENZ) is an interesting story. They have a shareholder meeting on
May 31 to approve a 2 for 1 split on June 1st and as you can guess they
will get the approval. Genzyme General develops and markets therapeutic
products and diagnostic products and services, with an emphasis on
therapies for genetic diseases. Genzyme General primarily consists of two
business units, Therapeutics and Diagnostics. These guys can really move
well and when their 2.8 million share a day trading is biased to the buy
side, big moves are in store. We have played them many times in the past
for some very handsome profits. They are now challenging some resistance
at the 109 level and on Friday they lost just 92 cents to 107.50. If they
clear 109, we are going in.
Knight Transport (KNGT) is doing a 3 for 2 split and generally we don't
review a stock that only trades in the 60K share a day range but they have
such a pretty chart we 'had" to. Knight Transportation, Inc. is a short-to-
medium haul, dry van truckload carrier headquartered in Phoenix, Arizona.
The Company transports general commodities, including consumer goods,
packaged foodstuffs, paper products, beverage containers and imported and
exported commodities. This thing has run from 18 to 29 before settling
back and consolidating at the 28 level. For a low volume stock, this is a
lot of movement. If they can close over 28.50 we may go in here, but some
volume would sure help!
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Tonight's Tutorial: (Knowledge is key in this business!)
When we put out our weekly issues of Opportunity Picks, we often include a
short term stock "play' such as breaking resistance maybe, and other times
we offer an interesting LEAP play that would make more sense. Some people
aren't completely understanding of the logic so I decided to take today to
clear it up.
A LEAP is simply a long term call option. Period. It is nothing to get
confused about. If you have ever bought a call option against a stock, you
very well know already how to buy a LEAP. So why would one buy a leap
versus the stock on a play? That is the question!
Since LEAPS give us the ability to "lock in " a buy price for an extended
period, sometimes as much as almost 3 years, they don't move too awful
much on daily stock price swings. Basically their "delta" is lower than
short term options. So if we are putting out a stock play where we expect
the stock to move several points in a week or so, the LEAPS may not move
very much, even if the stock does. That is because the options wizards may
look at the stocks move as a near term event and not be willing to jack up
the price of the LEAP in comparison.
So, often for short term moves, the best play is the stock itself or a
near term option play. So, why the LEAPS? Ahh, good question. Suppose we
are thinking that a stock is cheap now, but it has tremendous potential to
be a big winner. Maybe its contracts coming, or maybe its simply that
management is doing the right things, but in any event we feel the stock
is going to triple or even quadruple over the years. This is where LEAPS
come in so very handy. For a fraction of the stocks actual cost, you get
to "lock in" a great price on that stock for up to 3 years. If you are
right in your assumptions and the stock does quadruple, you will get more
"bang for the buck" from the appreciation of the leaps than the stock move
itself. Why? Leverage.
Lets say we like the XYZ company and they are trading at 18 dollars per
share, but we feel that in the coming years they will take over their
market niche and be big winners. So if we buy it at 18, and it goes to say
54, sure enough it has appreciated by 300% which in itself is a major win.
But lets look at the LEAPS. Lets say the January 2003 15 dollar LEAP was
priced at 6.00. That means that at any time between now and January 15th
of 2003, we have the right to buy the actual XYZ stock for 6.00 per share.
Well if the stock itself goes to 54 dollars, guess what happened to those
leaps? They went crazy. Remember we bought them for 6 dollars each. Well
if we have the right to buy XYZ for 15 and its trading at 54, we know the
LEAP has to be worth a minimum of 39 dollars (the difference between 54
and 15) But depending on how much time is left before the LEAP expires,
chances are those LEAPS are going to be considerably higher, maybe in the
area of 45 or so. Well if you bought LEAPS for 6 that you can sell for 45,
that is over a 700% return and it only cost you 1/3 the stocks price! That
is powerful stuff!
So the bottom line is that some plays are for a week or so and there we
want to focus on the stock or a short term option. But for long term
investment plays or severe speculation plays, the LEAP will allow you to
get in cheaper to start, give you more in return, and gives you less risk
overall. That is a winning combination! Hope that helps.
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Some Thoughts: (Just some things bouncing around in our heads)
As is usual we do a small review of the weekend Barrons to see what they
are blabbing about. Sometimes they are pretty good issues, and sometimes
they are worthless garbage can fodder. This week they started off with a
discussion about Wall Street analysts and the problems behind having high
priced analysts that seem to have an “agenda” when it comes to ranking
stocks. Like the amazing “Amazon to 400” dollar call when to this day they
haven’t made a penny. Well we have been saying for many years that what
goes on between the investment banking side and the analyst side is
criminal. Worse, and something Barrons didn’t talk about is how sometimes
a brokerage will call something a “strong buy” and yet if you read the
tape the next day, that brokerage is the heaviest seller of that stock.
Hmm. Upgrade it, get it moving and sell into it? Likewise downgrades often
see the same brokerage buying heavily. Interesting how some guy on the
Internet gets locked up for doing that, and these big banks do it daily.
We call it criminal.
The next article was an interview with Stephen Roach an economist from
Morgan Stanley and his less than rosy view of the US economy both now and
in the near future. A very well thought out give and take, I suspect it
lacks a few things that I find important that Roach didn’t seem to mention
much. Although he believes the consumer will pull in his horns some, he
didn’t take the approach I do that says the consumer is about tapped out
and energy prices could ultimately be his undoing. Overall, it was a good
thought provoking interview.
The next article worth reading (in our opinion) was about Chevron’s
takeover/merger with Texaco and how CHV should be a hot company once it
all settles in. I can only agree wholeheartedly. Energy is here to say and
although “bigger is better” is true to some extent, we think ALL the oil
companies will be okay investments. But for real “profits” its going to be
small companies with oil reserves that make the big moves.
Moving along we come to an article about John Moffatt an analytical market
researcher who sets parameters of measurement and then predicts economic
activity and stock picking. He says that in nine months things will be
rolling along again and he selects consumer cyclicals, paper, Retailers,
and basic materials. Hmmm. Can I comment here? In the article he says we
will get a “V” bottom recovery “if” the consumer stays strong. His
“models” show a big boost in the fourth quarter. I humbly submit this. He
likes energy because of the shortages. Me too. So, with unemployment
rising, and energy acting like a gigantic tax, is it possible the consumer
can’t cope? He doesn’t say.
Abelson was really on a roll this week with his twisted views about what
the Senator from Vermont /turned independent means, and he was fun to
read. At the end of his rather bombastic remarks. He took a swing at AOL
as his friend is short the stock, and they plugged Forrest oil as “raking
in the bucks”.
There was a good plug for Verisign (VRSN) as they got to keep their
dominance of the “dot com” registry that should get them a pop, and in an
interesting piece about McData shares, it was about how there is a
disparity between the MCDT and MCDTA share price that really shouldn’t be
there. I suggest the “b” class shares will fall a bit and the A class will
rise a bit because of it.
Of course there was the usual give and takes, some words about the Euro
falling, tax cuts, interest rates etc. Overall not a bad issue, I just
wished they led off with something more timely than Wall Street analysts
being called “crooked”. Really?
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Tomorrows Plays:
Short Term Holds: (one day through approx two weeks)
Techs:
We have dodged just about every piece of horrible news we could possibly
hear and still we came to rest 1 point above the resistance line turned
support at 2250. Amazing isn't it? Anyway at this point we need to be
really cautious, but I tend to think they are going to try and push them
up once again. If we are right, we could see the hope rally continue for a
few hundred points, if we are wrong we could be looking at a long slow
death.
A lot of the techs we were looking at ended the day not far from their buy
points. For instance we will buy INTC if it clears 30 and it lost 11 cents
to 29.10. Likewise MERQ does well over 70 and it lost just a couple to
67.55. We see that as mildly bullish. So there are a few stocks out there
that still have nice patterns and we will go into them unless the market
really melts under the 2500 line.
One thing we have to be clear about is this: We don't think that any up
move can last much more than into warnings season and that is just a week
and a half away. So we do need to be cautious on the whole group. That
said, there are some techs that still look attractive. PKI is a three
letter tech that looks good going into its split. SEBL appears to be
holding up nicely and we could find ourselves back in them again. VRSN is
settling back on low volumes, we could find some profits there again. DELL
is looking good once again. Finally, JNPR has been building a base for a
month and could pop soon.
Are there more? Absolutely, but again we don't want to load the boat at
this point and although a zillion could run, we will stay with these.
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Telecoms:
We aren't in a lot of telecom right now simply because they are about the
scariest part of the market. Most of the ones we are in are really little
guys Like MRVC, ORCH, and then we are of course in GMH for the "buy out".
(if it ever happens.) Then we hung on to DIGL even though it fell under 50,
only because volumes were so low, it didn't "feel" like selling, it was
drifting.
So now what? Not much. After ADCT announced such horrible news, we aren't
too interested in buying much in this sector. Granted if we "bounce" this
week they should all move, but we don't want most of them.
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Internets:
Internets were really weak Friday considering that EBAY got a lukewarm
upgrade, and MSFT announced some initiatives with AOL. Still the group
didn't do too well and that is bothersome. But, like every other sector,
the volumes were horrible. For months now AOL and EBAY are the only two we
have liked, and recently we added YHOO. (we bought EXDS hoping someone may
buy them) So what are we going to do? Not much.
If EBAY clears 64.50 we will buy them, likewise AOL over 55 is on our
radar. But we won't start either of them unless the market is moving up
and they clear those figures. |
