1. SECTOR-RELATED NEWS
INDICES
TWO BULL MARKET REPORT STOCKS JOIN THE DOW
For the first time since 1999, the Dow Jones Industrial Average is getting
a makeover. Gone in the revamp are AT&T (T, $19.60, down 0.39), EASTMAN
KODAK (EK, $25.17, down 0.37), and INTERNATIONAL PAPER (IP, $43, up 1).
Taking their places are AMERICAN INTERNATIONAL GROUP (AIG, $74, up 4, 6%),
PFIZER (PFE, $36.00, up 1.71), and Verizon Communications. The changes
will take effect at the opening of trading on April 8th.
TODD'S TAKE: This doesn't happen often, so the shuffle, announced on
April 1st, is an exciting change. It's even better considering that two
of the new Dow components are found in our Bull Market Report Portfolios.
The index is supposed to reflect what's happening in the market, and in
fact it has done that for more than 100 years. Changes to the index,
therefore, reflect changing times. The Financial Services and Healthcare
sectors, in particular, are larger parts of the economy than they were 10
years ago, and so they should be represented in the index.
Looking specifically at the stocks involved, we see three giants replacing
three well-known companies, but ones that have a combined market cap of
just over $40 billion. By contrast, AIG has a market cap of $190 billion,
Verizon has a market cap of $100 billion, and Pfizer has a market cap of
$270 billion. While AT&T and Kodak are icons of American business, the
companies aren't what they used to be. AT&T, for instance, doesn't know
what it wants to do. Once it was a breeding ground of innovation,
essentially creating the Telecom industry and spawning, among others,
LUCENT TECHNOLOGIES (LU, $4.38, up 0.42, 11%). Today it is struggling to
stay afloat in the long-distance business. Verizon, by contrast, is a
growing force in Telecom, and one armed with the top wireless business in
the country.
The same can be said of Kodak, which, while a pioneer in photography,
hasn't kept pace with the shift into the digital age. International
Paper, meanwhile, is gone largely because in this day and age the Dow
doesn't need so many Basic Materials stocks. Alcoa and DuPont still
represent that sector. The increasingly important Drug sector, on the
other hand, was represented by only MERCK (MRK, $45, up 1) and JOHNSON &
JOHNSON (JNJ, $51, up 1). The Dow needed the top Drug company in the
world!
The Financial Services is currently represented by only CITIGROUP (C, $52,
up 2) and AMERICAN EXPRESS (AXP, $53, up 1), both Bull Market Report
Portfolio components by the way. AIG is not a household name, in part
because it operates through a large number of subsidiaries, but it is a
giant in the Insurance business. It represents the sector well, and
finally it is getting some of the recognition it deserves.
Looking at these changes, note that none of the new components trade on
the Nasdaq. The last reshuffling in 1999 saw two Nasdaq stocks --
Microsoft and INTEL (INTC, $28.12, up 0.74) -- join the Dow. Clearly,
nothing in the Tech sector was a large enough, or a compelling enough
representative, to make the cut this time around.
Finally, the revamping won't change the value of the Dow. The index is
price weighted, meaning that to calculate its value, you add up the stock
prices and divide by a set divisor, currently 0.13500289. When the
changes take effect, the divisor will be changed. We'll let you know what
the new divisor is when it occurs. It also changes when stocks split.
Right now, a move of 1 point in a Dow stock, causes the Dow index to move
7.4 points. And as the divisor decreases over time, the Dow will
effectively become more volatile. Note, however, that inclusion in the
Dow will bring attention to the new stocks, which will drive up their
prices. Furthermore, while not as many funds hedge their portfolios with
the Dow as they do with the S&P 500, many do, and to accurately hedge the
Dow they will have to buy the new components. That creates a permanent
baseline demand for the stocks.
THE BOTTOM LINE: Take the changes in the Dow as a sign of the changing
economy and the changing shape of Corporate America. And take the changes
as a validation of the guidance you're getting right here. AIG and Pfizer
are powerful stocks that we've held and recommended for years. They are
companies that ha ve grown into leaders in their sectors, and now that
they're in the Dow, the stocks are going to serve long-term investors
well.
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PENSION FUNDS
GOVERNMENT GAMES WON'T SOLVE PENSION PROBLEMS
Members of the Senate and the House of Representatives have hammered out
an agreement that, if it becomes law, would spare U.S. companies from
paying $80 billion into pension funds over the next two years. The
government plan reduces the amount of required pension contributions, by
changing the way companies calculate their future pension commitments.
Airlines and Steelmakers, whose pension funds are in especially bad
condition, have been singled out for additional special relief. Lawmakers
are seeking to give these companies a break from the contributions they
are supposed to make to rebuild their depleted funds.
TODD'S TAKE: Underfunded pensions have been a big problem for a lot of
companies, including Automakers like GENERAL MOTORS (GM, $47, up 1). The
proposal gaining favor in Washington won't make the problem go away. It's
a joke.
The law currently requires companies to estimate the growth rate of their
funds by using a calculation tied to the 30-Year Treasury bond. Since the
yield on the bond is low, the estimated growth rate of the funds is low.
Thus, to keep it in the black in the future companies have to make larger
contributions today.
Well, the corporate lobby has asked that the government let companies
calculate the growth of their pension funds using a higher rate, one tied
to corporate bond rates. This, they argue, would help them get through
this unusual time in the markets, and let them tread water until they can
get their funds into better shape.
Folks, this is unbelievable. One of the reasons that pension funds got
into such a sad state in the first place is because too many companies
carried on with unrealistic expectations about the investment returns they
could generate. Warren Buffett, for one, has vehemently criticized
Corporate America for this over the past few years. By making overly
optimistic estimates about the returns they could generate, the companies
were able to put less money into the funds.
Just imagine if, a couple of years ago, the law had allowed companies to
base their pension contributions on an even higher rate of return. That
would mean that the funds would be in even worse trouble today. The
companies argue that the current market conditions are unusual
THE BOTTOM LINE: The "solution" proposed in Congress is a farce. It
doesn't change the size of the contributions; it pretends that smaller
contributions today will be enough to meet tomorrow's obligations. The
bigger problem is that if it goes through, the law will allow companies to
pay less into pensions today, leaving them in worse shape down the road.
It's just moving the problem down the road a few years. (Like the
Brazilian debt problem.) Besides the Airlines and Automakers, those with
big pension obligations include 3M (MMM, $82, up 2), COCA COLA (KO, $51,
up 3), NORTHROP GRUMMAN (NOC, $99, up 2), and IBM (IBM, $94, up 1). A new
law might spell relief to them in the short term, but eventually they're
going to have to pay up, and it is going to hurt dearly.
Check back with us in two years.
********************
INTERNET
GOOGLE EMAIL TAKES SHOT AT MSN & YAHOO
Search Engine giant Google is firing a shot across the bows of rivals
YAHOO (YHOO, $50, up 3) and Microsoft by introducing an email service of
its own. Called Gmail, the free service will offer users 1Gb of storage,
and the ability to search email -- including text, sender, and subject --
in the same way they search the web. The www.gmail.com website went live
Thursday, with the service expected to launch within weeks. It will be
supported by advertising.
TODD'S TAKE: In some ways, Google is entering the email market starting
at zero. After all, Microsoft, which operates MSN and Hotmail, has 35
million email users; Yahoo has 40 million; and TIME WARNER (TWX, $17.23,
up 0.41) unit AOL has 30 million. But all three of these companies should
be worried about this move from Google.
The company is one of the most exciting and innovative in cyberspace. It
has millions of loyal users around the world because its services are
simple to use, elegant, and they work well. The email service that it
will provide offers something completely new. First, the amount of
storage is phenomenal. Yahoo, for example, gives free users 4Mb, or a
fraction of what Google is offering. Even Yahoo's premium service offers
just one-tenth as much. Second, the search capabilities that will come
with the service are completely new. You can bet that Google users will
eagerly try the service, and should it prove helpful and easy to use, word
will spread like wildfire.
The email search capabilities raise some questions about privacy that the
company will have to overcome. That's a public relations matter. There
are also concerns about how a popular email service loaded with billions
of messages will affect Google's network. We wouldn't worry about that.
Finally, some analysts at least believe that potential users could be
reluctant to change to Google for that would mean changing email
addresses. Don't count on that becoming a major impediment; if the
service works, and it offers helpful advantages compared to competing
services, users will switch.
THE BOTTOM LINE: And that is the problem for Microsoft, Yahoo, and AOL.
User defections will directly hurt the top and bottoms lines, for email
makes money. To maintain, never mind grow, their user bases, they're
going to have to cut prices, add new features, and boost storage space,
all of which cost money. What's more, the move strengthens Google's
overall position as a portal, or a destination for more than just
searching, which would make it a haven for advertisers seeking web surfer
attention. That, more than anything, threatens the future growth of
ad-dependent Yahoo, and to a lesser extent AOL and Microsoft. The
dynamics of the Web Portal business are changing quickly. We don't
recommend putting money on the pure plays like Yahoo.
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2. BULL MARKET PREMIUM SERVICES CORNER
Bull Market Stock & Options Trader focuses on option volatility to
forecast results. McMillan has been doing this for over 10 years, and he
has discovered that when call volume is high, it is usually bullish. And
when put volume is high, it is usually bullish OR bearish -- thus
straddles are sometimes the way to profit from this. Tight stops are
used, and profits are allowed to run, unlike some letters that sell at a
certain level no matter what. In any case, try it out for a few weeks and
you'll see what we mean.
And note that all trading decisions are done AFTER the market closes, so
you don't have to monitor the trades each and every minute.
If you would like to see a sample issue of Bull Market Stock & Options
Trader, please click here: bullmarket.com
If you're a serious trader, consider a 30-day TRY ME subscription to BULL
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Subscription Questions? Send an email to Susan (Susan@BullMarket.com).
Have a Profitable Week!
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ABOUT THE EDITOR:
Todd Shaver founded BullMarket.com and became Editor in Chief following a
distinguished tenure in the money management business with both Morgan
Stanley and Salomon Smith Barney. In the 1980s he ran his own real estate
company, The Dulles Group, which specialized in finding large tracts of
raw land for investors and developers. In the 1990s he was the host of a
successful local radio show, The Bull Market Report, on business radio in
Washington, DC, giving a live show each morning during rush hour. Todd
was also a regular guest on Business News Network radio, where he applied
his knowledge of the markets to finding quality growth stocks. He has
also been a guest commentator on Bloomberg TV. He loves to teach
investors how to buy quality stocks and how to use the options markets to
enhance incomes.
While in the brokerage business his clients were high net worth
individuals. He knows and understands quality, long-term investing and
has a specialty in growth stocks. He currently manages money for a number
of clients both in equities and futures. For 2002, with the market down
23%, Todd was up over 20%, on average, for all his clients. For 2003,
with the market up 26%, Todd was up over 65%. With over 640,000 readers,
BullMarket.com is a powerful source for financial information on the
Internet.
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S U B S C R I P T I O N O P T I O N S
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