Saturday, February 24, 2007

The Week Ahead: Where Are We Headed?

The markets finished the week on a down note. You get the feel that many money managers are getting a little nervous with this market. It seems that we've had a few "distribution days" in the last week. To me, this is a sign that the broad markets are reaching a top. On a positive note, there is still no sign that the Fed is going to raise rates, at least until June. People are starting to question Ben Bernanke's optimism, which is something that is unusual for any Fed Chairman.

This just shows you what type of market we are in. I think no one truly knows where we are headed. The media is saying we're at a top, while the people who really know whats going on is not saying that. Back in 2001, when we saw a major drop, it was different. The media said you could do no wrong in the market. The only mistake was being in a value stock, and not growth.

My opinion is that we could see a 5 to 10 percent correction, but not based on substance, but rather fear. Lets take a look at what has happened over the course of the past year. We saw a major rise in the Dow, taking it to an all-time high. The Nasdaq has done well, but has lagged in performance compared to the Dow or S&P. This to me is important. It shows that real corporate profits are strong. We have seen consolidation of smaller companies into larger, more efficient companies, and this has allowed profits to increase. The Nasdaq, on the other hand, is still volitile and full of stocks with risk. Technology companies are still being created all the time, but people aren't falling for the old trick again. People are only willing to put their money into real profits, not the prospect of profits as was done in the 1990's. Those who are growth hungry are moving into growth companies that are making real profits. For example, Google, Apple, Garmin, Research in Motion. The days of the 75 P/E ratio are gone for the best companies.

The question remains, though, can the large companies continue to grow their profits. The answer is yes. All these profits have been made in the midst of a down real estate and homebuilding market. Fuel prices have increased almost double. Security and terrorism issues have cost companies money through extra time and money spent. And through all this, profits are growing. So what will happen when the real estate market comes back? Maybe some money will leave the stock market, but I think that it will drive the overall economy. Fuel prices will stabilize. We will be out of Iraq within a couple of years. There are factors arising that will allow our economy to stabilize on a Macro level.

We do have the issue of jobs being exported overseas, and the growth of the BRIC (Brazil, Russia, India, China) countries. This to me is helping corporate profits, because they are saving money on labor. If people in the US are mad about that, they should invest in these companies and make up the money there. Its not that difficult. I think a growing global economy is good for everyone. Trade will be opened up, goods will be cheaper, and less people will be living in poverty and the standard of living will increase in all these countries.

In recent weeks, I have been taking a keen interest in "lazy portfolios." Basically these are run by index funds. Vanguard has a nice family of funds. These funds have beat the major indexes, and can be owned for very little in expense fees.

TXU corp., a utility company I've been looking at, is going to be bought out by a private equity group. Too bad I missed out on that, as it rose 10 points after hours yesterday.

There has been rumors of a buyout at Capital One Finance, which is one of my holdings. We shall see if anything materializes. It would have to be someone big to do it (B of A, Citi, or JP) probably.

That's all for now. I'll try to keep things updated more often.

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