Tuesday, July 31, 2007

Evaluation Time

Okay, here are my cases why you should be bearish or bullish:

Bearish:

-Subprime mortgage issues appear to be spilling into all areas of lending. This fueled today's sell off.

-Companies' increases in earnings have been partially due to major borrowing to buyback stock and buyout or merge with competitors. This means that actual sales growth or organic growth may not be that strong.

-Brokerage's that helped to fuel this bull market are carrying a lot of the bad debt in the form of CDO's. A rise in rates would dry up M&A activity that fueled brokerage earnings.

-Private equity giant Blackstone group has performed poorly since its IPO. If you want more info, read my earlier post about this.

-From a technical standpoint, we are in dangerous territory. I just read a newsletter excerpt that said this:
As Jim Stack of Investech Research noted near the recent highs, "The DJIA has closed higher in 5 of the past 8 trading days, but declining stocks outnumbered advancing stocks in 7 of 8 of those sessions. That type of negative breadth divergence has occurred only 15 times in 75 years – the majority of which were in bear markets." He also noted "On Monday of last week, the DJIA hit a record high while declining stocks overwhelmed advancing stocks by a 2:1 margin." That divergence has never before occurred in market history, though again, lesser divergences have typically been characteristic of weakening markets.*


Bullish:

-Global yield curve is still fairly steep. Borrowing rates are favorable which helps to encourage expansion.

-Global markets and demand still very strong. This helps multi-nationals based in the U.S.

-From a valuation standpoint, many stocks are still relatively cheap.

-There are some great opportunities in financial names. No mortgage companies! I'm talking high yielding, solid institutions like Bank of America and U.S. Bank, which both have a dividend yield of over 5%

-Strong demand in some oil sectors, especially oil service and offshore drillers.

-International markets are still performing well. It wouldn't hurt to shift some money to a global ETF.

In summary, the market as a whole should be okay. Many pro's are advocating buying into this, but I'm not. I have to let the fear shake out a bit. I think that there will be some nice opportunities to make money yet this year, but it will be harder than it was in quarter 2.


*Text from John Mauldin's July 30th Newsletter.

Thursday, July 26, 2007

An Interesting Day, to Say the Least

Second biggest drop of the year for the Dow, and at one point, it was down 450. We need to watch early trading tomorrow. If we head sharply early, it would be very negative. I anticipate somewhat of a bounce back up tomorrow, how much remains to be seen. Let's take a look at the damage.

-Financials are getting flat beaten. We've seen this throughout the past couple of months. The reason for this fear is because of the financials. But as Buffett says, be "fearful when others are greedy, and be greedy when others are fearful." I think its time to start looking at some financials. I like Bank of America (BAC) especially with its increased dividend. Goldman Sachs (GS) got worked pretty good today. They are still the pinnacle as far as financials are concerned.

-Oil stocks retreated. It all started with negative profit news from Exxon (XOM), which is the king of the diversified oil companies. Refiners are performing horribly in the past week. I like drillers still, especially on the back of the Transocean(RIG)-Global SantaFe(GSF) deal. I think that no matter how the price of crude fluctuates, these companies are well positioned, as they are working with not only American oil companies, but other growing nations, including China. I obviously still like Noble (NE) which I have since my call to buy it in May.

-Tech stocks, believe it or not, have become where investors are moving their money. Apple (AAPL) performed tremendously when the market tanked. They've just got so much strength right now. They did guide down a bit for this coming quarter, but their sales of iphone, ipod, and mac are on fire. Baidu (BIDU), which is the Chinese search engine, is also a hot tech name. As anyone who reads my blogs knows, I've never been huge on tech. They are always fetching a premium and trade very volatile. This is why traders love them, but main street investors should be careful.

-Tomorrow is going to be very interesting. Are investors going to be fearful about holding positions over the weekend and liquidate? Are investors going to view this drop as a buying opportunity as they did in late February? I don't think that people are viewing this drop as more meaningful of an event. They are realizing the dangers of credit coming more expensive, and the risk of M&A activity drying up.

Wednesday, July 25, 2007

Tough to Tell

Some strong earnings out this morning, and that appears to be the only thing holding the market up. Anything cyclical is getting beaten up. Also oil service, refiners, and anything related to homebuilding. Wall Street appears more interested in tech names in the short term as Apple (AAPL) will report after the bell.

I'm pretty cautious right now. Obviously a correction is long overdue, but its hard to get too bearish with some solid earnings coming out.

From a value standpoint, some of the financial names are looking attractive. They have been hurt by the mortgage and credit questions, but they are still experiencing solid growth, and are returning a nice dividend. Bank of America(BAC) is trading below 9x forward earnings, and with a coming dividend lift will be yielding around 5%. I'd be a buyer especially if the subprime issues cause it to fall to the mid-40's.

Tuesday, July 24, 2007

More Choppy Trading

We seem to be falling into a pattern here. Down 100, up 100. One day the market is driven by solid earnings and a big M&A deal. Next day it is weak earnings and subprime fear. It is going to take a bigger piece of news or event to shake us out of this range.

It appears to be a good call to exit the positions in oil refiners. Both have traded down substantially in the past few days. Oil stocks are not responding as well to higher crude prices as they have been in previous months. Something appears to be a little funny there.

I've followed Textron (TXT) for quite some time now. They are a conglomerate with a nice mix of businesses, including golf carts and a financial wing. But most importantly, they have Bell Helicopter and Cessna. The big demand for helicopters from the military and private jets for corporations is working well for Textron. They just reported a great quarter, and I'm going to use a little weakness in today's trading to pick up some shares. I typically am not a big fan of conglomerates just because you usually buy them for one of their businesses which is hot, and other parts can cause earnings to lag. In this case, I like their growth prospects.

Monday, July 23, 2007

Closing Some Positions

I've read some negative news for oil refiners, that points to a peak in their run. With that, I'm going to go ahead and close the first two positions this year, selling Frontier Oil(FTO) and Valero(VLO). With Frontier, we locked in a gain of 53.95%, buying at 30.04 and selling at 46.24.
For Valero, we locked in a gain of 27.85%, buying at 57.20 and selling at 73.13. I purchased them both originally on March 1st.

As for the rest of the market, today's open is higher off the back of more M&A activity. GlobalSantaFe(GSF) and Transocean(RIG) are combining in a 53 billion dollar deal. The street seems to like it, and Noble (NE) which this portfolio holds, is also benefiting, up 5% early.

Earnings will continue to be the big catalyst. Volatility should still be fairly high, but maybe not as much as last week.

Friday, July 20, 2007

Lots of Buzz

Lots of noise coming out today.

First off, Google(GOOG) missed on earnings. It isn't too often you see that stock get hit hard. I think people are letting it cool off, but should still be bullish on it long term.

Caterpillar(CAT) missed on earnings, because of a soft U.S. construction market and some added expenses. I'm going to use this weakness to add holdings in the portfolio. Also Manitowoc(MTW) is getting hurt today because it gets lumped in with CAT, and this shouldn't necessarily be. They just purchased an Indian crane company to add to their international exposure. I view this purchase as a sign that things are going well at Manitowoc. I'm adding shares on this weakness as well. They report earnings on the 30th.

Thursday, July 19, 2007

Follow the Momentum

The bulls seem to be shrugging off any piece of bad news that the bears can throw out. Yesterday, the market clawed back from a rough day to finish mildly down. Strong open today, and this is being driven by some solid earnings.

Even though the reasons to be worried are climbing, you can't afford to miss what is happening over this period of time. Earnings are coming in strong, especially for those companies that have lots of earnings coming in from other countries. This helps because 1) Many countries are growing faster than the U.S., and 2) They are benefiting from the weaker dollar.

It is true that companies are boosting their earnings by borrowing money to buy back stock or acquire its competitors. This is a formula that has worked well as long as their borrowing rates stay low.

The big financial names, which have been an area of weakness, are coming in with pretty respectable numbers so far, so that has also been positive.

If things start to weaken, I'd stick with commodities, which should hold up. Particularly oil and gold.

Tuesday, July 17, 2007

A Lot on Tap This Week

Lots to look at on Wall Street this week.

-Earnings appear to be driving stocks steadily upward. I'm keeping an eye on results of bank stocks, to see their thoughts with regard to the subprime sector. I'm also interested in what Caterpillar (CAT) comes out with.

-Commentary will be coming from Bernanke. He usually keeps it pretty close to the vest, but the market moves with anything he says.

-The Dow hit 14,000 this morning. Wow, it sure didn't take long to move from 13k to 14k. Most experts appear to be hedging their bets, but aren't giving up on this bull market until we see signs of a change.

-We also have options expiration, which should create some volatility toward the end of the week.

-Most investors are weighing the two major possibilities: 1) Earnings come in weak, and credit issues push us into a recession (where the Fed would probably cut rates), or 2) Inflation pressures make the Fed raise rates.

Friday, July 13, 2007

Industrial Boom

Let's face it, a big reason why the market is gaining so much is the worldwide expansion. We know the story of the U.S. economy, with lots of risks in the housing and credit areas. But it is largely U.S. companies that are making these big time profits overseas, and thus the corresponding increase in their earnings. Obviously the growth of China has been well documented, but there are many others. The Mexican economy has experienced solid growth. Dubai, in the Middle East, is exploding with expansion. They just created a man-made island, with tons of real estate being built. To capitalize on this, I'm looking to invest in the industrials. Caterpillar (CAT) is always in the mix. Manitowoc Corp(MTW) has a huge industrial crane business, and just opened an operation in Dubai. Their stock has doubled in the past year, but I think it can go higher.

General Electric (GE) is another company, believe it or not, that has huge overseas earnings. They just announced a good quarter, and said their infrastructure business is booming.

I'd be a buyer of all these stocks, including the ETF (XLI) which tracks industrials, including railroads, defense stocks, and large construction companies. GE is its largest holding.

So if you're worried about problems forthcoming in the economy, don't change your mind, because I still think there are plenty of issues. But this is one area of the economy that is booming, and should continue to grow. Commodities and Industrials. Follow the trends.

Tuesday, July 10, 2007

Breaking the Pattern

We've seen a nice gradual run up over the past couple of weeks, which has finally slowed today. Retailers are reporting some poor numbers, and Alcoa(AA), which is often an indicator for the entire earnings seasons, reported less than stellar numbers.

I still see some room to go up in this market. Oil stocks keep plugging along. Portfolio holding Frontier Oil(FTO) seems to have so much strength right now. Financial names are continuing to get hit, and are starting to look pretty favorable from a valuation standpoint. I'm going to use this opportunity to pick up more shares in Bank of America (BAC), and to add a position in U.S. Bank (USB), which is a great name in this industry. They produce higher margins than their peers, and thus carry a little higher valuation. But I think it is worth paying up for. Warren Buffett is also a holder in U.S. Bank, which never hurts.

Here's an interesting article about adjustable-rate mortgages. Its something to keep in mind as we head toward this fall.

Thursday, July 5, 2007

Today's Action

A report came out showing gasoline supplies were up. Oil stocks were well on their way to gains before this. I'd view any pullbacks as buying opportunities. Over the past year or so, these stocks have seen general fluctuations, but have continued to move higher overall.

Overall, stocks appear to be headed mostly flat. For ammunition, the bulls have more M&A activity with the Hilton Hotels deal, and a strong service industries report. For the bears, treasury yields are moving higher again, the UK raised their benchmark rate, and Chinese stocks traded down 5%.

This tug-of-war seems set to continue throughout most of the summer.

Tuesday, July 3, 2007

Portfolio Update

The portfolio continues to cruise along, up 11.25% collectively. Some notes here:

-We've benefited from the iPhone mania, which Apple(AAPL) rising 40.60% and AT&T(T) rising 11.57%

-The call on oil refiners has been a great one, with Frontier Oil(FTO) leading the way up 54.18%. Valero(VLO) has also returned 29.90% for us.

-I've had limited exposure to financial names, which have been weak. Bank of America(BAC) is down 2.66%.

-My biggest loser has been Amgen(AMGN), which has dropped 6.53%. They've been hit with some negative news on some of their drugs, but I see it as a natural cycle for a big business. This stock will be back, and what was once one of the big growth names, has become a value play.

In the near term, we'll keep an eye on the bond yields as a predictor of interest rates. Oil should continue to be strong. Have a great holiday!