Monday, March 31, 2008

Good Report From Noble/End of Quarter Thoughts

Noble Drilling (NE) is a stock I've recommended strongly since last May. Today they reported that they signed a deal to drill off the Brazilian coast with new contracts through Petrobras (PBR). This is great news. Petrobras has been a hedge fund darling after their large offshore discovery last year. The offshore drillers have seen increased demand as oil becomes more difficult to come by. Noble is a company that I've liked because it has higher profit margins than its peers, drills in more international locations, and trades cheaper. Good news there moving forward.

The overall market is seeing some more weakness as we stumble through the end of Q1. I think investors are a little worried about how earnings will come in. The government is announcing new action almost daily, but no one seems convinced it will help in the near term. It appears they are putting more rules into place to prevent a future situation like the one we're currently in.

I continue to like large-cap, non financial stocks. Industrials (think GE, Boeing, United Tech) are continuing to perform well. Take a look at Vanguard's industrials ETF symbol (VIS). It has a large exposure to GE, and a mix among many other large-cap industrials. It also carries the lowest expenses of the industrial ETF's.

Disclosure: Long NE.

Wednesday, March 26, 2008

Today's Thoughts/Good Article

-The market isn't liking the news today. The Clear Channel trouble definitely affects confidence.

-I like Motorola getting proactive to save the company. Carl Icahn, like him or not, does get companies into motion. This will be a tough one, but they appear to be heading in the right direction.

-The downgrades and earnings estimate revisions continue on the financial stocks. Q1 earnings will be interesting.

-I read a great opinion article by Michael Lewis today. It explains the problems that Wall Street CEO's face in having to allow risky practices in order to stay competitive. What he's saying makes a lot of sense. Take a look at it here.

Tuesday, March 25, 2008

Consumer Confidence as a Contrary Indicator

Today's consumer results are spurring a lot of fear-inducing headlines, like:

"It's the Dispirit of '73: Consumers' expectations at low points since early 1970's"-Marketwatch

"Gloomy Data Damps Stocks"-Wall Street Journal

Consumer confidence, when looked at on its own, is often a good contrary indicator to stock prices. It is often a signal that prices have hit near-term lows. In our case, we have a lot of other data to look at, but this is positive news for stocks.

In a paper done by Ken Fisher and Meir Statman, they found that "low consumer confidence is followed by high stock returns more often than it is by low stock returns." They found that the correlation is too weak to be considered statistically significant, but can be quite useful when looking ahead at future stock returns and making decisions in regard to asset allocation.

The moral of the story here is don't get scared by poor consumer confidence numbers. It is often positive. The time to be scared is when consumer confidence is through the roof.

You can download their entire paper here.

Monday, March 24, 2008

Be Careful With This Rally

We're seeing some more favorable market action today. Bear's bid got upped, which many expected. Also, little news out on economic fronts, which spells recipe for rally. Still lots of short covering taking place. The Fed's liquidity appears to be helping confidence, at least in the short term. Other things like Visa's successful IPO are giving investors something to get excited about. There has been a lack of safe havens for investors with stocks being volatile, and treasury yields low. I think this is party why we've seen such a rally in gold and commodity stocks. Simply no where else for investors to put money.

I continue to like large-cap industrials. Take a look at ishares industrial ETF (XLI). Largest holdings are GE, 3M, United Tech, Boeing, Caterpillar, Deere, Honeywell. All companies with strong balance sheets. They should perform well due to growing overseas infrastructure, and the expectation of the U.S. spending more money on bridges and roads in the upcoming administration.

I wouldn't jump full force into this rally, but pick away at certain names. Stay neutral here. The bulls are saying "all-clear, good to go", and the bears are saying "bear-market rally."

I don't believe either.

Saturday, March 22, 2008

Update/Weekend Reading

I haven't posted for a couple of days, and much like many businesses, it looks like my blog has suffered from a NCAA basketball-related lack of productivity. But I'm back and would like to discuss a couple of things...

The markets rebounded nicely this week, but considerable volatility remains the theme. In reading this morning's Barrons, many are saying we may have reached a bottom in stock prices. I'm still hesitant to call that. Corporate profits will be under stress in April after the week first quarter. I do like large stocks that are well-capitalized. Dupont (DD) is in nice shape with its exposure to the agricultural boom. More conservative commercial banks look good here. Wells Fargo (WFC) and U.S. Bank (USB) come to mind. Brokerage's still are highly risky plays, with Credit Suisse's (CS) profit warning this week as evidence of that.

I haven't bought into the rise in gold prices, and still won't. Gold has historically underperformed for years. It has had spikes in prices, but has always reverted. I still have to be bullish on oil, purely on a supply and demand logic. I'm excited about alternative energies, but none have shown themselves as good investments as of yet.

I added some Amazon.com features to the blog. I love shopping there. Their Kindle book reader really appears to be a nice product. I'd love to hear more about it if anyone has tried one. I still love Apple products though, and am planing on buying and ipod touch.

Have a great Easter!

Tuesday, March 18, 2008

Bears Stearns as a Symbol

The loss of Bear Stearns was disappointing, but necessary. In every market cycle, there are one or two players that take on too much risk, or make poor decisions, and pay the price. We had to have a symbol for this cycle, and Bear Stearns will symbolically represent the mortgage and credit problems of 2007-08. Will there be more? Maybe, but unlikely. The Fed was smart in how they handled things this weekend. Bear lost all investor confidence, and there was basically a run on investors' assets. This will cripple a bank. But if the Fed just let it go, the market would have really tanked. Instead they orchestrated a buyout, in which JP Morgan was basically given Bear Stearns.

I heard some commentary from Larry Kudlow last evening about the Fed only allowing commercial banks to borrow from its discount window rather than investment banks. It is an old rule that was written in a different time. The Fed could have easily allowed this, and maybe could have saved Bear. Who knows. Its sad that a lot of people will lose their jobs, but Bear Stearns put themselves into the position they were in. Plenty of other investment banks are surviving.

Some say an event like this could mark a significant bottom in stock prices. I don't like to try and call bottoms or tops. Its impossible. The key is continuing to stick to the same fundamentals, and use these periods of uncertainty to purchase quality stocks at significant discounts.

Have a great Fed day!

Friday, March 14, 2008

A Lot of Fear in the Market

Bear Stearn's troubles really shook things up today. This morning inflation numbers came in lower than expected, and the market was ready to rally. But Bear through a big curve when news of their lack of liquidity required them to borrow money from the Fed through JP Morgan. Almost 2 billion shares changed hands on the NYSE today. Bear Stearns stock trades an average of 10 million shares per day. Today, 186 million shares changed hands as the stock dropped 47%. The fear isn't just about Bear, its will this spread to other banks. I tend to think there could be one or two, but I don't see a domino effect. Bear was reporting troubles long before any other investment bank was. Goldman was considered to be unscathed until about two weeks ago. Morgan Stanley had some issues, but has continued to look ok.

I'm still looking to buy. Remember Buffett's famous quote, "Be fearful when others are greedy, and be greedy when others are fearful." There is no shortage of fear out there right now. I think some of Buffett's stocks look attractive. Kraft, Johnson and Johnson, US Bank, Coca Cola, Wells Fargo, Proctor and Gamble, American Express.

These are big companies that for the most part have great balance sheets, have little to no risk of default, and little risk of a major decline in earnings. But their share prices have declined. That's why I'm looking hard at these stocks.

Have a great weekend!

Thursday, March 13, 2008

No Time to be a Hero

Stocks have further to fall, although its time to start paying attention in case we see any overreaction in particular stocks we like. There is little good news out there right now. If we start to see multiple hedge funds fail, that could trigger even more selling. The Fed's intervention helped banks, but won't fix the overall problem.

The thing to be aware of with the media is predictions. They're all predicting "when is the bottom." It's not that important. They won't truly be able to call a bottom until long after anyway. The key is finding opportunities in the market that are given to us by other factors. For example, a strong company's stock being discounted because the entire market is dropping.

I saw a video interview with former AIG CEO Hank Greenberg. One thing he said really stood out to me. He said we need leadership right now, and we're not getting it. We need a president to talk to the American people and inspire them. Tell them we are still a great nation and can achieve anything we put our minds to. Reagan was so successful with that. People feel so disconnected right now. The media has beaten us down, and there is no one telling us that things will be okay. Thats what we need in a president, and I think this is why a fresh, inspiring person like Obama is having so much success.

Tuesday, March 11, 2008

Well, Well Wellpoint

Some surprising news out from Wellpoint (WLP). They slashed earnings estimates from $6.41 to $6.01. Although this is not great news, the stock has over-reacted, trading down 26%. I'm adding to shares in the blog portfolio on this. The news has sparked a sell off in this sector as it shows potential for health care costs to really eat away at insurers profits. But its not like the health care industry is going away. No brainer here.

I'm also buying American Express (AXP) for the portfolio. Shares have been battered over the past six months, and this is a wonderful company top to bottom.

On the larger scale, stocks have been helped by more fed action. I'm conflicted here. Normally, I'd say they should get out of the way, and let the market react freely. But in this case, fed actions of the past decade have gotten us here, so maybe they should get us out. But who knows if they can? We'll see if this morning's gains can hold.

Monday, March 10, 2008

Where Will it End?

Some interesting fronts in the market today. First off, you have the market fully discounting a 75bp interest rate cut by the fed next week. It is now clear that investors just expect the fed to do whatever they please in order to alleviate losses. But most people are now losing confidence in the fed. Take a look at TIPS, or inflation-protected securities. People are so concerned about inflation that people are still buying these even though they now have a negative yield. Yes, negative.

These problems are going to take a while to sort out. All the while, there are companies that are performing very nicely. McDonald's (MCD) reported a rise in same store sales this morning. I'm a believer that large caps will out perform this year, especially companies without significant exposure to the credit markets.

At the same time, there are some great values in financial stocks. Morgan Stanley (MS) is trading below 40. Bank of America (BAC) at 36.50, and American Express (AXP) at 41.00.

I think there is some potential for stocks to move higher this week. There is little economic data being released, and there is anticipation on the fed for next week.

Friday, March 7, 2008

Be Careful Here

With the negative jobs data and more brokerages predicting recession, we need to be very careful. Be careful not to get too bearish. Today the sentiment almost feels so negative that we're going to trade higher just because of it. Its true that the economy has slowed significantly, and maybe we're in a recession. As investors, we need to figure out how to profit from this.

The question is how bad is it in the U.S.? If we see a couple of quarters of slow or negative growth while the credit markets settle, then the global economy will be fine because of the strength in overseas markets. If the U.S problem continues to get worse, then we could see a global bear market. I'm still leaning toward the first scenario, but will be watching closely.

Have a great Friday!

Thursday, March 6, 2008

Stay Defensive

Stocks continued to get pounded today as crude oil shot higher and nothing but negative economic data emerged. Some high quality companies are starting to look attractive, but now we have to ask what is attractive? You can say a stock looks cheap, but cheap relative to what? Last year? A stock's historical P/E can help you come up with a valuation in good markets or bad. But take Google or Apple. Their historical P/E won't tell you much. Google is too new, and the game has changed fro Apple. Because of the ipod and iphone, they are a completely different company than they were 10 years ago.

I continue to like resource stocks. Oil, water, and infrastructure stocks. It's not a great time to buy oil stocks as they haven't fallen as much as others because of crude oil's climb. National Oilwell Varco (NOV), Noble (NE), and Schlumberger (SLB) are all stocks I'd want to own long term. But you can wait for the price of oil to retreat, and these stocks will follow.

I'm pleased with the call I made on the Ultrashort Russell 2000 (TWM). It's gone up about 17% in 2 weeks, including almost 7% today. I continue to think the Russell will drop faster and more significant amounts than the Down and S&P, and it has.

Disclosure: Author owns NE, TWM.

Wednesday, March 5, 2008

Another Oversold Rally?

Yesterday's late reversal and strong trading this morning is pointing toward a possible oversold rally, much like the one in early February. Its a little early to predict this, as we've see 100 point swings either way in the DJIA frequently. But the Financial stocks are oversold. Citigroup (C) really has taken a beating.

We could see a rally, but it will take some time before the market is ready to make any broad moves higher. We have to see more economic data come in (specifically jobs and interest rate data), and we need to see more from corporations. Can non-financial companies report strong earnings, or will they begin to take a hit as well? Will the credit and mortgage problems continue? Will they get worse? I'd say that the financials will continue to be a source of pain, while many other companies will hold up.

Monday, March 3, 2008

More of the Same

Commodity and inflation-related stocks are continuing to perform well. Oil and Gold are moving higher. Elsewhere, the economy is standing still. Sentiment is getting very poor, which will be bullish, but not yet. There are still some deals being done. United Technologies (UTX) made a bid for Diebold (DBD). I like this deal for UTX. They are an extremely well run company with a variety of valuable businesses. This is proof that there are deals to be done, and some businesses are executing strategies well, even if others are having trouble. I'd be a buyer of UTX on any weakness.

Elsewhere, we'll watch for more economic data. Jobs report later this week should give more insight.