Weekend Update

I guess you can tell I’ve been excited about the market lately as my posts have gotten a little longer and more frequent. Last weekend I was aiming to put down some research notes so you could get an idea of how I think (and several phychiatrists have already offered their services) but I keep getting sidetracked by this oil foolishness. So we will try to avoid that topic today… First off, I demand credit for calling the bottom on the Nasdaq on July 17th when I said that the market was being artificially sold off for very bad reasons. I concluded that it was coming to a head with sellers being flushed out of the market and said: “I am starting to embrace the conspiracy theory that big money was short tech long-term over Sarbanes-Oxley and that the destruction of tech has been engineered to cover the lower than expected impact of options expensing we had last quarter. It’s very cynical but the timing fits like a glove (attn. Johnny Cochran!).” 3 days later, with the index back down at 2,020 I said: “the Nasdaq has plenty of room to bounce (75 pts) before hitting any real resistance other than the psychological 2,100.” Later that day (7/20) I upped my call: “We are no longer oversold so we will get a more realistic idea of market direction today than yesterday when there was a lot of short covering. This will test my conspiracy theory that the Nasdaq was forced down unnaturally and that we can ignore the very bad looking charts that show the 50 dma crossing under the 200 dma. The Nasdaq has miles to go before retesting the 50 dma at 2,150 but let’s see how it handles 2,100 first.” Of course I put my money where my mouth was with this call: “Another general play I like is the QQQQs at this level. Again this is just because we may be closer to a bottom than a top so I like the Aug $36s for $1.15 but getting out/not playing if the ETF goes below $36. If we have a big down move prior to Bernanke, I like them at whatever cheaper price on a gamble against a move up tomorrow.” ===================================== August is like Wednesday, it’s hump month for the markets and if we can get through August we have pretty smooth sailing through the end of the year. Way back on January 1st I laid out my conditions for a good 2006: “Housing slowing but not stopping, sending investment dollars into stocks An end to Fed tightening (not as likely as everyone thinks with Bernanke in charge) A light at the end of the Iraqi tunnel. Democratic control of just one of the house or senate (markets love it when laws can’t be changed) A Nasdaq charge led by Microsoft (not looking good atm) GM recovery (if they can work it out, the Dow will fly). “I’m not going to talk about worst case but any three of the above not happening will do the trick!” Boy that guy is good! Up until this week we were unsure about most of these items but now the Fed is finally done(ish), housing may not be falling off a cliff, the Democats will cerainly take the House and narrow the Senate, Microsoft woke up and GM is close to a double. The Iraqi war may never end but that’s just one out of 6 so we are cleared for takeoff. All we need to do is get past Wednesday without the Hurricane or Jihad that the oil bulls are hoping for and we are in business! By the way, how hard up are the Republicans? Well, in Connecticut they are actually backing newly independant Democrat reject Joe Lieberman in the Senate race! http://www.dailykos.com/storyonly/2006/8/2/131936/2010 I’m not going to get started on politics either but this is a very interesting article on the current Republican strategy of “outing” all Democrats as Al-Queda sympathisers: http://www.dailykos.com/storyonly/2006/8/19/113940/803 By the way, Democratic win of either House or Senate means major investigation into Haliburton and other war profiteers in 2007. There are some (OK, many) who are saying that this rally is just a puff job engineered by Republicans in order to bolster the President and the party’s dismal ratings. If so, I would have to question the timing as it is hard to imagine an August rally that can be sustained through November but it will be interesting to hear what Fed Presidents Guynn and Moskow have to say on Tuesday during a very slow economic news week. Bernanke gets the last word on Friday but the driving force next week will be Iran’s Tuesday response to the UN. This article from the Persian Journal doesn’t make me too comfortable about it: http://www.iranian.ws/iran_news/publish/article_17306.shtml Here is a classic PR item regarding the Aug 22nd “crisis” with the “logical conclusion” that you should run out and buy as much oil and gold as you can (oh yeah, and sell your stocks while you’re at it because all the big boys were in the Hamptons and missed the rally): http://www.moneyandmarkets.com/press.asp?rls_id=386&cat_id=6 Isn’t it interesting that no one told us about this eventful date until oil and gold started sliding? This would have been very useful last year when both were much cheaper. The date has been booked since 1427 so you would think it might have popped up on one of these “analysts” calendars maybe a week or two earlier??? There is an adage that once you hear people talking about something in an elevator you’d better get out of a position so keep your ears open for this one! ==================================== We talked about how there is a lot of money on the sidelines and one thing keeping it there has been some major action from the widely held 30 year bonds which rose 5% since June 30th but are slamming into major resistance next week: http://stockcharts.com/gallery/?$USB This may be the final straw that gets money to start moving back into the markets as a rejection off this level will be a very bearish sign for long notes. It may surprise you to know that with all the activity of the past couple of weeks, volatility has actually gone down by almost half, this is not great for options trading but makes for a very bullish indicator as it confirms the market direction: http://stockcharts.com/gallery/?$VIX It’s a little hard to see but you can get the gist of how declining volatility is an excellent indicator of rising stock prices: http://finance.yahoo.com/q/bc?t=3m&s=%5EVIX&l=on&z=m&q=l&c=&c=%5EIXIC&c=%5EDJI I think lower volatilty will also be a contributing factor in dropping gold even further as it takes a certain degree of uncertainty about paper to get you to pay $600 and ounce just so you can hold some shiny metal in your hands (see follow-up blog on the gold outlook). ===================================== This is a complex issue but we were unable to play nice with our trading partners (no surprise if you think of the spoiled brats that play on our team) and the Doha trade talks broke down so now we are going to get NASTY with our GSP preferred partners India, Russia, Brazil, Indonesia, Thailand and others: http://money.cnn.com/2006/08/18/news/international/ustrade_payback/index.htm China will be the winner here as we seem to have no problem with them doubling the number of children working in factories to produce these goods! If this turns out to be more than just an empty threat on our part, this could be a disaster for many segments of the retail chain. ===================================== Hey, it turns out it may actually be illeagal to tap people’s phones without a warrant! A federal judge made a ruling on Friday that really ticked the President off but you may not know about it because the ruling, arguably the most significant constitutional question of the decade, was virtually ignored by the media: http://thinkprogress.org/2006/08/18/nsa-coverage/ Another story no one is talking about is a bunch of former generals and other national safety advisors getting together and begging Bush to get a workable foreign policy: http://news.yahoo.com/s/oneworld/20060818/wl_oneworld/45361379581155875399 Cheney offered to go duck hunting with the concerned advisors… 1984 is a short book and should be read by all in these terror-ridden times and this new book is an offshoot of that so at least read this review to get a handle on how our government is handling you: http://www.greenleft.org.au/back/2006/680/680p21.htm ===================================== Unless you’re a tech head, this article can give you a real headache but it’s one of the reasons I called for Microsoft this week: http://www.productwiki.com/microsoft_xbox_360/article/10_reasons_why_the_360_has_already_won_north_america.html ===================================== Let’s look for a bottom on NKE if the market keeps heading up. They have an uber cool new shoe called the air stab and they just cut a huge deal to open Nike stores in Russia. The stock is down on poor European sales that will be more than made up for by China’s 10% growth and everyone seems to have forgotten about the IPod deal they’ve cut with Apple (a stock that still seems to be popular). Their Q4 earnings were disappointing as the company was hurt by high oil and labor prices (shoes come from China!) and Addidas’ huge sales during the World Cup. Nonetheless, Nike’s sales were up 8% from last year and the company was punished with a 10% drop for missing by a penny as Q4 profits fell 5% (but annual income was up 15%). Because of a stock buyback, EPS was up 18% for the year. “We set prices in advance, so when you have price increases for oil or labor, it starts to move into our cost structure over time,” Don Blair, Nike’s chief financial officer. This is a company earning 100% more per share than 2003 ($2.77) and selling at 2003’s high, 20% off the 2004 ($3.51) highs, and 8% below last year’s ($4.49) average. After turning in $5.27 a share to close 2006 it’s no wonder the executives are a little frustrated with the stock price. The Nike+ line (with IPod connectivity) was released July 13th and I’m hoping for a weak start to bring the price in a little more (it takes a long time to cross train salespeople and work the bugs out) but I will buy the Oct $80s (currently $1.55) on any sign of strength. http://knowledge.wharton.upenn.edu/article.cfm?articleid=1527 ===================================== I’m liking the WY Sept $60s for .85 as I think they are down for a lot of the wrong reasons. ===================================== There are two major macro trends I see. One is the passage of global environmental regulations that will force electronic manufacturers to spend a lot of money to get greener. There are also much stricter limits on lead, murcury and other nasty things that they use in bulk so please send me any suggestions as to who might make money here. Please make all comments in my main blog as I have a lot of trouble keeping up with syndiation sites – thanks. While I am still awaiting my Nobel Prize for the Microwave Oven Rule of Behavior (see “My Trading Policies”) I am now ready to submit my second soon to be award winning theory callled the Consolation Prize Theory. Conventional wisdom has it that the large decine in luxury home sales will lead to an equally large decline in luxury goods sales. While this may be true for the kind of items that come with a home when you buy it (cabinets, counters, perhaps refrigerators, washing machines and ovens) I think Wall Street is missing the boat on this one. When a rich person buys a luxury home they are planning to spend perhaps $100K on moving, lawyers, closing costs, decorators etc… They are also planning on taking a 6% hit on the sale of their existing home and probably have to come up with an extra $100K to make a deposit on the new home as well. So I’m planning on leaving my $1M home that I have $400K of equity in with a $5K per month mortgage to move into a $1.5M home I will have $300K of equity in and a $10K mortgage and the move will cost me about $150K of cash when all is said and done. Now, the economy didn’t hit me but home prices are a little ridiculous and I’m only being offered $900K for my home (I know contrary logic but you always think you are overpaying for the home you want and being ripped off on the home you’re selling) and the rates are much higher than when I started looking so I decide not to move. I find myself with $250,000 in the bank that was set aside for “home stuff” and a pretty disappointed wife. I’m a little disappointed myself so I go pick up that HDTV that I was planning on getting for the new living room as a consolation prize which my wife takes as a go-ahead signal to remodel the kitchen and at least 2 bathrooms, replace some carpeting, paint, buy a new couch and order a hot tub (believe me, this is what happens!). What hurt Home Depot’s Expo centers the past few years is the fact that people buying new homes (pretty much everyone was) aren’t really looking to remodel. All that is about to change as long as the economy doesn’t really collapse. So let’s have some suggestions for companies that will benifit from luxury home remodeling. Be careful to avoid ones like corriander counter makers as their biggest clients are builders. Think of things that don’t come with luxury homes but get added at some point! Have a nice weekend, – Phil