Sunday, June 27, 2010

June 27, 2010 The weak ahead, stick to the fundamentals


June 27, 2010 The weak ahead, stick to the fundamentals

It was a great weekend. Friday night we went out with our next door neighbors (He is a casual reader of this blog), for they had to tolerate 11 months of construction to get our little backyard project done, and we haven’t connected with them in while. Then Saturday an unexpected (that means Devin knew about it and I forgot about it) but wonderful visit to our house from some longtime friends and her parents. (Her Dad is an avid reader of the blog and has helped me make some nice money with bonds over the last year or so.) So what does that have to with making money. Nothing other than the fact it’s nice to be able to enjoy friends, a nice meal, and a glass of wine, after all, that is what it’s all about.

Another wonderful moment happened when I got up Saturday about 6:20 am and found my Barron’s in the driveway. Every Saturday morning feels a little like Christmas when I see Barron’s on the drive. As usual, it’s a great issue and I recommend you subscribe so you can see how close I come to blatantly plagiarizing each week.

The cover story turned me off because it was about Pharms. You know drugs. Boring, (except maybe TEVA). Patents are expiring, the FDA is making almost impossible to get trials completed, there are still questions about the health care bill and prescription care programs, we have an administration that is anti big business, so Pharms do not get much of my attention. The portfolio made some good money over the last couple of years ambulance chasing the swine flu vaccine makers and some SARS virus groups like RHHBY, PFE, MRK, GSK, and BMY. (The realized gain for about a 11 month holding was 16% from about Feb 09 to Jan 2010.)

Needless to say I did not head right to that article. I got my cup of tea, brewed with my Keurig K-Cup coffee maker, love that thing, and enjoyed going through the entire issue. Picked some positive news about travel and our industry. Abelson’s opening article The Coming Storm made me feel like my recent entrance into the financials (BAC, C, WFC) may have been ill timed. His top line review of the financial reform situation was not optimistic except for citing that it could have been worse. I am going to keep riding those horses even though later in the morning on pages M32-M33, in the short interest data both C and BAC has significant shifts in the short positions meaning there are some large hedge fund moneys placing 3-6 month bets against these to equities. Abelson spent the last 400 words spouting negativity from a buddy of his (must be because he quotes him a lot), a guy named Dee Keesler of SDK Capital. He is yelling the sky is falling. Dee has a track record of saying the sky is falling. We checked out some history on the guy, and he get its right quite a bit of the time, but his cited causes are not always spot on. If you say the sky is falling long enough, some sky will fall.

Leslie Norton wrote an interesting article explaining which stocks and fund might do well when the Chinese actually get around to unpegging the Yuan from the Dollar. (versus talking about it). It is interesting to note that China wanted the heat off of its currency issue prior to the Toronto G-20 meeting and Obama wanted financial regulatory reform. China issued a sound bite and our legislation locked itself in rooms for twenty hours and delivered a bill that some are calling draconian. It is even more interesting to think that somewhere between 10-17% of the population is unemployed and we don’t have a jobs bill that shows results, but The President can now stand in front of 19 other nations (many of which have less debt than the US) and say we have financial reform. Ya think Washington has some priority issues? But I digress.

Norton’s article is a good primer on the impact of the Chinese currency float. In a snapshot, think Australasia Currencies, Base metals and commodities should all benefit. The article actually has specific stocks and funds to consider. If anything excites me I will mention them here.

I finally got around to reading the Andrew Bary article about the PHARMS, and it has me rethinking my position. They are dirt cheap, some great companies and could be very interesting long term plays (Beyond 24 months.) More homework and I’ll report back. Please get a copy of this article if you think that people will continue to get fatter, that heart disease is going to impact every industrialized nation in the world, that science is getting more cleaver in treating diseases and that there is long term profits in drugs. There is some money to be made.

A couple of other articles got my attention and we will be kicking the tires on Darden Restaraunts DRI (Cramer was pimping this a couple of times last week.), and Lincare

And if there was not enough bad news to go around, Mark Veverka wrote a piece explaining all the things that could go wrong with AAPL. It’s like reading the small print on a bottle of cough syrup, you eyes might fall out, you could be incontinent, you may loose feeling in your hands, and hearing might be amplified to where your ears bleed and in some case may cause death. Provocative but useless article. By the way, the article was based upon a Bernstein Research report. The kicker is that the researcher at Bernstein has a 300 dollar target price?

The title of tonight’s blog mentions fundamentals. It is worth noting the average P/E ratio for the S & P is currently 15 on past 4 quarter and 12 time future quarters. Historically that is low. In other words stocks are cheap. There is no forward or upward momentum. That is why the market is called range bound. The only way to make money in this kind of market is to look for the value. Make sure your picks have cash (Free Cash Flow), make sure they are using that cash to pay down or eliminate long term debt, issue juicy (North of 3%) dividends, and are buying back shares. If your picks do not do that they for sure must have the next best new thing or they are using the cash to buy the company that makes the next best new thing or it will be extremely hard to see appreciation for quite a while.

The week ahead is busier than the last few. Monday will see an analyst meeting for Roche holdings (Speaking of drugs) and they are touting, maybe their new diabetes drug and tell how they are doing with the FDA trials. Maybe Roche could come out with a drug that would let Barnie Franks Talk like Sidney Poitier. Sony issues its annual report. YAWN. Barnes and Noble reports and hopes to not loose more than 81 cents a share. I am guessing minus 85 cents a share. Sorry B&N.

Tuesday will see consumer confidence reporting. The collective brain trust out there is looking for a rating of 63 as we have seen increases in the number from 47 over the last few months. This is mostly employment driven so it could go either way. I am an optimist so I am hoping for a 65-66 and a nice little bump to these moribund equities. Tuesday the only stock reporting is GIS General Mills. OK its not the only, but look at the list of 43 companies reporting on Tuesday. I swear I do not know another name on the list. GIS is looking for 41 cents a share. Keep in mind that Kraft and ConAgra both had weak numbers last week. Logic dictates GIS should too, but I am going to have two bowls of Cheerios on Tuesday and I will help them make a 44 cents a quarter quarter and get a little nudge in the stock.

Wednesday we get the teaser ADP Payroll report which is sometimes a good tell for Fridays Job report. We will also get the sporadic Chicago Manufacturers index number which is a gauge of all kinds of business in the Chicago area. The number of the street is 59.7 (anything above 50 means economic growth), I am thinking 62. Apollo Group and Monsanto report on Wednesday. APOL has icky all over it because of a class action lawsuit involving the SEC. It won’t matter if they hit the 1.55 a share that is the consensus. (They will). Until we can get the details the stock should continue the slide its been on for 6 weeks. I cannot for the life of me get a feel for whether MON will hit the 8 cents a share as expected. We do not own the stock and have done no homework. Good luck. (Can’t wait till Jul 12 when the new earnings season kicks of with AA.)

Thursday we see the Auto sales number for June. The consensus is flat at 8.9 million units. Because we just helped our mother in law get into a car, we are going to wild and say 9 million and look for a nice market reaction. Thursday will also give us a look at initial jobless claims. I suggest you look at the last 12 month chart on this stat and then tell me things are not stabilizing. It will be about 450M give or take 5. If it’s less than that, break out the cheap scotch. If it’s better than that, it won’t matter as there is too much doom and gloom in the press. A busy day on Thursday will also bring us the Institute of Supply Management index. Again anything over 50 means economic expansion. The consensus is 59. I am looking for 60.5, BUT I did not drink tonight so I may be going through withdrawals. Construction spending is reporting that day too but it should be flat or maybe up 1%. That is the consensus and I have no opinion.

Friday has a couple of biggies, the employment report, look for overall unemployment to go up a hair to 9.8 to 9.9% and the market having a tizzy going down 2% on Friday. Then we have factory orders which should finish up 1%, but not enough to help the market which will be focused on the sky is falling job situation.

Steady as she goes and to quote the old Hill Street Blues TV show, “Let’s Be Careful Out There”. Do your homework ease into your picks, buy on the dips, take a profit when you can, and move your stops with your average cost.

Salve Lucrum


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