23 January 2011 Barron’s Review and The Week Ahead
We are going to shoot for two post today as there seems to be a bit to cover. (We ran out of time so you get one.) We missed our golf buddies this weekend but had a great neighborhood trailer trash cookout Saturday night as a couple of us sprang for new Webber grills. While our next door neighbor like us cooked burgers and dogs another neighbor could not even afford to have the meat ground up. He called the hunks of meat “Steaks” with some Frenchie name like feelay meegyan. Vey uppity I would say. Anyway of the four homes hit by the mudslide, 3 have qualified for the big flamingo prize because they have actual trailer in front of their home. It was a good time had by all.
(Don’t feel too sorry for us as we went through 4 bottles of decent wine. 3 of the 2007 Lodi Brazin Zinfandell and I Gresyson 2007 cab)Anyway, yesterday morning (before the boy’s basketball game-he got two rebounds and one foul-we stood up and applauded when he got his first foul of the season-surrounded by Catholics everywhere as well as few Episcopal schools-standing a applauding for a foul was probably not appropriate) we cracked into our Barron’s Magazine. Another great issue. As we mentioned last week the writers seem to be walking a fine line between exuberant enthusiasm for a great run in the market over the last two months, and the inevitable correction waiting around the corner. Nearly every bullish article was tempered with comments about historical reversion to a more sedate S & P or Dow. Or they point out that some portion of this current level is support by The Feds Blue Smoke and Mirrors of the printing press and QE II.
Alan Abelson kicked things off with his piece Street Crime about insider trading.
After two full columns on that issue, he finally makes a statement about the market saying that The Fed is providing a lot of the wind (or air) under the wings of the market kite. He suggests and we agree that efforts by the Fed were necessary and most probably helped consumer sentiment. Abelson guesses (and he never works alone so the guess is probably well founded) is that there is “several trillion dollars in market cap” propped up by the feds efforts. Ok for the remedial reader, market cap is the current prices of the stock multiplied by the number of outstanding shares. Now what does that mean? The S & P 500 captures about 75% of the US Equities market and its total market cap is about 11.6 trillion dollars. Follow where I am going? If that 11.6 trillion is only 75% of the estimated total market, than that total market is about 15.5 trillion in market cap. So even if we use a conservative definition of several trillion dollars as meaning 3 trillion, that means we have a 19.4% ethereal support to market prices. Let’s say several trillion means 5 trillion. That would mean we could be looking at a 32.2% adjustment. Maybe someone did that math last Thursday and that is why we have seen this rally cool of and not continue for an eighth week.
Michael Santoli jumps right in and announces that its time for “A well-Timed Dip”. He also sites the low volume, low volatility “sleepwalk” as he calls it to new high may very well be Fed fluffing. He explains that the Market (in this case I believe he is referring to the big players) we mesmerized by the Fed dedication to fixing things that they bought into the market without much thought about how the ride would end. Unfortunately and as Santoli notes, the market has its own feeding frenzy that has no basis in logic or fundamental research. It becomes the bigger fool theory.
Then he shifts gears ands gives us what looks like a fairly attractive play in the gas and oil sector. DO YOUR HOMEWORK-WE DO NOT OWN ATPG ATP Oil and Gas engages in the acquisition, development, and production of oil and natural gas properties in the Gulf of Mexico, the United Kingdom, and the Dutch Sectors of the North Sea. If you are a Motely Fool subscriber you can see a though explanation of why a long term option strategy might be an interesting all or nothing play for this stock http://www.fool.com/investing/general/2011/01/21/this-weeks-rising-star-buys.aspx If you can’t access it let me know and I send you and abbreviated summary. The Santoli article does a great job of laying out the reward side of this bet, but not the risk side. It could be a great play.
Jay Palmer does a great piece of NVDA, the hot chip maker. In the article he mentions a joint project with ARM Holdings (we have pimped them here and did quite well with the pick) which revolves around a GPU (Graphics Processing Unit) integrated with an ARM Holdings CPU (Central Processing Unit) called TEGRA. Palmer points out that the technology is important enough that INTC Intel has dropped its legal attacks against NVDA and want to make nice. As Palmer closes with, “If Intel can’t beat them, than no one can.” Great article and it really shows we bailed from ARMH a bit early and missed the boat on NVDA. DO YOUR HOMEWORK WE DO NOT OWN NVDA but after a little research, they look like they could have another 18-20 % on the upside. The recent (last week) pullback looks like a buying opportunity. The 22 dollar stock appears to be a 26-27 in the making. I can’t tell if the ARMH/NVDA TEGRA chip has been factored into the 9-12 million new iPhones that Verizon will be moving. We would assume so but can’t really tell. Looks like linkage to me?
Another GREAT article was by Lawrence Strauss and it deals with stock buybacks ZZZZZZZZZ, no don’t fall asleep on my yet. If you have read my blog for any time now, we pontificate about the holy trifecta of shareholder’s value. Dividends, paying down debt and stock buy backs. Of course all of those come from free cash flow, or at least should. Strauss’s article explains how some companies (possible most) are really bad at buying their own stock. He cites a couple of books a serious investor might want explore to explain what is a good value for a company to buy their own stock. He cites Koller’s, The Four Cornerstone’s of Corporate Finance (on the way I will let you know how it is) and Rappaport’s, Expectations in Investing. Strauss provides a nice chart of large caps who have done buybacks and how their stock have performed. Get this issue as this article is a good read.
Jacqueline Doherty takes all the wind out of CRM Salesforce.com which provides customer and collaboration relationship management (CRM) services to businesses and industries worldwide. Blasphemy, does she not know that CRM is king of the cloud? The F 5 stock crash last week turned some of those clouds to rain drops and Doherty is suggesting that CRM could cause a flood. I would have to agree that 2012 P\E rations of 240 remind me a lot of the dot.com era, but there are a lot of smart folk looking at 170 for this 132 dolly stock. DANGER DANGER Will Smith. Do your homework. WE DO NOT OWN IT.
Side Note: In Barron’s recently there have been adds for some relative new ETFs for playing the VIX. VIXY and VIXM are two ETFs offered by ProShares that play the CBOE Volatitlity index of the S & P 500. You might look at them as a way to play the probable adjustment to the market.
The cover this story is about Mr. Buffet and his billions. Andrew Bary was busy this week as he contributed several articles but this one is especially interesting as it address the fact that Berkshire Hathaways BRKA has not moved in about a year (Currently about $122,000 a share.) and he is sitting on about 50 Billion in cash. Bary explores the possibilities. Great read.
In essence, this is yet another great issue. The sentiment is positive but almost all the authors are hearing footsteps.
The Week Ahead.
We are diving into earnings seasons and while it’s a bit early to call it seems to be off to a good start. There is some economic news ahead this week and it will impact the market as it usually does. Monday is quiet, but Tuesday we have some retail reports that should so softness and it will be blamed on weather. We also have an important consumer confidence report on Tuesday. This indexed ration has been stuck in the 50-60 range since the first quarter of 09. The guess is 54.3. Thanks to some positive news in the market place, Obama playing nice with business, and a very slowly recovering job market, we thinkest a better number than 54.3 Let’s look for 56.
Wednesday we have new home sales. The experts are looking for 300,000. The time frame covered was wicked with rain and snow so I am thinking miss. 285,000 is my guess, but a correction and jump next month. If you are in any energy stocks, keep an eye on the petroleum report on Wednesday. I am guess demand is up and supply is down. We had two pipeline issues in North America and that will cause some tightening. Oil should go up and CVX should too. No surprises from the Fed on Wednesday.
Thursday we have durable good orders and jobless claims. Look for a recover to 1.5 on the durable goods order. That is the guess and we can’t disagree. Maybe it’s a little low and we might see it a little higher. Don’t look for any surprises with the jobless claims number. It will hold in the 405 thousand range.
On Friday we will see what inflation has done to the GDP. The experts have it going up from 2.6 to a 3.5 annual rate. We are thinking of 3.1%. That should ball the meaningful data points this week. As usual, keep an eye on the ground for Euro news and developments in China. We are guessing a flat to slightly up week in the market with lower volume.