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Tuesday, September 18, 2007

move to fall

As measured by the REBC(Red Eye’s Bikini Clock) summer is officially over. We had one of the worst and best rides of the summer this weekend so it was a fitting ending. On the way to Baltimore we hit turbulence from ships exiting the harbor and quickly turned from boaters to small airborne craft pilots. At one point I looked back to check on our passenger and he was in the fetal position of the boat begging for mercy from the boating gods. Which was granted in the form of flat waters all the way back across the bay and we had three boats running flat our all the way back in the best ride of the summer. As we sat later at the bar of Lisa’s small plate attempting surgery on my finger from the latest and last of summers injuries with tweezers, a paperclip and scotch, The Tic-Tac kid and I shared a toast to a great season with lots of boating, a sprinkling of pretty girls and liberal doses of good times and good friends. So, away go the flip-flops and shorts; trade the red for white, gin for scotch, break out the tennis shoes and blue jeans. Baseball is headed to the stretch and the genetic misfits known as football teams capture our fancy as we head into the early days of fall. It was a great summer but given the injuries sustained in the Squirrel Wars of 2007, the the curious incident of the whiskey and biting dog incident, and now the holy god not only is that the biggest splinter I have ever seen that’s all the way under you nail accident (FYI-Doctors lie.4 Novocain needles in your finger is not a little stick. It is a big painful evil,nasty mother of all sticks) and other assorted missing nails, banged bones and torn bits of flesh another couple of weeks of summer may have well been the death of me.

Which brings us to the stock market. It makes less sense than my personal life at this point. At least there I understand the cause and effect of what happens (Basically, I am an idiot and set in my ways. As I have been given to understand I am also arrogant, obnoxious and condescending. And they say it like it’s a bad thing!). But I confess to being a little confused by the market and its seeming disconnect form the real world. As long as you do not eat or use energy, there’s no inflation. However a trip to the grocery store shows me that food prices are the highest I can recall seeing. Oil is at a new high. Back out auto gains driven by model year discounting and rebates and retail sales in Augusts back to school period were down. The consumer has depended on the housing ATN for the last several years, but with the credit dry up and in some areas declining values, that bank is closed. But everyone now expects the Fed to cute rates later today. This allegedly will reaffirm consumer confidence. But it also has the impact of bailing out banks and funds from the consequences of stupid decisions. Apparently takes risk and win. Great! Take risks and fail? No worry that’s what the fed is for. Unless you are an individual who took a jumbo two or three year Arm with a teaser rate and are going to see you mortgage rate double in a few months. You are just screwed. In the face of this the stock market is within 4% of all time highs. Lehman creates earnings in excess of estimates by changing their tax rate. Rally time in spite of the fact that revenues fell 47%.

Most of the activity I am seeing is in the indexes, leading me to believe that short tem money continues to dominate stock market action. The focus is on how will we react to the fed today, or ABC ‘s revised earnings SWAG. 4: 15 IS long term. Great company trading at book profitable pays a dividend, buying back shares and insiders buying the open market. Who cares? Special situation with a high-annualized yield? Sold it to pay margin calls on debt positions. Convertible preferred paying over 10% with strong management. No interest. Index baby. Bid em.

I have heard convincing arguments from Louis Navellier and even Jim Cramer of late that we are going to move into a market that favors value over growth. Here a shocking statement coming fromm me. I think I agree with them. Value has outperformed growth for over 7 years, a pretty much unprecedented run. Usually the periods are much shorter. This run has been fueled by falling rates and rising housing prices that have pushed traditional value industries forward and allowed for easy takeovers and refinancing of under performing stocks. Companies were bought on credit at stupid multiples of assets and earnings and launched the prices of cheap, undervalued stocks. Those days I think, are over. Having said I agree with the statement, now we have to look at where does this growth come form. It is not going to be tech unless corporate America gets a lot looser with the cap ex checkbook. We have already seen by the IPOD price cuts that consumers aren’t going to pay up (as they did in the past for new toys. The toy budget is already pretty stretched.) I think areas like heavy construction rebuilding the country’s badly stretched infrastructure perhaps. I like GNCI here and it sells at valuations I like. Coal should be a growth industry in years ahead as we look for ways to get away from foreign energy. Coal to liquid technology could play a big part in making coal a growth story. I like MEE, CNx and ICO here. Growth will come from new areas not yesterdays growth story. We will have to look for them. My other problem is that I think we have a few years of downright sloppy markets ahead. I don’t see how we cant. We have priced stocks for perfection in an imperfect world. It’s going to be tough to deal with and take some innovative and adaptive thinking to not just survive but earn good absolute returns. How do we do this? Selling put options on market sell offs on stocks we like. (A caveat here, I think it will be necessary to add some trader think to our methods and be willing to own the stocks put to us and use covered calls to trade around the positions and exit at a profit. I am kind of anti buy and hold here; also don’t post minimum margins. Post the full price of the underlying stocks). I think trading the value line 1 and 2’s under ten, buying on sell offs in the overall market and selling the next rally will work. The Dorsey Wright high low indicator has been successful in the past at timing shorter-term entries and exits in the stock market. We need to watch it closer. I remain very impressed with Navelliers Portfolio grader pro service that’s spots institutional buying in individual stocks. Paying attention to the grading of our stocks could materially improve our entries and exits and therefore on profits. It is going to be harder to make money for the next few years. When we run our screens finding stocks with profits and dividends trading below book, we are probably going to have watch our market entry point as well as institutional activity in the stock a lot closer than years past and be quicker to trade than we used to be. Further we should try to focus on areas that offer earnings growth because I think that’s where the money will flow. Just cheap isn’t going to be enough anymore. It’s going to have to grow as well. The idea isn’t to beat the market. If stocks are down 20% and I am only down 10, it is not a win. It’s a loss. You cannot eat relative performance.

So we move into fall now and look forward to crisp days and cool nights, breaking out the blankets and wamr socks. Sweatshirts are going to replace tee shirts and its just about time to shut the pool and clean the chimney in anticipation of crackling fires ad good red wine. After a wandering summer, the Great Girlfriend Hunt of 2007 begins in earnest (although hopefully out the (mostly self inflicted) weirdness of the 06 hunt). The Yankees and Boston are keeping it interesting; Detroit refuses to go quietly into the September night. The ravens beat the hated Jets, The redskins are surprisingly 2-0, and navy is not as good as years past but still fun to watch. Of course, there is the downside of Notre dame being truly horrible but we have to take the good with the bad. The leaves will turn here in the Mid Atlantic in a few weeks as well as all over the northeast with a spectacular splash of colors, giving us an injection of color before the gray of winter sets in. There is much to like about fall with the only real drawback being the women wear so damn many clothes!

We are going to get a rate cut today. I just do not think we are going to like it as much as current sentiment thinks we will.

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