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Tuesday, May 31, 2005

What is Google?

What makes Google so special? Most can't believe advertising revenues alone justify it's current price. Advertising is a $600 Billion market, given that Google shows a better return on advertising dollars then any other model, why shouldn't adveristing dollars keep flowing to Google? If someone does happen to build a better wheel, here are some other things Google is working on:

• algorithms • artificial intelligence • compiler optimization • computer architecture • computer graphics • data compression • data mining • file system design • genetic algorithms • information retrieval • machine learning • natural language processing • operating systems • profiling • robotics • text processing • user interface design • web information retrieval


Thursday, May 26, 2005

Shorts are hero's

Ever since the dot com crash of 2000 there has been a big fascination with shorting. If you shorted the S&P at the peak and covered in 2002, you would have made 50% or 25% a year, and creamed the index... On paper. In reality interest rates were high, so the interest paid on the borrowed shares would have trimmed your profits by 10%+.

The case against shorting is that it is unamerican. That's non-sense, there is nothing more patriotic then realizing a company has a problem and selling ahead of the real sellers so you can create liquidity at the bottom. Studies have shown that shorted stocks outperform stocks not shorted. In that case why are there so few short sellers? Perhaps the chart below can explain.

Since inception in 1994 the short hedge fund index returned -19.27% or -1.87% per yr

The S&P returned 204% or 10.31% per yr during the same period.

The reason there are so few short sellers, is they went out of business.

Monday, May 23, 2005

If your sitting at a poker table and don't know who the Patsy is

I keep hearing people express concern because they don't know where to invest their money. With interest rates being so low, bonds, CD's and savings pay just enough for a person to say..."Where should I put my money?".

So begins the search for the land of opportunity. They look at Europe and Latin America, only to discover they are in bad shape. China has growth, but unless you know what your getting into, your investing in a country where anything goes (including screwing investors) as long as it doesn't interfere with the government.

So, if your sitting at table and don't know who the patsy is... Your it! Look no further, your sitting on a gold mine and you don't know it. US STOCKS, there's no place like it. For all the problems the US has, its less, and more resilient then other countries. There is no place on earth without problems, there will always be problems, but you have to ask which economy can best absorb and deal with its problems.

The dollar has been going up, US treasuries are being bought to the point it is yielding 4%. Clearly foreigners are pouring their money into the US. Why would they buy US treasuries yielding a measly 4%, because there is no better place to put it.

US assets are safe, but there is only one US asset that will show a decent return for the next 6 months. US STOCKS.

The Big Four

A collegue of mine inspired me to create an index of four stocks that we like. He refers to them as "The Big Four", named after the daily moves they make. These stocks are ANTP, BOOM, NGPS & FORD. Although they are in different industries, they all have things in common.

  1. They show significant earnings growth.
  2. There are no expectations of these companies, so they always surprise. A study shows companies which beat expectation continue to outperform for the next two years.
  3. The have small market capitalization (less then 500MM) and floats (less then 10MM).

Sunday, May 15, 2005

The Republic of Georgia

Much money has been lost in the new Russia thanks to the illusion of a place where free trade exists. Putin can call it whatever he likes, but the people can see the government is involved at every corner. There is no formal tax code, if someone wants to start a company they have to sit down with a tax minister and negotiate the terms. No wonder Yukos owed so much in back taxes, the tax minister can change how much a company owes in taxes at will. Now the Russian government is in the business of selling oil. Those who see Lukoil gas stations (Putin is part owner) popping up, should get the message, either you partner with the government or you won't have a business. Most of the other former soviet states are no better taking after mother Russia's lead.

The republic of Georgia has decided to break the cycle under the wing of their newly elected 36 year old president, Mikheil Saakashvili. The country is doing several things that no other former soviet state is doing.

  1. The government is looking to make itself simpler and smaller; several government ministries will no long exist by 2007.
  2. As of January 1, 2005 the new simplified tax code is in effect. It will no longer be a progressive tax, a flat tax has been implemented for simplicity and to prevent government corruption.
Being that so few countries around the world are taking such measures, I think Georgia will be an interesting experiment to watch. For the more daring less patient I think Georgia is a great investment right now. The nation is taking steps to allow people to trade freely, so you can expect capital from countries that burden trade around the world to flow into Georgia.

Friday, May 13, 2005

Finish this sequence

01/01/2001 | S&P FORWARD YIELD = 3.9% | 10-yr-T = 5.1% | S&P 01/01/2002 = -10% return
10/31/2002 | S&P FORWARD YIELD = 7.1% | 10-yr-T = 4.2% | S&P 10/31/2003 = 38% return
01/31/2003 | S&P FORWARD YIELD = 6.9% | 10-yr-T = 4.2% | S&P 01/31/2004 = 37% return
01/01/2004 | S&P FORWARD YIELD = 6.4% | 10-yr-T = 4.4% | S&P 01/01/2005 = 10% return
05/13/2005 | S&P FORWARD YIELD = 7.1% | 10-yr -T= 4.1% | S&P 05/13/2006 = __% return

* my estimate is greater then 20%, what is yours?

Thursday, May 12, 2005

So you wanna go against the big boys?

You've read all the books on technical analysis. It makes it seem so easy. So you begin trading and realize that a profit is not so easy. The big boys have read all the books you have. They understand what the tech and daytraders look for. It is for this reason that big boys who want to unload a big chunk of stock, buy first, run the price past resistance, which attracts the daytraders to start buying and then unload their size on the all too willing technical traders. It is perhaps why many of these authors who were profitable decided to start writing for a living instead of trading. One thing very few of these market books do is provide a statistical analysis of their system over a wide sample. If someone says a profitable strategy is to buy 50% retracements, how about showing us how many such retracements there were in the past, and how many of them were profitable/losses, what the average profit/loss is, and if this works as well today as it has in the past.

Many daytraders think they can predict the market, outrunning the big boys. Unfortunately you can't see what the big boys are doing, but they can see you. The brokerages know who the daytraders are, and they very willing to tell their big commission payers (hedge funds) what positions they are in. The funds take positions against them knowing these traders either have stops that can be triggered or have to exit by the end of the day. If you think your too small to be noticed, often there are droves of others doing what you which makes it worthwhile for the big boys to target you. It is for this reason I rarely daytrade and I always choose my market carefully.

Often I see people try to trade the biggest markets out there. Choosing companies of the S&P 500. I think this is a mistake unless you are a long term investor (buy and hold). First off you have pension funds who are only allowed to buy companies in the S&P 500. They have multiple analysts per S&P company + pay lots of $ to other research firms, for an individual to have an advantage over them is slim. On top of that you have the mutual funds who try to outsmart the mammoth pension funds, and the hedge funds who try to outdo the mutual funds. The level of competition is intense.

I prefer to find the smaller cap growth companies. Many of these companies are too small in market cap to be traded by pension and mutual funds. You can find many that show earnings growth far superior to S&P 500 companies, which is a key factor in the price and multiple a stock trades at. Often these companies have very few shares outstanding, so when the big boys can start buying the stock, it will really move.

Wednesday, May 11, 2005

Stocks that go BOOM

DYNAMIC MATERIALS (NasdaqSC:BOOM) specializes in explosion cladding,
say what?
Bonding metals using controlled explosions.
so what?
explosive cladding can marry two metals that can't be welded.
what's the point?
It's a cost-saver because it avoids the necessity of making a thicker wall of more expensive material.
Who needs it?
Petrochemical, refining, hydrometallurgy, aluminum, shipbuilding and energy industries.
Prove it!
Income from operations is up 306% and revenue increased 72%.
How about the competition?
Dynamic materials has 60% of the market share, next biggest play is
Asahi Kasei in Japan.
Shouldn't DM be worried about
Asahi Kasei?
If your a plant in New Jersey, would you rather have it shipped from PA or Japan?

Materials is an undervalued sector. If I had to pick one materials stock for a growth porfolio, BOOM would be it.

Tuesday, May 10, 2005

Lets talk strategy

The S&P is currently at the same levels it was 1 year ago. I took out my pen and paper and did a little counting to see who has been running the trading days for the past year. One way to see who runs the market is to find the midpoint (high + low / 2) of a daily range. A close below the midpoint indicates the bears where in control by the close, a close above indicates the bulls controlled the session. It turns out that 44% of the trading days for past year were controlled by the bears. If done since the start of 2005, 48% of trading days were controlled by bears. What does this mean? Forces between the bulls and bears have been balanced in the past year to date.

The forward earnings for the S&P 500 is $74 per share according to Thompson. S&P closed today at 1166.22. The yield for the S&P comes out to 6.3% (74/1166.22). A good indicator of where interest rates will be 1 year from now is the 10 year treasury which currently yields 4.2%. This means the S&P has a 2.2% yield premium (6.3 - 4.2). In the past 25 years, every time the S&P yielded greater then 1% over the 10 year treasury, the S&P has showed a positive return in the next 12 months.

This is a market that over the next 12 months favors the patient bull. I think the best way to take advantage of the highly impatient bearish sentiment we find is to sell puts. Option premiums on puts are currently high. Selling puts allows you to collect that premium while the trendless market erodes the time premium from those who bought it from you. In a worst case senario the stock goes down into the money and you end up owning the stock. Given that the market is bullish bias for the next 12 months owning stock is not bad. GOOG & SHLD are both good stocks this strategy can be applied to.

Media misleading


On 4/16 the NYTIMES (page 1) decided to talk about how bad stocks and the economy has gotten. Had you bought 1 unit of the S&P at the open the next trading day you would currently be up 2.4% on the index. I'd like to thank the NYTIMES for calling the bottom on 4/16, unfortunately for most readers, the article makes it sound like 4/15 was the beginning of the end and put its readers in a position to sell at the very bottom to willing buyers like myself.

Through the end of 2004 every major media outlet was pounding the table on the dollar going to sh*t. Had you bought 1 unit of the US dollar index on 12/31/2004 you would currently be up 5%. And what is the reason for this dollar bashing? The trade deficit has been the main argument (although I've heard everything from slowing jobs growth to a surplus of housekeeping maids in CT). Last I checked we had a deficit bigger then this back around 1984 (massive when adjusted for inflation). The 80's & 90s turned into one of the greatest bull markets of the 20th century. At the same time Japan has a surplus and they have been in a bear market since 1990. What do you expect when people just sit on cash and don't spend it.

In Japan there is a culture of shame, where if you fail at something you don't do it again to spare your family shame. So after people have lost money in the stock market and real estate, the Japanese decided to avoid anymore shame by staying in cash. Japan is an extreme but much of the world shares Japan's sentiment to a lesser degree. Luckily for the US we have no shame. If we fail, we get back up and try again. We know that goods and the fruits of people's efforts are worth more then the paper we trade for it. We rather own a home, car, stocks, bonds and have a stocked fridge, because these things hold more value then cash.

In the media there exists a tendency to turn to legacy. Whenever someone comes on TV and says we should do something, the reason to end all arguments is; "We should do it because that's what they do in Europe". Why should we do what Europe does? Why is what's good for Europe good for the US? What makes Europe the pinnacle of a healthy society? Europe currently has the highest unemployment levels since WWII.

Finally there is talk that if all these other things don't kill the US, oil prices will. First I'd like to say that oil prices where higher in the 70's. Even so Goldman comes out and says oil could go as high $105. 3 days later oil tops out around $60 and has recently closed below $50 which already makes the Goldman report wrong since $50 was the bottom of the range. Keep in mind two things. 1) Basic law of supply and demand is that as prices go higher there is more incentive to produce and less incentive to consume . 2) Goldman is the biggest trader of oil these days, how convenient it was for that report to come out on the last day of the quarter to prop up the value of the huge oil inventory Goldman holds.

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