• The International Harry Schultz Letter
    Posted by on December 29th, 2005 at 2:50 pm

    The investment newsletter industry is known for having some unusual characters. The Libertarian Party has nominated an investment newsletter editor for president not once, but twice.
    As MarketWatch, Peter Brimelow looks at the always-contrarian Harry Schultz (sorry, Sir Harry Schultz):

    In person, Harry Schultz is small, polite and diffident. But his letter — one of the oldest in the industry, in business since the 1960s — is famously self-promoting, not to say megalomaniacal.
    For quite a long time, for example, Shultz insisted on being called “Sir Harry” because, he said, he’d been knighted by an obscure authority that no one had heard of. (He’s described on the letter’s masthead as “Chevalier Harry D. Schultz, KHC, KM, KCPR, KCSA, KCSS.”) Similarly, Schultz has cultivated a portentous mystery about why he never returns to the U.S.
    Over the years, this has certainly irritated a lot of financial journalists. But Schultz also has an undeniably active and creative mind, expressed in the myriad investment recommendations, sometimes inconsistent, that he makes (for this reason, HFD follows only the recommendations listed in Schultz’s “Model Portfolio) and in the offbeat causes that he espouses.
    Thus, his most recent monthly letter mourns the death of Chalmers Goodlin, whose Burnelli Lifting Plane design Shultz championed over decades — claiming, typically, that political and business interests were conspiring to suppress it.
    Schultz also has a gift for the big picture. Consider:
    While I’ve watched him, he was an embattled gold bug in the 1970s (vindicated) as well as during the early 1980s both a much-denounced gold quitter (also vindicated) and a bond bull (catching the 20-year bond bull market, one of the greatest in history).
    Currently, he’s pessimistic on the long-term outlook for the stock market and bullish on gold, essentially because he thinks the U.S. economy finds itself back in the same trap as in the latter 1960s.
    But for the short term, he expects stock strength and gold weakness. It’s a stimulating combination.

  • What Do These Have in Common?
    Posted by on December 29th, 2005 at 12:45 pm

    1. a radio station in South Dakota
    2. a perfume shop in the Virgin Islands
    3. a dog boutique in Utah
    Give up?
    Answer: They all got 9/11 recovery loans from Small Business Administration.
    The Washington Post has the details.

  • Creeping Pessimism?
    Posted by on December 29th, 2005 at 12:21 pm

    On Business Week’s Web site, there’s a poll asking people where the Dow will be a year from now. Obviously, this isn’t a scientific sampling but I was struck how pessimistic the answers are.
    The last time I check, the answers were as follows:
    10,000 or below…….15.9%
    Around 10,500………12.9%
    Around 11,000………25.3%
    Around 11,500………27.1%
    12,000 or higher……15.5%
    Not sure………………..3.4%
    That means that the median is “around 11,000.” I won’t predict that the Dow will hit 12,000, but I think it’s entirely reasonable that it could. That’s a little over 10% from where it is today which is in the middle of the long-term average. Yet only one in six respondents said “12,000 or higher.” Strange.
    I normally would expect polls like this to be overly optimistic. Maybe I’m reading too much into this, or perhaps the public is much more pessimistic that I realized.

  • The Market Today
    Posted by on December 28th, 2005 at 5:36 pm

    Sheesh…what a snoozefest? I think traders must still be on vacation. There just ain’t much going on right now. The Dow, Nasdaq and S&P 500 all closed boringly higher today. Our Buy List gained 0.25% today to the S&P 500’s 0.13%. For the fourth quarter, we’re up 6.04% to the market’s 2.42%.
    Yesterday the market didn’t like the inverted yield curve. So oil and bonds went up, and stocks went down. Today, it was just the opposite. This time, energy stocks led the way and everyone else was quiet. Oil crept back over $60 a barrel. I really doubt it will be able to stay that high.
    Although yesterday was one of the worst days for the market in two months, it didn’t seem so bad to me. Perhaps it’s because volatility is so low. As I’ve said before, we’re in the middle of a remarkable bear market for risking-taking. It seems to be a worldwide phenomenon. This past week, the VIX (^VIX), the volatility index, again hit some of the lowest levels in over a decade.
    I have a hard time believing that the 10-year Treasury bond (^TNx) is currently yielding just 4.38%. Who cares about the budget deficit if we can borrow money so cheaply?
    The one stock that wasn’t boring was Frontier Airlines (FRNT). For the record, I still like Frontier a lot even though it won’t be on next year’s Buy List. It’s not anything against the stock, I just think Frontier is a bit too volatile to have on the Buy List. You can see why today. The stock opened at $9.25, dropped to $8.90 and rallied to close at $9.36.
    I noticed that Dell (DELL) is still a good buy. The shares are back below $31. The big surprise was that S&P decided to add Whole Foods (WFMI) to the S&P 500 instead of Google (GOOG). Whole Foods’ stock came close to hitting $80 a share. I’m sorry to say that I wouldn’t pay half that much.
    Remember Lucent (LU)? Me neither but it was apparently very popular a number of years ago. Anyway, for fiscal 2005 the company made $1.185 billion. Not bad, but here’s the really funny part: $973 million of that was due to a “pension credit.” So 82% of the company’s profits are solely related to the fact that’s pension fund is in the black. In short, I wouldn’t buy it.

  • The Buy List for 2006
    Posted by on December 28th, 2005 at 10:49 am

    Just in case you missed it, here’s the new Buy List for 2006:
    AFLAC (AFL)
    Bed Bath & Beyond (BBBY)
    Biomet (BMET)
    Brown & Brown (BRO)
    Donaldson (DCI)
    Dell (DELL)
    Danaher (DHR)
    Expeditors International (EXPD)
    FactSet Research Systems (FDS)
    Fair Isaac (FIC)
    Fiserv (FISV)
    Golden West Financial (GDW)
    Harley-Davidson (HDI)
    Home Depot (HD)
    Medtronic (MDT)
    Respironics (RESP)
    SEI Investments (SEIC)
    Sysco (SYY)
    UnitedHealth Group (UNH)
    Varian Medical Systems (VAR)
    I’ll start tracking these stocks beginning next week. The “buy price” will be the closing price for this Friday.

  • Thoughts for 2006
    Posted by on December 28th, 2005 at 10:46 am

    I’m not going to make any broad market predictions for 2006. I’m always awful at those. Hey, I thought the Colts were going to go undefeated. The real news happens in places where most people aren’t looking. That’s the thing about financial markets. The surprises are so surprising because no one expects them. Weird, huh?
    We all know what’s going to happen with General Motors (GM), but who will say the same about Wal-Mart (WMT)? The only truism is that you should never say “it can’t happen.” Here are a few quick thoughts on the year ahead.
    Stocks to Sell Right Now
    I truly love my local Whole Foods (WFMI). The stock split today and it was just announced that it’s being added to the S&P 500. That’s an odd coincidence, and I’m going to take it as a sign. Whole Foods’ stock is WAY too expensive. The forward P/E ratio is slightly higher than Google’s. Simply put, Whole Foods shouldn’t be where Google is. Come to think of it, Google shouldn’t be where Google is.
    Every year I think Panera Bread (PNRA) is about to crash and burn and I’m always wrong. So why should I stop now. There’s no question that Panera is a big hit. The restaurants are Starbucking their way across the continent, and the company has a solid balance sheet. But still, $67? I don’t think so.
    No one has gotten better press this year than Hewlett-Packard (HPQ), but the company still has a long, long way to go. I can’t wait for Carly’s book, which should be coming out soon. This will be a rare instance of pride coming both before and after the fall. HPQ still doesn’timpress me. Yes, when you lay off 15,000 people, you’re able to see an improvement in your financials. The real trick is getting good press while you’re doing it. My prediction is that Mark Hurd’s honeymoon with Wall Street will come to an end.
    There’s something about Lehman Brothers (LEH) that I just don’t get. Every quarter they put up great numbers. I can’t put my finger on it, but I don’t see where all the growth comes from. How can they consistently do what others can’t? Maybe the company really is that good. Maybe not. Personally, I’m rooting for the yield curve
    Also, Google (GOOG). Sorry sports fans, not this year. There’s just too much baggage.
    Stocks to Watch
    If Citigroup (C) decides to spin-off Smith Barney, that could be one of the best opportunities in years. I so want this to happen, it just makes sense. The larger Citi is weighing down a very good business unit.
    What will happen with Cendant (CD)? I don’t know but I’d love to see the new structure succeed. More companies on Wall Street should be broken up.
    Patterson Companies (PDCO) has been a great stock for years, but the company has fallen on hard times. Here’s an important investing lesson: Companies aren’t like sports teams that suddenly hit slumps. When earnings get hit for a few quarters, there’s usually something very wrong. I hope Patterson can get back on track.
    Who will do better this year, Merck (MRK) or Pfizer (PFE)? I’m not going near either one, but I’m rooting for Merck. If I were smarter, I’d make a paired trade—long Merck and short Pfizer. It could the smoothest line we’ll see all year.
    I can’t wait to see how well Danaher (DHR) does this year? It’s on the Buy List for 2006. The stock hasn’t done much recently even though earnings continue to grow and grow.
    Oracle (ORCL) is always fun to watch. This is another stock that I won’t go near. They have many problems, but I never count Larry Ellison out.
    Trust me, the least-important stories this year will be Ben Bernanke, the Fed or the mid-term elections. The status quo will probably hold across the board. The big story to watch is what’s happening in China. We’ve never seen anything quite like it.
    As Americans, we’re not used to having our economy knocked around by someone else. Other countries worry about a recession in the U.S. because it will impact them. The thought never even occurs to us. For the first time, Americans may start to worry that rough times in China will mean rough times here. The emergence of China is the story of our times.

  • The Story of Wheat
    Posted by on December 28th, 2005 at 4:34 am

    The Economist and I don’t have the best relationship. Sometimes it drives me freakin’ nuts. But then, just as I’m ready to bash my keyboard against my forehead, it will give me this and all is forgiven. Read the incredible, improbable and wonderful story of wheat. (Yes, wheat.)

  • Hedge Funds Are the New Mutual Funds
    Posted by on December 27th, 2005 at 9:49 pm

    So says Daniel Gross in Slate:

    This was the year of hedge funds. The largely unregulated pools of private capital—generally available only to institutions and the rich—have proliferated nearly as fast as adulatory articles about them. Hedge-fund managers have historically been the Garbos of the asset management world: They want to be left alone by the media, by the public, and above all, by the Securities and Exchange Commission. But in recent years—and especially in 2005—they’ve had a coming-out party. Aggressive hedge-fund managers are seeking to shake up management and push restructurings at blue-chip companies like Time Warner and McDonald’s. Others, not content to flip stocks, have taken the reins at well-known companies, as Edward S. Lampert has done at Sears.
    As the chart accompanying this article shows, the hedge-fund industry has doubled in the last four years; there are now an estimated $1 trillion in assets in 8,000 funds. Staid institutions like university endowments and state employee pension funds are plunging cash into hedge funds. And investment banks have rolled out funds that allow merely well-off people to invest in them.
    Are hedge funds the next big thing in mass investing? And if so, will they suffer the same lousy fate as the last big thing in mass investing—mutual funds? In the 1990s, the mutual-fund industry doubled. Millions of new investors, lured by excellent recent performance, thronged into funds. Today, according to the Investment Company Institute, there are 8,000 U.S. mutual funds with $8.5 trillion in assets. Yet every year, the majority of them underperform broad market indexes—and charge fees for doing so. It turns out the mutual-fund industry expanded well beyond the ability of mutual-fund managers to run the money effectively. Today, mutual funds are a clunky business that relies heavily on marketing, survives on management fees, and fears new competitors.

    Read the whole thing.

  • The Market Today
    Posted by on December 27th, 2005 at 9:06 pm

    The yield curve finally inverted today. Unlike most things Wall Street freaks out about, I actually agree that this is a big deal. An inverted yield curve is when short-term interest rates are higher than long-term rates. The norm is that long-term rates are higher. Investors typically get more by shouldering the risk of having their money tied up for a longer period of time. That’s the theory anyway, and it ain’t happening now.
    When people aren’t paid to take risks, they stop taking them. The yield curve has often been a good barometer for future economic performance. It’s actually been a lot better than most economists.
    Interest rates had been headed this way for along time, but today the yield two-year Treasury note briefly topped the yield on the 10-year Treasury bond. This seemed to scare the market as stocks lost ground all afternoon. The S&P 500 lost 0.96% and our Buy List lost 0.53%.
    We can thank our avoidance of energy stocks to today’s out-performance. For December, the Buy List is up 0.95% to the S&P’s 0.57%. The energy sector was clobbered in today’s session. Natural gas prices plunged 10% today, and they’re down 23% since Wednesday.
    Frontier Airlines (FRNT) did very well today. Bob McAdoo, the analyst at Prudential, raised his earnings guidance for next year by four cents a share to 12 cents.
    Also Boston Scientific (BSX), against all reason, logic and common sense, is sticking by Guidant’s side. Well…at least they get points for loyalty.

  • Natural Gas Prices are Down 23% in the Last Three Days
    Posted by on December 27th, 2005 at 1:43 pm

    From Bloomberg:

    Natural gas plunged for a third day in New York as warmer-than-normal weather slashed demand for the furnace fuel.
    “The long-range forecast is for more warm weather,” said Michael Rose, director of the trading desk at Angus Jackson Inc. in Fort Lauderdale, Florida. “There’s no doubt about it. When it’s cold in New York, the prices go higher, and when it’s warmer, prices go lower.”
    U.S. heating demand will run 30 percent below normal for the next week and 22 percent below normal from Jan. 2 to Jan. 6, according to Weather Derivatives, a Belton, Missouri-based forecaster. New York will have a low tomorrow night of 41 degrees Fahrenheit (5 Celsius), the National Weather Service said. That’s 13 degrees above normal.
    Gas for January delivery fell $1.213, or 9.9 percent, to $11.07 per million British thermal units as of 12:29 p.m. on the New York Mercantile Exchange. It was the biggest fluctuation of any commodity today. Gas prices are down 30 percent from a record $15.78 per million Btu on Dec. 13.