Wednesday, December 29, 2004

BEATING THE SAME DRUMS!

I hate to beat the same drums but, when it is time to make money, it often requires more than one push to get the majority to catch-on. When the majority finally does move-in, markets quickly move to the bigger fool stage. MER, ET and other brokerage companies are doing well after reports that the public is finally beginning to come back to the market.

We are a long way from the public committing to "all in". When they do, in the bigger fool stage, it will be wise to make sure you are not one of the last ones at the party. By diversifying ones portfolio and moving to the best values offered, one should stay in the game continuously. There are times to be aggressive toward stocks, bonds or cash but even the cash investor is participating in the game if he is in cash for solid and rational reasons. Clearly the time to be most aggressive toward stocks was in October two years ago, but the bull market is not over. There may be some stocks that have entered the bigger fool stage. Perhaps SIRI, EBAY and GOOG are among them. Never-the-less, one should stay aggressive toward stocks. The trick now is to pick the right stocks.

I have put serious money into big US companies of late. However, I continue to mix in a few turn-around plays and high flyers and naturally most of the talk is about the turn-around plays or high flyers. In a new monitored account a couple of years or so back, we purchased Goodyear Tire as our first core position. We did not have the money to diversify the account but we made a plan to dollar-cost average by buying 14 other stocks as funds came available. The GT was an excellent first pick and is up about 300%. Our second pick TXN is up about 10%. Today we added equal weights of TIVO and GOOG; not picks for your Grandma.

Peter Thiel, the founder of PayPal, is working as a stock analyst now. He is a stock market bear. His focus is on all the problems of the world including the declining dollar. He mentions EBAY and GOOG as being over-priced having discounted perfection. He is a smart man but EBAY and GOOG are among my top holdings and barring a major disruption in the businesses, I intend to hold long-term. Ebay is up another couple of bucks today!

The monitored account mentioned belongs to a young person who wants to hit home runs. In fact, her goal is to win at least one "world series" (the world series is making 100 times your money on one stock). Goodyear is off to a good start as a 3 bagger and as a cyclical pick is unlikely to be more than a 10 bagger. GOOG is selling at a high price but has the market really discounted all the potential? How can anyone know the potential of this new world of wireless broadband that we are entering? TIVO is on the cutting edge of our rapidly developing "new TV" market. The "big boys" keep working around TIVO but TIVO owns some significant patents and it may come down to a choice between a TIVO system or a MSFT system. To compete, TIVO will need capital and bigger company may take the plunge. TIVO could lose out totally or it could be very big; the only middle ground on this one is a buy out at a low premium.

This young person would like to own GOOG and TIVO 30 years from now if indeed they continue to be the innovators in the market. A few bumps, even large ones, along the road will not matter.

Our TYCO is doing very well. "Cuzzin Bill" put us on to this one. JP Morgan over-weights it and just moved the target price to $40.

The news from FON/NXTL and TWX this morning was anticipated in my earlier posts. FON/NXTL is onto a neat way to build market share quickly. TWX will try the concept of offering cell phones branded as TWX service. FON/NXTL will sell the air-time to TWX at wholesale prices. TWX can easily insert a flyer in a cable bill, offer a discount for a "total package of services" and occasionally virtually lock in a customer. It is one thing to switch from cable to satellite TV but a real pain to change one's email address, phone number and buy new cell phone equipment.

The trial will take place in Kansas. As reported earlier, ESPN, Quest, AT&T, and others (probably Disney) are preparing similar services. ESPN signed in order to add distribution for short sports TV segments over cell phones. TWX is looking for additional distribution channels for its music, video and internet offerings. FON/NXTL may trade TWX service for content. The rumor is that Disney sees a new profit center though cell phone animations.

The above reminds me of a cell tower lease of my families land. What a clean transaction? On adjacent property, the family owns commercial buildings that must be leased, maintained and managed. The commercial buildings are profitable but a lot of work. The cell tower is no work at all; once a month the check is deposited directly in the bank. The cell phone companies do all the work but the family participates in the business. After the first lease was in place, another company added equipment to the same tower and they send another check! FON has already built the towers, why not let TWX help pay for them?

FON and NXTL are in competition with VZ and Cingular. All three companies want solid coverage through-out the country. Although it will take a couple of years for FON and NXTL to merge their networks, the total area covered by the two companies is more than the area covered by either. Even though ESPN, AT&T and TWX will over-lap the same coverage areas as FON/NXTL, they will buy mostly spare capacity! This is smart! It is using resources wisely! FON/NXTL will increase the utilization of the current network and be able to build-out places that would be un-profitable for the single company.

As indicated in earlier postings, the big cable companies have no incentive to partner with VZ or Cingular. The fit with FON/NXTL is a win-win. Look for Cox, Comcast or both to announce a similar deal. This market is competitive and requires billions in capital spending but the growth has just started. TV, Music, Video and an internet that we would not even recognize will be available through the coming high speed networks.

An interesting little sideline is that Microsoft continues to get widows SIP software installed in more devices. For example, the X-Box game machines support SIP. Gamers from around the world are able to talk to one another while competing. The voice and data traffic are being carried over the Level Three network. In my monitored accounts, we have one small position in LVLT. This is a speculation on VOIP and high volumes of video traffic. We also own T. Each of these stocks are out of favor but they both are ready to carry much larger volumes of voice and data. Much larger volumes of voice and data are coming. Voice requires only a small fraction of the bandwidth required by video.

The oil inventory draw down was in line with expectations this morning. The coming elections and insurgent activity in Iraq continue to cloud the forecast for oil prices. Oil normally bottoms in the winter. Gasoline demand drives the price in the summer. At least a couple of the sell side brokers call for prices to rise again next summer.

The normal business cycle suggest that now is the time to rotate out of oil and into consumer staples and health care. We bought a chunk of PFE at $23.52 and of course wish that we had bought more. It is trading above $27 today; MRK (which we do not own) is over $32. Our purchases of PEP, WMT and others are doing o.k. Long-term demand suggests that oil companies will continue to enjoy large profit margins until some major new sources of fuel come on-line. The rig count is high and places like Tripoli are busy. My accounts are under-weight in energy. Some of the proceeds from PFST may go into energy. We participate indirectly in the coal markets through ownership in the railroads.

Did my posting move the market? Nah! It is still fun to know that I posted that industrial metals are over-priced yesterday and then see the price of Gold drop $4 today while the dollar fell to new lows. I see the past few days of dollar/gold action as an interesting divergence. The increases in short rates may actually be having an effect. The dollar may be bottoming out and Gold may have already peaked. The dollar dropped in over-seas trading but bounced this morning. At the very least, the dollar is running into some pretty strong support.

Our RBK is on a pretty strong run. The unfortunate Sunami problem may actually boost the profit margins for a time. I am not sure but I believe the reduction in tariffs should increase the importation of RBK shoes to America. I plan to take another look at this long-term holding.

Please remember to keep your transaction costs and taxes low and to diversify. Remember that the best places to invest are not being discussed in the news media. The news focus is on what is hot. I am a news hound and therefore likely to get caught in the "news trap". I have to work at making sure I hold contrary positions. I would be happy to review your holdings. As an amateur, I cannot charge you a fee or make any recommendations. I can tell you what I think and it is up to you to decide the best course; just as it should be. Do you hear the drums?

1 comments:

Jack's Old Merrill Pal said...

Speaking of the Doctor!

TiVo just announced a portable movie device. An iPod for movies if you will. This could be quite interesting.