Tuesday, December 28, 2004


The environment for stocks can't get much better. Core Consumer Price Inflation is rising but is still only slightly above 2%. The Fed Fund Rate has increased 4 months in a row but is only at 2.25%. Housing demand is strong, continuing unemployment claims are dropping and labor earnings are soaring. Consumer confidence is high. The world wide business slow-down is coming to the end. China is pulling hard on the reins to slow things down and will only grow at about 7.5% this year!

The fear of terrorism, fear of oil supply disruptions and fear of being flooded with low priced textile imports are all still present and tending to hold stocks below fair value. Market mavens are typically predicting moderate stock returns for 2005 while predicting earnings gains of 11% or better.

Perhaps there is too much complacency but the good news is that the good news hardly gets reported. News reporters are likely to ask if the oil price is going to go back up or is housing the next bubble. For two years, housing has been seen as the next bubble. While I do not recommend that one purchase residential rental properties at the current time, housing demand is quite strong. Mortgage application indexes are quite strong. The refinance index has dropped because most have already refinanced at low rates. Apartments are experiencing vacancies because the former tenets have purchased a home. A friend of mine recently reduced his house payment by $450 per month and is enjoying financial and emotional relief.

The Big Picture Looks Great! What is new?

Yesterday, I mentioned that AMZN had a great season. The positive numbers showed that, for the first time, AMZN had higher consumer electronics sales than book sales. AMZN sold one half million gift certificates! Search statistics show that the Internet Movie Data Base (owned by AMZN) was one of the most popular sites. This is a wonderful site for reading reviews. A few companies sell movie tickets on-line; this is another ripe area for AMZN to enter. AMZN has started a Netflix style service in Europe. The purchase of NFLX by AMZN would give AMZN 2.5 million new customers, local distribution centers and it would all tie in nicely with its movie data base. Blockbuster is tendering for Hollywood shares. Does the movie rental store survive as a viable business model?

As you might expect, after the 9% move yesterday, Bear Sterns upgraded AMZN. The stock is up again today and Bear has a target of $55. The big negative is that Wal-Mart and other retailers are figuring out how to sell on the internet. Wal-Mart is a leader in internet traffic. Since I have both stocks in my portfolios, I am biased. I believe they can both continue to take market share. The losers will continue to be the smaller retailers that cannot match these big guys on price or the closing of stores like Toys are Us and video rental stores.

BankAmerica raised its target price on SIRI to $5.25. BA still has a sell on the stock. VOD and FON have each started cell phone music services. It is widely anticipated that APPLE will announce its deal with Motorola January 10th. The new phone will not have a hard drive but will down-load i-tunes to flash memory. Drives continue to come down in size and you can bet your boots that most phones will offer TV and Radio in two or three years.

A major point to remember is that the need for the super large drive goes down each time the transmission speed goes up. Now-a-days, you can store your pictures on-line with Picasa, your diary with Blogspot, and a gigabyte of files, address books and email with Gmail (all of these are Google products but you can find competitors to offer the same services).

Third generation speeds are rolling out now and which will be slow in a few years. We are still in the horse and buggy phase. China now has the fastest internet service! Standards are already being set for the day when the old analog TV spectrum comes available. When all TV goes digital, there will be a tremendous amount of spectrum available for other purposes. Broadband wireless Internet Access will become ubiquitous. With a very fast wireless connection, you will always have access to voice, data, video, storage and many totally new services. Don't dread the day, embrace it and make money off of it!

The reason AOL has joined the party offering free web mail, is because web mail is a "sticky application". Once a consumer gives out his email address, it is a lot of work to let everyone know of the change. Redirect service may be available but it is like your phone number; you do not want to change unless you must.

I am anxious to see the email numbers. I suspect that Gmail is getting a good percentage of new addresses. A free service that offers search and other capabilities is hard to beat. I still use my Road Runner address but anticipate going exclusively to Gmail in 2005.

Comcast has had a good run recently; there was a positive article in Barrons this week. The Japan ETF, EWJ has moved up nicely. Liberty Media, TIVO, GNTX, AHG, YELL, PFE, ETRS, and ADBE are all doing very well. The list of good performers is quite long. AMX, TPX, CCJ, ADM, ET, EBAY and others are at or near 52 week or longer term highs. Even the real big slow movers like GE, FLR, GSK and PEP are gradually making headway. GT continues to maintain its status as one of our top holdings. At $14 a share, I have the same fondness for the stock as I had at $5.00 per share; it has a long way to go. In calm seas and fair weather, it is amazing how far you can go if you have a good wind!