Tuesday, February 15, 2005


Just in case you didn't read my comments about the big turn last week, whole sectors of stocks are moving higher! A log jam has broken in the fast growing information technology sector. Nokia, the largest cell phone manufacturer, and Microsoft, the king of personal computer software, after slugging it out for years, have joined forces. NOK will offer the Windows Media Player on the phones. The cable companies and phone companies have also joined forces with MSFT. They are all offering set-top boxes with built-in MSFT media software. Warren Buffet and George Soros have looked at the cash flow being thrown off by the cable companies and they like it. They have each bought millions of dollars worth of CMSCA or TWX.

Millions of new phones will be purchased. Millions of new set-top boxes will be purchased. Millions of computers will be upgraded. Millions of tunes and shows will be played on portable phones. Useful and exciting new products are coming. Combinations that will be used for entertainment but that will also increase the levels of productivity and thus the levels of wealth.

Motorola has announced deals with Skype and with AAPL. Skype users make unlimited free phone and data calls over the internet. AAPL sells millions of songs to only a few million people who carry i-pod players. The number of people who carry portable phones is a few hundred times larger. Between NOK and MOT, the use of sophisticated portable "computer-phone-players" is about to explode. The use of digital TV is about to explode. TXN has developed phones with its award winning DLP technology used on big screen TV's. The cost of fancy phones is going down at the same time the available features are going up.


Ed Hyman is the man. He has produced high powered macro-economic (BIG PICTURE) research for as long as I can remember. Big, institutional, investors are willing to pay his price. I get a free sneak peak from time to time. Today was one of those days when he shared his thoughts with Steve Leesman of CNBC.

Steve showed the big miss in the final quarter of 2004. The projections were that earnings would be up at the annual rate of 15%. Earnings actually grew better than 20%! The street consensus for next quarter is up 7%. Ed Hyman had a 9% estimate but he has just raised it to 13%! Profits are going through the roof!

More important than the upward revision in earnings is Ed's call in regard to the fed funds rate. His indicators show that the FOMC has already raised enough. It is Ed's belief that the Fed will soon cease to raise short rates more! Investors will listen to Greenspan's comments carefully tomorrow. He will most likely make obtuse statements along the lines of "steady as she goes". Barring some highly unlikely surprise, the earnings momentum is ready to push stocks higher. It is always dangerous to get too excited during option expiration week. The next couple of days are not all that important. The next few months money is going to be made.

Please read earlier columns in regard to sectors. Avoid interest sensitive sectors and buy economically sensitive sectors. For example, home building stocks are down 5% in five days while energy stocks are up 6%.

After listening to Leesman, I checked the plot of the long bond yield minus the S&P 500 dividend yield as posted on Market Guage. Dividends have been rising steadily and yet the chart is near a record low! This is a very bullish chart!

Sometimes folks automatically discount the insights of a "chart watcher". I suppose they assume the person makes investments based on skirt lengths, foot ball games and the alignment of Mars and Jupiter. Not me. However, a picture is often worth a thousand words and a comparison of bond yields to stock yields is a fundamental measure of value. The market is currently drawing a pretty picture.

Another pretty picture is the graph of Business Inventories divided by Sales. The ratio is near record lows. Should prices start to firm, inventory building should add to economic growth. Boom time approaches.

No doubt, current P/E ratios are historically high. Assets have appreciated during a period of low interest rates. Sometime within the next 2 to 5 years, I expect the economy to over-heat, bond rates to go up and company earnings growth to slow. Right now, the gap is a beautiful wide gape. It does not get much better than this. Earnings are growing faster than the economy. The gap between stock earnings yields and bond yields is not only large but is getting larger. There is only one word I need to share.


Unfortunately I must remind you that you invest at your own risk. Some of the stocks mentioned in this article are very over priced. Please feel free to contact me. I would enjoy reviewing your portfolio and suggesting ideas to you.