Sunday, February 06, 2005


Ash Wednesday this week, Easter in 40 some days and several good market weeks ahead. The next several weeks should be really good for high beta stocks. There are lots of signs pointing up. (See the previous articles to read about the encouraging talk from Alan Greenspan, Chairman of the Federal Reserve Board).

Back at the very start of this latest big move in stocks market, the long-term treasury bond dropped at a 17% annual rate for the six months leading to the break-out October 10, 2002. In the past six months, bond rates dropped at the annual rate of 12%. This is a very large decline in rates on trillions of dollars invested.

The AAII sentiment reading hit 45 last week. This is the lowest level in 8 months and a positive level. It has certainly been much lower but not a bad number in a strong economy.

The 12 month rate of change in S&P earnings growth relative to the change in long bond rates is at record levels. This is the result of strong earnings growth and lower bond yields. Stocks are cheap by several such measures. After 6 increases in the discount rate, stocks are still cheap relative to short-term rates.

The head of Rockwell Collins says the worldwide airline business is soaring. The legacy carriers in the states are not buying new planes but they are flying old planes much more. Delta (DAL) reported January traffic up 12% and a load factor of 71.8%. CAL did even better with revenue seat miles up 4% and a record January load factor of 76.1%. When airline profits turn, they should be big.

Technology stocks often lead new market break-outs and Friday we had a break-out in tech stocks. The word was out that INTC is eager to get into the cell telephone side of the business, possibly by buying QCOM or TXN. I would not bet on such a combination but I hold both QCOM and TXN in accounts and will continue to hold the stocks. After all, the end users such as Nokia have shown strong sales which indicates that the inventory build at TXN is likely finished. Technically the TXN stock chart shows a solid base in 2002 and a higher confirming bottom in 2004. TXN is the market leader in phone chips and big screen TV technology.

Corning reports strong demand for LCD glass. Price points are being hit that should accelerate acceptance of large screen TV's.

Market mavens continue to worry over inflation and say they see price increases everywhere but I think most do not notice the offsetting price declines. A good example is in long distance phone cost. In today's dollars, the average cost per minute for long distance calls has declined from 53 cents per minute to 7 cents per minute. Indications are the cost will drop to 2 cents per minute in the next few years. We continue to buy goods from China and other developing countries because the prices are so cheap. Clothing costs have declined for years. Productivity has dipped but is still a good number.

For the past two months, energy and utility stocks have been among the top performers. Utilities tend to follow long-interest rates. For the last two days, technology stocks led the way. In two months, oil service stocks were up an average of 17% and gold stocks were down 15%. After a tough few weeks, small caps are up 6% since January 24.

The tech rally helped and hurt this week. In the top five were LVLT and ADBE up about 12% each and in the bottom five AMZN and EBAY took hits. All my airline stocks did well: AMR up 6.74, DAL up 4.64, NWAC up 4.06 and CAL up 4.03. Online brokerage stocks were hit when SCH announce price cuts. In the consumer discretionary area, as one might expect, auto parts companies are doing well as we move from economic recovery to economic expansion, Genuine Parts up 5.43% and Auto Zone (AZO) up 7.51%. Big Lots made a big move up 11.72%. United Health (UNH) was up again as was Stryker (SYK). Our last oil service purchase, RDC, was up 6.07%. Consumer staples such as PEP up 3% and Colgate up 4.36% did a little better than our Wal-Mart up 2.02%. Our old favorite NXTL has marked time for a good while but it was up 3.87% for the week. Industrials gave us good news and bad with FLR up a super strong 12% and TYC down 5.48%.

I'll be buying again Monday. I will hop on down the beta trail. Beta is a measure of how much a stock normally moves relative to the market. Technology issues tend to be "high flyers", when the S&P goes up 1% small stocks or technology stocks may go up 2%. The most important thing is to be in the market during major moves. The three week decline in January was enough to take the 5% value line swing index to the negative side. However, big piles of money have been added to accounts since the end of the year and big players are eager not to miss the "big move".

The good news is that us small investors can hop in there, buy all we can afford and sit back to watch the "big boys" load up at higher prices as the weeks pass. Of course, by the time the Social Security reform is passed, stocks will be very high and it will not be the best time to invest. Hop in there and get your stocks now.