Wednesday, August 24, 2005


Many thanks to those who have written asking if I fell off the deep end. No I didn't, I am alive and well! Just very busy.

Rather than answering each email specifically, I will give general answers and include market opinions and updates along the way. If I do not answer your specific question, please write again.

1) Yes. Real estate still has a way to go this cycle. Second homes continue to make the big difference. Of the homes sold recently, 23% were second homes. This means household formation is still stronger than new home construction! Echo boomers still have first homes to buy and millions of boomers have not yet purchased a second home. Folks who do not own a second home are going to feel like the Lone Ranger in days to come. The norm is quickly evolving to be ownership of two or more homes. Even in relatively small towns across America, the trend is toward living and working in-town during the week and escaping to the second home on week ends. If you have ever tried to get to Cape Cod on a Friday afternoon, you know what I'm talking about.

2) Yes. Corporate executive pay did go to ridiculous extremes. I appreciate the graph sent and hope to find the time to post it. Yes. The market works. No. We do not need specific laws to limit CEO pay. Instead we need individuals to own stocks directly. One of the biggest sales jobs ever perpetrated on American citizens was to convince them to pay 150 basis points per year and to give up voting rights to mutual funds. The fees paid to manage 401-K accounts often are larger than the tax savings realized. Fund managers make big salaries and vote for entrenched corporate directors and executives. The little guy can only vote with his feet. Buy individual stocks and avoid high fee funds. If you must own funds, buy ETF's; however, don't gripe about corporate pay or other governance issures unless you are willing to read your documents and to vote your shares.

3) Yes. I am still excited about Google. In fact the powerful new products WOW! me. I have downloaded the new desktop search including the side bar and Google Talk. The difference in Google Talk and AIM is in attitude. Google Talk is open source. The difference is akin to the way Apple Computer started but then allowed IBM to take over. A good comparison to Beta Max and VHS could be made except that Google Talk is a better product and it is open source.

The power of the sidebar is particularly noticeable. Already, it knows of several web sites I like to visit, of stocks and industries I follow and of news topics that are of most interest to me. The sidebar is smart and it learns more every time I do something. It is neat to have important information so handy. For example, I don't have to navigate anywhere to check the weather at home, in Myrtle Beach or in Blowing Rock because I have saved those as places to follow. Neither must I navigate to check a stock quote because my favorite stocks have already been selected and are constantly updated. Future software updates will surely allow me to follow entire portfolio balances.

Yes. Google is on my add list and I will likely buy more when I receive the proceeds from the next condo sale. DO THE GOOGLE GULP--THE PRICE IS HIGH BUT THE FUTURE IS BRIGHT!

4) Yes and No! To the question are we really in a BULL MARKET! The answer depends on your definition of a BULL MARKET.

a) We have not broken to new highs in all major indices; we are not likely to hit new NASDAQ highs for many years to follow.

b) P/E ratios have declined sharply since 2000 and the decline is not over! The after inflation earnings yield on stocks is dramatically lower than historical norms; therefore stocks are not cheap! Note that my point has usually been that stocks are cheap relative to bonds and real estate. Bond rates will revert to the mean!

c) Short term considerations give reasons to expect a significant pause or even a 10% correction. The market went to over-bought levels a couple of weeks ago and the excess speculation has not been cremated; it is dying but not dead. September is historically the weakest month of the year. The possibility of sanctions against Iran hang over the oil market in particular. An oil disruption would scare the willies out of the strong. The FOMC would react quickly to a disruption but the short-run pain could be severe. The FOMC has shown no inclination to stop tightening short rates. Calls for the FOMC to stop now are short sighted if the short term trend in inflation continues. It is not the current rate of inflation that is a problem but the trend is worrisome. Payroll costs could rise by 4% or more this quarter.

d) On the other hand, many indicators show that the economy is following a familiar pattern. Similar to the mid-decade slow downs in the 80's and 90's, the economy is ready to slow prior to the economic expansion phase of the cycle. This phase will probably last at least until the Presidential Election year of 2008. The election year cycle has been a reliable cycle; odds are good, there will be a market peak in 2008 that is substantially higher than the market bottom of 2006. The wiggles in the market between now and the 2008 top are impossible to call. The top of 2008 may easily be topped again in 2009 but on the other hand P/E contraction is going to "win" at some point.

e) Earnings growth has been strong and is expected to stay strong during these next several years. Some of the growth in earnings may continue to be "absorbed" by the continuing decline in P/E ratios. However, I believe the decline in P/E's which has abated recently will continue to abate; I believe there will be modest P/E expansion between now and the 2008 market top.

f) While the upcoming slow-down is not likely to reach anywhere near recessionary levels, the recession that will follow the Presidential Election of 2008 is likely to be unusually nasty. There is no need for the FOMC to raise short interest rates much more in the near term. However, sooner or later, long bond rates will move up enough to make P/E multiples contract. The good news is that the increase in bond rates will happen in a strong economic expansion and decent stock market.

g) Ironically, the only thing this stock market needs right now is a significant uptick in new claims for unemployment insurance. When the market smells that the economy is slowing, long rates may test the lows one more time before the march to higher ground and the stock market will shift into BULL MODE--that is if you call a 20 to 30% S&P gain in six to 12 months a BULL MARKET.

5) Yes! My daughter did make an 84% annual return in her retirement account a couple of years back and yes she did have a 29% annualized return, July 2005, in her regular account and yes my other daughter has nearly a 100% return over the past two years. The 84% return was made by putting 100% of a relatively small retirement account in international stocks during the 2003 BULL MARKET (by my definition). The 29% gain was a result of aggressive stock selection which included catching volatile airline stocks and high tech stocks coming off of lows. The 100% gain is in another relatively small and under-diversified account. The three largest posions are GT, GOOG and TXN.

6) Yes, I plan to get back on the blogging trail. My wife and I have much work left to close down our resort condominium rental business. Selling ones business, down-sizing ones house and planning for retirement are all time hogs. In case you have not heard, it is far more difficult to sell a business than it is to buy one. Blogging will be "catch as catch can" until these projects are completed.

Tomorrow, Cheryl Phibbs, Sandra Kupsky, Marilyn and I will meet to discuss our plans for the coming years. Some of the ideas follow:

We expect to post a comprehensive investment web site to a Google hosted location.

Our expectation is for the web site to be hosted by Google at no charge other than the sharing of advertising clicks.

The web site will be chart intensive. For example, I write about the real estate cycle and I believe investors need to know about the four phases of real estate. They need to know the characteristics of each phase and to see our estimate of where we are in the cycle. This information is best presented graphically.

We expect to continue to select stocks for our Stock of the Week portfolio. We plan to post the portfolio to the new site along with the details of each transaction and follow-up messages.

We expect to offer online educational seminars. One trap where investors are often caught is in paying attention to too much extraneous information. We believe investors need to focus on the important stuff and to screen out the "noise". We hope our seminars will teach the fundamentals. Investors can be overwhelmed when they listen to one sage say buy tech and other say sell tech to buy pharmas.

We plan to post an asset allocation model. We believe the concept of diversifying is often misused. We know of recommendations to buy a sector just to be diversified. Helping our readers make money is our goal. If a sector is significantly under-priced, it is reasonable to over weight that sector and it is reasonable to invest zero in a sector that is dramatically over priced.

An important decision we have deferred is whether to charge for our services. At the current time, we plan to maintain our "amateur" status. The posting of the web site will require many hours. We may eventually ask for donations or request subscription fees.

For now, lets just make money in the market and not worry about fees. Post a comment if you know of a good expansion phase stock. Clearly the equipment tech stocks are on a nice run. Do you have a favorite?