A Portfolio for Four Seasons!

Will the US economy go into recession - technically defined as two consecutive quarters of negative GDP growth - in 07? I have no idea. I’m neither an economist nor a clairvoyant. But I do know one thing: this portfolio is ready to ride out whatever Wall Street throws up.

The folio exceeded my expectations in 06. It came out of the gate in mid-September to beat the S&P500 nine times out of the 16 weeks it traded. I can’t get an accurate comparison to the S&P’s 13.6% year return - the folio regularly changes in size through addition of funds – but the return on the last trading day registered 4.70% (excluding dividends).

As an aspiring money manager I think a 56% success rate against the market benchmark is not a chest thumper but it’s not bad. I aim for at least a 70% success rate in 07. My proudest achievement in 06 was not that the folio hung in there with Wall Street but that there was not a day when all the stocks closed down. Even on days when the three major indices - the Dow, Nasdaq, and S&P - all saw red, the strength of the diversity of the folio ensured that it saw some green. This is definitely a folio I can roll with in 07.

Here’s how the stocks closed shop in 06 (MA – Moving Average):

How They Ended 2006 by Return to Date (RTD)

Stock	RTD(12/29/06)	Rank	MA(12/29/06)	Rank
NHP	10.20%	1	7.19%	3
IGE	8.71%	2	8.82%	2
EEM	7.51%	3	6.72%	4
ADBE	6.87%	4	5.08%	6
MSFT	5.44%	5	5.69%	5
EFA	4.99%	6	4.60%	8
IWR	4.52%	7	4.27%	9
IJR	3.33%	8	3.22%	10
PG	2.63%	9	1.89%	13
BAC	2.43%	10	2.36%	12
COST	2.39%	11	2.83%	11
SLV	0.66%	12	9.87%	1
PBW	-0.64%	13	1.62%	14
EBAY	-2.75%	14	4.74%	7

The Most Defensive Stock
In 2006 there were only four occasions when all but one stock closed down. On two of these occasions PG, the consumer staples giant, defied gravity. SLV and EFA closed up on the other two occasions. Conversely, there were five occasions when all but one stock closed up. On two of these occasions SLV saw red. PG, EFA and IGE saw red on three occasions.

However, PG is the only stock that’s been negatively correlated to the S&P. Therefore, PG is the most defensive stock. This makes sense. When investors are spooked and there’s a “flight to quality” PG is one of those stocks that tend to benefit. What’s the next best thing to PG for defense? SLV.

The prospects for PG and SLV in 2007 look good. PG should benefit from a slowing economy if consumers tighten purse strings. Having detergent to wash clothes and toothpaste to brush their teeth will matter more to consumers than a PS3 or a gas guzzler when pocketbooks get stretched!

Both stocks should benefit from a weak greenback. PG earns more overseas than it does in the US so those extra dollars from foreign currency conversions should do wonders for the bottom line. A weak dollar is bound to stoke inflationary pressures as imports become more expensive for US consumers. SLV, like gold, is a good play on concerns about rising inflation.

I hope you got defensive stocks similar to PG and SLV in your folio. Otherwise you’re playing Football without Linebackers. Good luck!

Technical Leaders
These stocks closed 2006 above their Moving Averages:

Stock	Size of Gap-up	Rank
NHP	3.01%	1
ADBE	1.79%	2
EEM	0.79%	3
PG	0.74%	4
EFA	0.39%	5
IWR	0.25%	6
IJR	0.11%	7
BAC	0.07%	8

Whether or not the economy loses steam NHP, a health-care real estate investment trust (REIT), should hold its own in 07. By design a REIT pays “buku” dividends, which is going to matter more when stocks lose traction in a sluggish economy, but a health-care REIT is like a covered call option on the economy. What do I mean? Well you get downside protection in form of a regular dividend, and since health-care is a growth sector – think of retiring Babyboomers – you’re perfectly placed to benefit from any upside in economic growth.

However, REITS are generally viewed as financial stocks by investors so any rate hike in an inverted yield curve environment could throw a spanner in the works of REITs. Luckily for NHP, its mortgage business accounts for only 5% of revenue so it shouldn’t be that vulnerable to any increase in interest rates. Allez NHP!

What can I tell you about ADBE? In 2007 it’s coming out with one of the most highly anticipated software products in the industry, and I dare you to find a firm that is as strategically placed to benefit from the Web 2.0 migration of digital content to mobile devices. So don’t act a fool and dump the stock once the new product is out because you’d be missing out on the real gravy train. The firm has also decided to stop giving intra-quarter guidance, which made the stock very volatile.

I don’t need to preach about EEM and EFA. The rest of the world no longer catches a cold when the US economy sneezes so if you don’t hold positions in foreign stocks in 07 then which planet are you from?!

BAC is good to go in 2007 unless interest rates start to creep up instead of down as expected by most economists. Rising interest rates will put the stock under pressure but the firm has deliberately expanded its non-consumer banking businesses to pick up the slack in the consumer banking business.

Actually, BAC seems to doing the opposite of what Citigroup is doing, which is to go on an international buying spree of commercial banks. Interesting. That BAC is also a high-yielding stock will pacify investors should sentiment turn against banking stocks.

Technical Laggards
These stocks closed 2006 below their Moving Averages:

Stock	Size of Gap-down	Rank
IGE	-0.11%	9
MSFT	-0.25%	10
COST	-0.44%	11
PBW	-2.26%	12
EBAY	-7.49%	13
SLV	-9.21%	14

EBAY, which had been riding high after reaching a low point in August, suddenly lost its mojo in mid-December when it swallowed its pride and admitted it couldn’t go it alone in China. This prompted many investors to drop the stock like a bad habit. Honestly, I’m a little concerned about EBAY. The online auctions division has lost considerable steam. Also, if the economy fizzles so will online listings.

EBAY’s performance in 07 will almost entirely be tied to the success (or otherwise) of its PayPal and Skype units. Do I think Google’s Checkout will threaten PayPal? Not in 07. Actually, PayPal has such a headstart that I doubt Checkout will ever threaten its growing popularity for online payments. I know Google keeps saying Checkout is not out to take market share from PayPal but please!

As for Skype, its future actually looks a little brighter after AT&T agreed, as part of its recent deal to acquire BellSouth, not to bundle its telephone services with internet access for Digital Subscriber Line (DSL) subscribers. Had AT&T not offered this concession, it would probably have been able to shut out Skype and other voice-over-internet-protocol (VOIP) players that have been able to offer subscribers cheaper call rates partly because they spend no money to lay wires down like Telcos do.

Skype has also started to charge for previously free calls to landlines and mobile phones in the US and Canada. So things are looking up for Skype. All told, PayPal and Skype could pick “some” slack in online listings for EBAY in 07.

Silver collapsed! This is not how I expected SLV to end 2006 but it dropped almost 10% in mid-December. The bloodshed happened in a week when investors were particularly jittery about inflation and “irrationally” sensitive to economic data. SLV is a hedge on rising inflation so when data came out that suggested inflation was easing investors bailed out of SLV in droves. I remember watching in horror on December 15 as SLV dropped like a waterfall!

However, I expect SLV to bounce back in 07 due to a weakening greenback. Interest rates are expected to go up in the UK and the Eurozone so the dollar is bound to bleed some more at least against the other major currencies.

So there you have it. The folio stumbled out of the gate in September but quickly regained its footing as I added some stocks and rebalanced – gave more weight to some stocks than others. Rebalancing will continue in 2007. I can’t assign equal weights to all stocks and just sit back and watch the folio trade; not all stocks are created equal so doing that is not an intelligent way to manage a folio for four seasons.

The worst-known manager intends to build on the experience acquired in 06 to “bring home the bacon” in 07. Do not adjust your sets!

What's the Big Deal About CostCo?

Once in a while in relationships I ask (myself) whether the reasons I’m attracted to a partner are still valid. If not, it may be time to move on. I do the same with my portfolio. And each time I’ve taken stock of the stocks COST is that one stock that’s given me second thoughts.

COST operates on razor-thin margins. I mean, discount warehousing is almost a “margin-free” business anyway – buy high and sell low - but COST’s policy of no more than 4% markup on any of its big-ticket items means that operating profit margins are always in the 2% zone - compared with Target’s 8% and Wal-Mart’s 6%.

So despite the very low margins why am I attracted to COST and are these reasons still valid? I got into COST because of 4 main reasons: CEO mentality, Treatment of employees, High net-worth membership clientele, and International expansion.

I’ve read interviews with the CEO and listened to him on earning calls. He’s got a good head on his shoulders. Not only does he have skin in the business, he’s prepared to endure short-term pain for long-term gain. He holds a long-term view of the stock - to the chagrin of some on Wall Street - and spends a lot of time in the stores, not in some C-suite or corner office overlooking the waterfalls.

An analyst once commented that it’s better to be a COST employee than a shareholder or investor. Wall Street is generally not happy that COST pays its employees much more than the industry average. Of course this bites into income but the tradeoff is higher worker productivity and low turnover – the firm has one of the lowest employee turnover rates in the industry.

Have you ever visited a COST parking lot? It’s filled with luxury cars – the type of cars that park themselves! The highest level of membership at COST is Executive - there's also Gold and Business - and according to the firm at the end of fiscal 2006 executive members, who fork out $100 in annual membership fees, represented 23% of its primary membership base and generated about 45% of all sales. That’s 45% of almost $60 Billion; do the math!

On the Q1 fiscal 2007 earnings call last Thursday the company revealed that Gold membership stood at 17. 7 million, up from 17.2 million year-on-year, and that more members were spending more at a faster rate. But the icing on the cake is that more members are switching to executive membership. As long as COST continues to pack the wealthy in it will be able to operate on tight margins.

Finally there is COST’s international ambition. When I was searching for a discretionary stock to add to the folio, Target was the first firm to come to mind. But I quickly switched to COST when I discovered that Target had no plan to expand overseas soon. No thanks.

An international presence helps to cushion weaknesses in domestic sales and also brings foreign currency exchange income. International operations – 133 of its total 504 warehouses - already represent 18% of sales. Four new international stores will open before the end of this year with more to come in calendar 2007.

All told, COST remains attractive to me for the same reasons I got into it. Sales have grown by an annual average of 12% over the past four years; membership continues to grow; employees are some of the best paid in the industry; and the boss is fanatical about the discount warehouse business. The stock doesn’t move in giant leaps but it has appreciated about 24% over the past five years, versus 25% for the S&P500. COST is a tortoise, not a hare. That's the big deal. I’m still down with it.

Adobe Flashes Cash

Inflation is back! This week the bogeyman of investors and consumers alike made news on Wall Street; actually it made Wall Street. Inflation “appears” to be trended downwards, which means a higher spending power for consumers going forward.

If consumers can keep up their spending binge the economy may not slip into recession in 2007. At least that’s what the bulls think. However, I would say another month’s data is needed to really clarify where inflation is headed.

Nevertheless, the tide that lifted boats on Wall Street this week didn’t leave the folio behind. The manager is back to winning ways this week, thanks in part to ADBE, after two weeks of playing second fiddle to the S&P:

Worst-known +1.30%
S&P +1.22%
Dow +1.12%
Nasdaq +0.81%

ADBE sizzled this week. The “acrobatic” software powerhouse released fiscal Q4 2006 and fiscal 2006 results on Thursday and the stock just took off. The acquisition of rival Macromedia in December 2005 has started to filter to the bottom line.

A quick run of the annual numbers reveal a mixed picture overall. Key profitability indicators – NOPAT margin (net operating profit after tax/sales), earnings growth, and return on equity (ROE) - have become depressed:

Period Ending	NOPAT Margin	Earnings Growth	ROE
12/01/06	19%	-16%	14%
12/02/05	29%	34%	37%
12/03/04	26%	69%	36%
11/28/03	20%	39%	30%

This is not surprising after such a major acquisition. Earnings were particularly hit by stock-based compensation expenses and acquisition-related costs. The company’s target for operating margin in fiscal 2007 is 25% to 27% – this will get margins up to pre-Macromedia acquisition levels. I think this is doable with the planned release of a major product.

An immediate benefit of the acquisition is a buffed-up balance sheet, so ADBE now has more money to burn on R&D and further acquisitions.

Back in October when I decided to get into the stock instead of Apple, http://worst-knownportfoliomanager.blogspot.com/2006/10/beta-on-my-mind.html, and http://worst-knownportfoliomanager.blogspot.com/2006/10/new-portfolio-ready-for-holiday-season.html, I wasn’t aware of how huge the opportunities that await the firm were.

Other investors may be buying into ADBE because in fiscal Q2 2007 it’s going to release Creative Suite 3 (CS3), which is its most ambitious product and will be the biggest revenue driver yet, but this isn’t my primary motivation.

As I’ve done more homework on the application software industry and the worldwide migration of digital content to mobile devices, my conviction that ADBE could make a killing in this environment - provided it doesn’t lose its mojo - has got stronger. This firm thrives on innovation and adaptability. This is why am into ADBE.

Despite the absorption of Macromedia, it can still comfortably grow revenue by about 14% in fiscal 2007. I feel comfortable with this stock going forward.

Bank of America Shows Me the Money!

Next week the folio ka-chings! No, not the way you thought. The worst-known manager has picked Bank of America (BAC) to carry the banner for financials. For a long time I wanted to play financials with an Investment Banking stock. I was wary of the commercial (or consumer) banking sector because of its susceptibility to a flat or inverted yield curve, which makes banks’ borrowing costs higher than their lending costs.

However, I-banking stocks tend to behave like growth stocks and generally have higher Betas than their commercial banking counterparts. The folio is really growth-biased but I feel like a very low Beta (volatility) stock is needed to give it some balance.

Furthermore, since the folio is going to have direct exposure to only one US financial stock – the folio is indirectly exposed to foreign banks through EFA and EEM – it might as well be an “integrated” bank, which combines I-banking with commercial banking.

So an integrated bank it is. Okay, but then why not Citigroup (C) or JPMorgan Chase (JPM), BAC's erstwhile competitors? As a long-term investor I’ve used some of my most favorite fundamental metrics to rank C, BAC, and JPM – actual data points can be found at Yahoo Finance. Check this out:

Metric	Citi	Bank of Am	JPM Chase
Profitability
Profit Margin	2	1	3
Operating Margin	2	1	3
Management Efficiency
Return on Equity(ROE)	1	2	3
Growth
Quarterly Revenue Growth	3	1	2
Quarterly Earnings Growth	3	1	2
Balance Sheet
Total Cash	1	3	2
Total Debt	3	2	1
Cash Flow
Operating Cash Flow	1	2	3
Dividends
5-yr Avg Div Yield	3	2	1
Payout Ratio	2	1	3
Forward Annual Div Yield	2	1	3
Stock Volatility
Current Beta	0.42	0.47	0.67

I suspect the reason BAC is not top billing in ROE is its small global exposure. In 2005 it earned about 7% of revenue from overseas operations, compared to C (67%) and JPM (21%).

Now, I’ve examined BAC’s annual reports for the past three years – with particular attention paid to the Chairman’s letters, gleaned news archives and studied analyst reports that I can lay my hands on. There is no doubt that BAC plans to go global in a big way soon. En fait, it has to go global if it really wants to grow big. Right now, it is pushing against the regulatory ceiling for its core consumer banking business in the US.

BAC is well known for its generosity when it comes to dividends, but I decided to get into the stock really because of its growth potential and long-term performance. When you look on a global scale at where BAC is missing in action, Europe Middle East and Africa (EMEA) just jumps out at you. There is no smoke without fire and the recent rumor about a possible acquisition in Europe is not without merit. Bank of Am is on a treasure hunt in Europe; period.

In terms of performance over the long-term BAC has trumped C and JPM in stock appreciation on a trailing five-year basis. Not bad for a stock more known for being a dividend cash-cow. This historical feat is certainly no guarantee of future performance but here’s the real kicker about this stock going forward: I may not be a sucker for dividend income right now but baby boomers (1946-64) are.

When boomers start to draw income as they retire over the next few decades – there goes social security – stocks like BAC will be top of their list. I can’t think of any demographic change with the potential to benefit cash-cow stocks like BAC as the retirement of boomers. The demand for BAC stock is clearly going to do wonders for its appreciation.

On the balance sheet front, BAC’s smaller cash position compared to the other two banks doesn’t bother me as much as the huge debt. However, since the bank is numero uno in US deposits and a top-five wealth manager this makes sense.

Bearing in mind my aversion to the vulnerability of commercial banking to compressing net interest margins I take comfort in the fact that BAC’s revenue base is the least weighted in commercial banking - at 51%, compared to C (59%) and JPM (54%). My feeling is that BAC aims for a majority non-commercial banking revenue base, based on the growth rates of the firm's individual businesses. I certainly hope so.

In terms of growth expectations integrated banking stocks are fairly valued right now but are cheap compared to the overall financial sector. On a forward price/earning (P/E) basis, BAC is the cheapest of the three banks and the pull-back on Friday was an opportunity to buy a solid financial stock that is going places.

It was definitely a close call between Bank of Am and Citi. In the end, however, the long-term growth prospects for BAC did it for me.

So there it is. The financial stock vacancy in the folio has been filled. Next stop. Africa, the motherland!

Season Greetings Season Numbers

Last week the six-week winning streak of the manager over the S&P ended. This week, I actually end up in the doghouse, no thanks to the lingering effects of the collapse in techs last week. Here are the numbers:

Nasdaq +1.00%
S&P +0.94%
Dow +0.93%
Worst-known +0.92%

The Labor Department released November non-farm payrolls on Friday and Wall Street’s reaction was muted. The S&P advanced a paltry 0.2% and volume was nothing fancy. Many investors were probably skeptical of the higher-than-expected numbers. I was.

Apparently, about 15% of the 132K jobs created in November were in retail, the most for the sector this year! Ditto bars and restaurants; hotels and motels. These sectors accounted for the bulk of the gains in the payrolls but I bet you many of these jobs are temporary.

Once the holiday season ends, heads will roll in retail. The “hospitality” sector may not see as many job losses as retail because the choleric dollar continues to boost tourism. So check back with the Labor department in March before you put your faith in the strength of fourth quarter job numbers.

Are Techs Done for The Year?

Historians say December has statistically been the best month for stocks but there’s an increasing view on Wall Street that the December gravy train has already come and gone this year. The market rallied in September and October, when stocks typically dud.

So it's a wrap. Bears expect the market to be uninspiring and range-bound to the end of the year. Apparently today’s run-up – Dow up 0.7%, Nasdaq 1.5%, S&P 0.9% - is typical of high-octane starts to December. In other words don’t let it go to your head bull.

The bears may be right. Who knows? History may or may not repeat itself. But it does look like technology stocks are done. As October dawned I picked out the technology sector and the natural resources sector to shine this quarter. The rationale was that techs would get a holiday season bounce while the oil sector would benefit from colder weather as usual, all else being equal.

However, a quick analysis of my humble folio indicates techs appear to have lost steam over the past few weeks while natural resources has powered ahead. Over the past four weeks, EBAY, MSFT, and ADBE have posted average return-to-dates (RTD) of 7%, 6% and 5% respectively. Meanwhile SLV, IGE and EEM, which is weighted 17% in energy, have posted RTDs of 15%, 8% and 7% respectively.

Techs seem to have had their bull run. With all the talk of a slowing economy next year uncertainty – and fear of job losses - has crept into the minds of many consumers. It’s a bit too early to tell what December holds for techs but they have slowed their roll since October, when the Nasdaq posted a whopping 4.8%, it’s biggest monthly gain for the year so far.

Mind over Matter: Techno-crafting

This week my six-week winning steak over the S&P comes to end, albeit on the downside. Here are the numbers for the week:

S&P -0.30%
Worst-known -0.37%
Dow -0.70%
Nasdaq -1.91%

Who is responsible for this aberration? It’s technology stocks. But I’m a sucker for growth so there’s no love lost and I can’t do without them.

There’s a reason technology stocks often have high betas (or volatilities) – sensitivities to market swings: they can give up gains as fast as they earn them. For this reason always have, in addition to small-cap and/or mid-cap tech stocks, large-cap techs like MSFT, Intel or IBM in your portfolio.

These elephants tend to have “blue-chip” (or low) betas that will limit your downside risk when the market tumbles. To illustrate, consider the following table.

Top Five Stocks by Average Weekly Return to Date (RTD) for the past 5 Weeks

Stock	RTD(this week)	Rank	RTD(last week)	Rank
SLV	14.54%	1	13.32%	1
EBAY	7.70%	2	9.15%	2
IGE	7.63%	3	6.52%	3
EEM	6.19%	4	5.95%	5
MSFT	5.74%	5	5.97%	4

The top billings of EBAY and MSFT show they were among the best folio performers when the market soared in October and November. So it pays to hold technology stocks when everything is gravy in the market. However, when things fall apart as they did on Wall Street this week, tech stocks get hit hard because of their high betas.

Now, looking at the table above you might think that MSFT and EBAY, in particular, hung in there through this week’s bloodletting in the equities market but the table above masks their collapse. Here’s a ranking of the change in RTD from last week to this week – in decreasing order of magnitude:

SLV +4.81%
IGE +4.60%
EFA +1.38%
EEM +0.31%
IWR -0.49%
NHP -0.73%
IJR -0.99%
PBW -1.03%
PG -1.34%
MSFT -2.31%
COST -2.54%
ADBE -5.69%
EBAY -6.11%

Obviously tech stocks get slayed big time in market downturns. But notice that MSFT, which is a large-cap tech stock with a beta of 0.79 – the closer to 1 the less sensitive – fares much better than mid-cap techs ADBE (beta 1.81) and EBAY (beta 3.88!).

Were it not for the restrained negative reaction by MSFT my losses this week would’ve been greater since the folio is 15% weighted in the stock. So if you’re growth-oriented but eager to limit the downside not only does it pay to go tech, it pays to go big in tech.

Remember, the Trend is Your Friend

Wall Street takes a drubbing today to end the week down following the release of some weak manufacturing data. Investors overreacted in my opinion, though I understand the fear: the weak housing sector is starting to spill over into other sectors of the economy previously thought to be unaffected by the downturn in housing.

But some caution need to be exercised for two reasons. First, the data is only for one month, which does not signify a trend. Second, since manufacturing accounts for only 12% of economic growth why all the fuss?! It is consumer spending, which accounts for two-thirds of economic growth, which matter the most.

I'm not sushi. A downturn in manufacturing will mean job losses and thus less consumer spending but, like I said, a month's data is not indicative of a trend. Bears need to slow their roll.

Microsoft and the Danger of Complacency

Investors “bum-rush” the market on this last day of November, exchanging over 4 billion shares, almost twice the regular volume, just on the Big Board (NYSE) alone. This is definitely the hallmark of institutional buying and selling; money managers leave their marks on many stocks today.

Yet all the buying and selling fails to inspire much movement in the major indices. The market closes flat despite the deluge of economic data that continues to reiterate the…..soft landing – yes, you guessed right – scenario.

What about the dollar? Well it continues its descent against the Euro and the British Sterling – actually drops to a 14-year low against cable (sterling). U.S. exporters and multinationals may cheer the tumbling greenback but it’s safe to say many Americans – the ones that have passports that is - won’t be traveling overseas this holiday season.

Bonds actually see better action, buoyed by weak manufacturing data. The benchmark 10-year note rallies to yield to a 10-month low – more bad news for the dollar. Falling yields suggest the Fed is more likely to cut short-term interest rates than raise them, which is what the dollar needs right now.

Nevertheless, November has been good to Wall Street. The three major indices post gains for the month:

Worst-known mgr 4.25%
Nasdaq 2.75%
S&P 1.65%
Dow 1.17%

The Dow and the S&P have now posted their longest monthly winning streaks - six months - since August 2003, according to Bloomberg, something bulls will be really proud of.

All hail the Vista. MSFT releases the new operating system to business customers today, though you wouldn’t know this by the reaction of the stock price. You and I can expect to get our hands on the system from January 30. Wonderful! Now that Vista is out, what does MSFT do now? Going after Sony with the 360, or Apple with the Zune, is not the answer.

MSFT needs to get crazy innovative again because there is a danger lurking ahead. Web 2.0 is gaining momentum and many of the applications that made Mr. Softee rich, such as Word and Excel, are migrating from the PC to the internet.

Google already offers free web-based word-processing and spreadsheet programs to facilitate seamless collaboration. All this is probably old news to MSFT. But the problem with MSFT is that it likes to watch from the sidelines, until it is almost too late to catch up. If it's not careful, competitors will do to it what it did to Netscape with Explorer: nullify and void. Redmond, Washington, do you copy?

London Bridge is Falling Down

You want proof of “globalization”? Well, get this. Some US investors may be long-faced about the fall of the greenback but it seems British investors are up in arms about it – many UK large caps are exposed to the dollar through US investments. On a day when the major US indices barely breathe gain after yesterday’s bloodbath the FTSE, which is the UK’s index of the 100 biggest companies, is down for the sixth straight session.

If international investors are pulling money out of US equities in droves because of the dollar’s decline, one of the ‘excuses’ given for yesterday's market tumble, I can’t think of anywhere better than UK equities to put this money. The sterling, the British currency, is riding high against the greenback right now.

However, this doesn’t seem to be the case, at least going by the performance of the FTSE since the dollar lost it on Friday. So don’t let the weakening dollar keep you awake tonight again; the pain may be harder to swallow on the other side of the Atlantic.

Is Wal-Mart to Blame for the Market Thump?

The country’s biggest retailer reports a tepid fall in store sales. The stock market tumbles. Is there a connection between these two events? Did you think yes? Well you are wrong if you did. The fact is Wal-Mart’s problems are just that; Wal-Mart problems.

In October, when the giant retailer announced a flat rise in same-store sales, competitors begged to differ with better figures. I bet today’s announcement of a decline in same-store sales in November, apparently the first monthly decline for Wal-Mart in 10 years, will not be mirrored by competitors.

This is not a piece on Wal-Mart but today’s retreat on Wall Street has little to do with the firm’s announcement. After all, many people do not shop at Wal-Mart and the giant retailer does not sell everything under the sun.

If Wal-Mart is really not the scapegoat for today’s market tumble, can it be the decline of the dollar? I don’t think so. The greenback tumbled on Friday, and Wall Street’s already taken it on the chin. Actually, a weak dollar is good for US exporters and multinationals - when profits are repatriated from operations overseas.

So the dollar’s collapse should be good news at least for large caps. Oh, by the way, the dollar actually strengthens against the Japanese Yen today. Furthermore, markets across the water in Frankfurt, London and Paris also tumble. So the weak dollar is not the right culprit for today’s market decline.

Now if it’s neither the dollar nor Wal-Mart, what is responsible for rattling investors? Maybe the rise in oil prices played a part but it’s mostly plain old profit-taking. After months of running up there’s a belief that the market needs a correction to prevent stocks from getting overpriced.

So investors take some money off the table. Since the fourth quarter has historically been good for stocks some of that money will find a way back into the market soon.

In folio news, SLV is the only stock that holds its head in the bloodshed today. I’ve touted the values of SLV as a good diversifier of folio risk for a while now. It has a negative correlation with some folio stocks and very little positive correlation with others.

This means SLV moves mostly in opposite direction to other stocks and even the market. PG is another stock that behaves this way. Every portfolio should have stocks like PG and SLV. They’re like a bullet-proof vest: you may not think much of it until it saves your life.

Oil Pushes Wall Street Off the Edge

The biggest news of the day – the precipitous drop in the value of the dollar against other major currencies – may have had some negative effect on the market but it is not what actually pushes the major indices into the red. It is the rise in the price of crude that does.

The few investors who bother to trade today were already sulking over the inflationary effect of a weak dollar – higher prices for imported goods - when suddenly, OPEC puts the nail in the coffin with unofficial talk of further oil production cuts at the December meeting of the cartel.

A weakening dollar and a rising price of crude are the worst of both worlds for Wall Street since both fuel inflation, and thus engender higher borrowing costs for firms in terms of increased interest rates. From all indications the greenback will remain weak over the coming year so the only hope for investors is for oil to trend lower in 2007.

For the week, the folio beats the S&P in gains. Again! The last time the S&P topped the folio, which came into being in the second week of September, was the week ended October 6 – six weeks ago!

Worst-known +0.92%
Nasdaq +0.59%
S&P -0.02%
Dow -0.51%

Who are the stars that help the folio shine this week? Here they are:
Top Five Stocks by Average Weekly Return to Date (RTD)

Stock	RTD(this week)	Rank	RTD(last week)	Rank
SLV	13.32%	1	12.89%	1
EBAY	9.15%	2	9.54%	2
IGE	6.52%	3	6.19%	3
MSFT	5.97%	4	5.58%	5
EEM	5.95%	5	5.65%	4

SLV has occupied the number one spot for as long as the folio has beaten the S&P. I initially had doubts about holding SLV with IGE – they have a positive correlation of about 0.39 - and even stopped putting more money into it for a while. However, the increasing prospect of the dollar remaining weak through 2007 has given me second thoughts.

Though gold is a more popular hedge against a weakening dollar, and thus inflation, I prefer to hold SLV because I suspect many Central Banks will unload some of their gold reserves next year as gold rises in response to the weakening greenback. Since many of these banks don’t hold reserves of silver, the white metal won't suffer from supply-side pressures as much as the yellow metal.

Also, with regard to the folio, SLV is negatively correlated with more stocks in the folio than IGE is. In other words, SLV acts as a better diversifier of portfolio risk than IGE does. So not only has SLV been the star stock so far, it likely to remain so in the coming year. Of the precious metals, silver is where the smart money is.

Bears Sidelined in Comatose Rally

When the cat is away, the mice will play! Today’s muted market gains on way lower-than-average volume suggest many bears have hit the road, thereby leaving the bulls to play. It is likely that today’s rally will extend to Friday, since Wall Street is all gung-ho about “Black Friday”. Nevertheless, up or down market action on Friday will be lackluster.

Profit takers must have taken exception to my extolment of ADBE’s virtues yesterday because they’re all over the stock today. ADBE is beat down 1.74%, thereby giving up over half of yesterday’s 3% gain. Bless the profit takers! I often like to see some consolidation after such run-ups; otherwise there’s always the danger that a stock will become overpriced.

There’s still a vacancy for a financial stock. I’m apt to avoid the big boys – Citigroup (C), JPMorgan Chase (JPM), and Bank of America (BAC) – because they're exposed to the vagaries of the yield curve through their commercial banking businesses. But if BAC snaps up Barclays PLC of the UK as rumored, I’d have to take a hard look at the stock.

Barclays is a British blue chip with many tentacles – Barclays Bank, Barclays Capital, and Barclays Global Investors to name a few – so a successful tie-up with BAC should lessen BAC’s overdependence on commercial banking. Perhaps more importantly, it will help BAC gain a foothold in Europe and Africa, where rival Citi has had successes. I’m watching the space.

And Adobe Marches On

It seems Wall Street has already closed shop for the long weekend. The indices essentially vacillate around the flat line as investors get no economic data to chew on. Volume is also lower than normal; another signal that many investors stay on the sidelines.

However, oil spikes on news of weather-related disruptions to the Trans-Alaskan Pipeline (TAP), which transports about 4% of the US’s daily oil consumption, and some unscheduled refinery shutdowns. Don’t expect the spike in crude prices to last though, since inventories are still higher than levels at this time last year - Katrina contributed to shortages last year. This is why investors really shrug off the spike in oil prices.

A batch of economic data tomorrow will give investors probably the last chance to really play this week since Friday’s market action will be short – market closes at 1300 ET.

ADBE has really caught fire this month. Today it spikes 3% and then puts in another 52 basis points (0.52%) in after-hours trading. What is driving investors crazy about ADBE? It’s the upcoming release of Creative Suite 3 (CS3), which debuts in Spring 07.

The creative suite bundle of products is the numero uno money maker for ADBE – over 50% of the top line – and CS3 will be the latest version so its significance cannot be overestimated. Apparently there’s pent-up demand for CS3, in particular, because of better inter-operability with Macs.

However, ADBE is more than just a “quick buck” firm. Its fundamentals are strong, and are getting stronger by really any measure but just on ROE, it has averaged about 34% over the past three years – compared to 20% for MSFT, its arch-rival and nemesis. ADBE is one to hold for the long-term.

This firm is going to make a killing as more video and digital content in general migrate to mobile devices over the next few years. I don’t know why it took the comments of an analyst for investors to see what lies under ADBE’s hood. The engine that is ADBE is humming.

Emerging Markets on a Tear

I thought by now investors would know better not to decipher minutes of the Federal Open Market Committee (FOMC) meetings each time they are released. Maybe I don’t really understand English, but there is never a clear giveaway to bulls or bears in these minutes.

But some investors continue to react feverishly. Were it not for a sell-off soon after the minutes emerged today the indices were on course to match or even top yesterday’s gains, based on the prevailing “soft landing” in 07 scenario reinforced by the economic data released so far this week.

Nevertheless, buyers outnumber sellers to take the indices higher on strong volume support. The consolidated number of shares that change hands reaches almost 5 billion, similar to yesterday’s tally. Based on the volume over the past two days there is definitely widespread support on Wall Street for the current market rally. It is by no means losing steam.

From all indications the US economy – as measured by Gross Domestic Product (GDP) - is poised to slow down in 07 to a level in the 2% - 2.4% range versus 2.5% - 3% forecast for this year. Meanwhile Europe, and even slow motion Japan, is forecast to grow faster than the US in 07. But emerging markets (EMs) will be in a league of their own. This must be one reason why EEM has posted gains each session since last Wednesday.

According to the World Bank many EMs will next year grow between 4% and 6%, with outliers like India - 7% and China - 10%. To be sure, EMs have grown faster than mature markets – US, Europe and Japan - for a long time now but these days many US companies with international operations now derive a higher proportion of their revenues from EMs. When PG reported its FY2007 first quarter results last month, revenue from non-US operations topped 50% for the first time in the firm’s history. This is a growing trend amongst US large caps.

What does this all mean? I believe against next year some rotation into EMs or US firms with large non-US operations is called for. The manager never invests in large caps without exposure overseas – this is why I picked COST over Target - but this week I increased my direct positions in “foreign” stocks from 28% to 30% - EFA down to 21% from 22%; EEM up to 9% from 6%. It is likely to remain 30% through next year. The US may sneeze in 2007 but the rest of the world won’t catch a cold.

Microsoft to Apple: Watch Your Back

Market action today is weird. Volatility is a tad higher than yesterday, especially with the mixed economic data picture. But this was expected so nothing strange there. However, after trading around the flat line for most of the session, the indices suddenly spike up sometime around 2.30 pm ET.

Some observers put this down to market-friendly “fed speak”, following some comments by an active voting member of the Federal Reserve that suggests the fed will not be raising the funds rate anytime soon. Others note that it is “technical” action by the S&P that drove the buying frenzy.

The S&P broke through a resistance – or ceiling - around the 1390 level after several attempts, which means it is now likely to trade above this level going forward. This reportedly prompts heavy buying activity of S&P futures in the futures market, which rubs off on investors with money to burn.

The truth is probably somewhere in between the fed speak and the technical action though the latter seems more plausible to me since fed speak is now too common to have such an effect on the market. Nevertheless, the S&P will need to trade above 1390 for a couple of sessions to give the breakthrough some credibility and stamina.

Needless to say, the Dow and the Nasdaq both post ample gains in sympathy with the S&P. Volume is also high, so a lot more buyers than usual register their bullishness.

The Zune is here. MSFT’s “iPod killer” hit the stores today. Seriously, with Apple’s (AAPL) 75% market share and a five-year head start, inter alia, MSFT has its work cut out. However, despite being late to the party as usual I would not count Mr. Softee out. It destroyed Netscape when it came out with Explorer (Internet Explorer) and it has been giving Sony’s PlayStation a run for its money with the 360 (Xbox) video game console.

How would I know when the Zune starts to get on AAPL’s nerves in this MP3 battle? When AAPL starts to talk increasingly about how bad a job of catching up to the iPod the Zune is doing. Right now AAPL is not saying much because it doesn’t view the Zune as a threat.

Techs Power Ahead

In terms of economic data this week is going to be the busiest of the month. So I expect market volatility to be high. To me this is a signal that this week may not be a good one to get in and out of positions, since many stocks are likely to oscillate more to market sentiment than to firm-specific issues. It is a week to stay cool, calm and collected unless compelled by an external force – meaning firm-specific issues – to act otherwise.

In the absence of economic data today techs benefit mainly from positive analysts sentiment. So of the indices the Nasdaq gets off to the most auspicious start on regular consolidated volume around the 4 billion mark. The rest of the week matters more than today to Wall Street though. In the greater scheme of things today is just the calm before the week storm.

Today, the folio starts to trade with NHP, a health-care real estate investment trust (REIT). After several weeks of research NHP seems to me one of the best health-care REITs out there in terms of transparency, diversity of revenue base and operators, dependency on Medicare and Medicaid, and operating fundamentals.

I believe a health-care REIT is a better way to play the health-care sector than pharma, biotech or health-care operators. Pharma and biotech stocks tend to have wild price swings and top-lines often dependent on the success, or failure, of one or two drugs, just to name a few dislikes. Besides, the sectors are too esoteric for me.

As for health-care operators, I just feel it is better to own the landlord – the REIT that is paid rental income – than to own the tenant – the operator of properties leased from a REIT.

It seems investors have put the sudden resignation last week of ADBE’s CFO behind them. The stock resumes its uptrend today and may find support around the $40 level by the end of the week. After all, the firm has just entered a big product cycle, having just begun the shipment of Acrobat 8, its new internet formatting software.

Also, a new version of Creative Suite 3 (CS3), its software design tool – it includes the ubiquitous Flash technology - and ADBE’s most important product in terms of revenue generation is slated for release in May 2007. Expect ADBE to bring home the bacon going forward.

Investors Resigned to Their Fate on Dems

Yesterday, Wall Street reacted feverishly to the takeover of Congress by Democrats. Today, investors seem resigned to their fate. Volume is substantially down from yesterday. The absence of economic data contributes to a lackluster ending to the trading week.

However, the Composite put in a late run to muster a stellar 2.5% gain for the week. Techs are really trying to end the year with a bang after getting battered in H1. Next week will see a more energized market action as a slew of economic data hits the Street. The sell off yesterday was a warning signal to Democrats: roll back the tax cuts on dividends and capital gains and watch the Big Board go red for days.

ADBE comes under pressure as expected, albeit in a civilized manner, which suggests that Wall Street does not view the departure of the CFO as a “clear and present danger”. Needless to say, I use the pull-back to snap up some more ADBE shares.

The folio does it again this week. It seems to have settled into a pattern where it beats the S&P and the Dow in weeks when the market ends up, but still manages to hold on to some gains when the market thumps. The Nasdaq is such a tough nut to crack when the market does well. Here are the gains for the week:

Nasdaq 2.53%
Worst-known 1.88%
S&P 1.22%
Dow 1.02%

Investors Get Jittery over "Benign" Gridlock

Wall Street had wanted a divided legislature where a red Senate and a blue House checked and balanced each other on business related issues. What investors get today is a Democrat-dominated Congress. The reaction is a sell-off in stocks across the board, especially in sectors viewed by investors as likely targets of heavy scrutiny by Democrats – pharma, defense, oil, which is spared a rout only by the rally in oil prices.

However, there were some signs that the run-up this week was about to be snapped. As the indices rallied over the past three days, volume on the Big Board (NYSE) and on the Composite (Nasdaq), in particular, decreased progressively. A combination of higher peaks and lower volumes often indicates that a rally is losing steam.

Volume today is unusually high though, which suggests that tomorrow may see another sell-off, perhaps more restrained. Having said that, I don’t think the negative reaction to a Democratic Congress will last, after all there is still a Republican White House to deal with.

In folio action ADBE announces a management shake-up after the closing bell, which sends the stock further down. The stock is going to be under pressure from tomorrow until it’s clear why the CFO, who had held the post for only five months, suddenly resigned. The pull-back in ADBE will create a rare buying opportunity though. I may get my hands on some.

Vista Tops Election "Bounce"

The newswires catch fire on this post-election day. Straight out of the gates, the major indices had traded below the flat line until MSFT came to the rescue midway through the session. Mr. Softee announces that Windows Vista, the new operating system from the software giant, is done and dusted to be shipped to retail customers on January 30 and suddenly the market comes alive. Not even the fact that the Congressional gridlock that Wall Street yearns hangs in the balance could stop the rally.

The MSFT announcement doesn’t do much for the stock price in live action though. Investors have adopted a wait-and-see attitude until Vista starts to ship. MSFT expects consumers to make a “fast and immediate” switch to Vista. However, based on the release dates – corporate customers get it from November 30 – a discernable impact on MSFT’s top-line is unlikely to be seen for several quarters after January.

So the question is: what firm-specific fundamental will move MSFT’s stock before Vista starts to really impact revenue? Although I’m tempted to say Zune and Xbox I think it will essentially be plain old valuation.

The projected earnings that analysts will price into MSFT’s valuation, and thus into the stock, will provide some upside support in the near-time. However, this means that by the time Vista starts to sell as expected by MSFT much of the impact on the stock will have been priced in, unless Vista becomes a blockbuster like XP. In this case the stock will gain additional upward momentum from “earnings surprise”.

With Zune I’m afraid I don’t think this will really do much for MSFT’s bottom line until it proves it can challenge the iPod’s dominance. Xbox itself is still losing money, though this is what MSFT expected. But with market leader Sony about to release PS3 and Nintendo also slated to unveil a new console for the holiday season, will Xbox ever get a chance to turn a profit?

PBW benefits noticeably from a rally in oil prices and election bounce. Political pundits see better days ahead for alternative energy technologies in the next Congress. I happen to agree with the pundits on this one, simply because the current Republican executive has voiced more support for green technologies than the ousted Republican dominated Congress.

For exposure to health-care, and by default exposure to the real estate sector, I’ve finally decided to go with Nationwide Health Properties (NHP) rather than Ventas (VTR). I’m already exposed to VTR through IWR, which coincidentally also has some health-care real estate investment trusts (REITs). I know this is double dipping in health-care REITs but eventually I intend to replace IWR with individual Mid-Caps. For now the ETF will do.

Hopefully, NHP will pull back over the next couple of days to present some buying opportunities. If everything goes to plan, the vacancy in the folio for health-care should be filled by this time next week.

Adobe Matches Microsoft Rapprochement

Wall Street strengthens hope of a deadlocked Congress with a mini-rally to top yesterday’s run-up. There is strong support on the volume front, as the number of shares that change hands rise considerably from yesterday’s tally, in particular, on the Composite (Nasdaq).

Although most investors have bet on legislative gridlock, there is less consensus on what the market reaction will be should a one-party majority emerge in both chambers. Anyway I think any adverse or sanguine market reaction will be ephemeral; attention will quickly switch back to economic data once the political circus ends.

ADBE and MSFT have gone at each other for years. So it’s not that surprising that hot on the heels of MSFT's recent thumbs up to Linux, the open-source system developed by Novell, ADBE announces reportedly the biggest software code donation to the Mozilla foundation. Mozilla developed Firefox, the open-source web browser that has slowly captured market share from MSFT’s Explorer. ADBE seems determined not to be outshone by Mr. Softee. It’s your move MSFT!

Rumors of an EBAY exit from China surface again, despite pronunciations to the contrary by management on the earnings call last month. Such an exit will suggest EBAY cannot compete in a tough but growing market. With growths in key developed markets at a plateau where will EBAY go if it can’t stand the heat in China? First Japan, now China?! Honestly, EBAY needs to ride out the Oriental express, not hop on and hop off.

Wall Street Begs for Legislative Gridlock

Perhaps it’s a sense that the market sell-off last week was unjustified. Or maybe it’s the buyout frenzy that private equity firms orchestrate, which suggests that equities may still be historically undervalued. How about the consensus that Wall Street cherishes a deadlocked Congress, historically viewed as the most sanguine for business interests?

Any or all of these reasons could explain today’s run-up in equities, despite the rise in oil prices. Even bonds rally slightly in the home stretch. The major indices all close up to recover all of last week’s losses and then some. However, support on the consolidated volume side is slightly lower than the average posted last week, which suggests that some buyers remain cautious. Profit-takers will definitely be in action later this week; even in a bullish environment some gains are always consolidated.

Overseas, the rally in equities is replicated on major bourses in Asia, Europe and South America. World markets, like Wall Street, seem to be betting on a legislative gridlock in tomorrow’s mid-term elections.

The rising tide lifts all stocks in the folio. EEM is particularly impressive with a 2.4% run-up. It is helped by strong foreign purchases of Brazilian equities in October and today’s moderate rise in crude prices – EEM is 10% weighted in Brazilian stocks and 18% weighted in energy stocks. If foreigners are buying into Brazilian equities, it is likely they are also buying into other emerging markets, which bodes well for EEM.

I’m still on the hunt for health-care real estate investment trusts (REITS), the preferred gateway into the health-care sector. I’ve narrowed my choices down to two REITS – Nationwide Health Properties (NHP) and Ventas, Inc. (VTR). At this point NHP is in pole position because preliminary research shows it to be more diversified - in terms of operators and sources of revenue, more transparent, and less dependent on Skilled Nursing facilities and Hospitals - properties that derive the bulk of their income from Medicare and Medicaid. By the weekend a final decision will be made.

Mind over Matter: Rotation

Once again it’s time to get into the mind of the manager; to examine my investment tactics and strategies.

The worst-known manager essentially follows the "dollar cost averaging" (DCA) principle. In DCA the same amount of dollars is periodically invested in a stock so it really doesn’t matter when it is purchased. If a stock is riding high at the time of purchase, your dollars get you less of it; if the stock is momentarily getting beat up in the market you pick up more of it.

So to a large extent DCA avoids the necessity to time the market to “buy low, sell high” – at least the buy part. Unless you are a day trader, which I am not, timing the market can be difficult.

Also, DCA is much better than periodically purchasing a set number of shares; it doesn’t make economic sense to buy the same number of shares when a stock is trading at $50 and when it’s trading at $20.

I build on the principle of DCA by having a pool of dollars to invest each month. But rather than invest an equal amount of dollars in each stock, I take the pool and slice it to take advantage of seasonal changes.

For instance in Q4 - the holiday season – consumers tend to spend more on tech products. So this quarter I’m likely to put more money in techs and discretionaries – MSFT, EBAY, ADBE, and COST – than in consumer staples – PG or health-care. When the weather is about to get colder or during the summer driving season - when demand for crude oil typical rises - more dollars will be rotated into IGE and SLV.

Furthermore, when the economy slows large caps like PG, EFA, MSFT will see more green than smaller caps and emerging markets – IJR, IWR, and EEM. Large caps do better when the economy slows because they have the market share and resources to weather a slowdown.

As an active investor, this strategy just suits me fine. Since the economy constantly changes it’s only right that the folio take advantage of these changes. So far the strategy has served me well. As of Friday, only ADBE and PBW had posted negative returns to date on a cost basis.

Stock	FirstBuy	LastBuy	RTD (11/03/06)
SLV	9/12/06	9/12/06	12.97%
EBAY	9/29/06	10/23/06	9.05%
IGE	9/12/06	10/23/06	5.88%
EEM	9/29/06	10/23/06	4.64%
MSFT	9/12/06	10/23/06	4.52%
EFA	9/12/06	10/23/06	3.18%
PG	9/12/06	10/23/06	2.07%
COST	9/29/06	10/23/06	1.83%
IWR	9/29/06	10/23/06	1.36%
IJR	9/29/06	10/23/06	0.30%
ADBE	10/23/06	10/23/06	-0.84%
PBW	9/29/06	10/23/06	-1.54%

Wal-Mart Declares War on CostCo

What the numbers is going on at the Labor Department? The department says the number of jobs created by firms in October was 92K, versus expectations of 123K. So it’s a disappointment for Wall Street. But then the payrolls for August and September are revised upwards; the September numbers bumped to 148K from the 51K announced on October 6. What?! That’s almost triple the October announcement.

This huge discrepancy doesn’t really make the headlines as much as the absolute numbers but can someone remind the Labor Department that the markets do react to these numbers, especially at times like these when economic indicators continue to give conflicting signals. As someone commented on CNBC, investors already have a long list of risks to contend with; “statistical risk” should not be added to these.

Anyway the market ends a five-week winning streak. Geopolitical concerns induce a jump in oil prices that rattles investors already jittery from confusion about the strength of the economy. The Dow shows no green at all this week while the Nasdaq again gives up some of the stellar 4.79% gain made last month.

It’s been a dismal start to November for Wall Street. All hopes of a rally in equities now rest on stronger indications of higher consumer spending during the holiday season.

To boost sales over the holiday period Wal-Mart (WMT), whose sales stagnated last month, comes out of the left field with a decision to cut prices for many electronics. The decision knocks COST for six as many investors interpret the WMT move as the declaration of a price war. Many “big-ticket” items sold by COST are electronics.

COST already operates on ultra thin margins – less than 2.7% versus 5.9% for WMT. So this WMT move is undoubtedly a challenge for all discount retailers, even WMT itself. Honestly, I don’t really see much room for maneuver for COST in terms of price cuts.

Although COST is the nation’s largest warehouse discounter – it sells more than WMT’s Sam’s Club - it probably will have to hold its ground on prices, take some losses on the sales front this holiday season, and then recoup these losses from the membership fees it charges.

The market thumps for the week but the folio still manages to scrape a tiny gain, helped by IGE and SLV’s gains from the rise in oil prices.

Worst-Known +0.06%
Nasdaq -0.84%
Dow -0.86%
S&P -0.95%

From next week the market will be completely at the mercy of economic data. The earnings season will be "gone with the wind".

Oh, do I think the elections on Tuesday will dramatically impact the markets? No! Although there are more Republicans than Democrats on the Street the rich still set the rules in America, and the last time I checked Congress is still part of America.

Has Microsoft Lost the Battle Against Linux?

The market continues its reluctant “correction”. I say reluctant because it barely changes from yesterday’s close. This is hardly surprising, since investors typically hold fire before payroll numbers emerge on the first Friday of each month.

I think a conundrum that worries investors has emerged. Economic indicators continue to point to a slowing economy and rising inflationary pressures, albeit tempered, at the same time. So Wall Street can’t seem to ascertain whether the Fed’s first move from the current “do nothing” stance will be to raise interest rates to curb inflation or cut rates to prevent a recession.

That’s why an important indicator like payroll numbers, or the number of jobs created by companies, has taken center stage in the mind of Wall Street over the past few days. If the number of jobs created in October falls way below the consensus of 123,000, which to me seems like a huge leap from the 51,000 created in September, the market may sell off.

Companies often ramp up hiring in October through December, but aren’t many of these jobs part-time retail positions created to deal with holiday season spending or to cover workers that plan to go on extended leaves? Anyway, tomorrow can’t come soon enough for Wall Street.

I’ve never used Linux - the open-source operating system developed by Novell – but it must be giving MSFT a run for its money as the software giant surprises the market with an “interoperability” – I know it’s a mouthful – agreement with Novell. MSFT says in a conference that the two firms will still compete but co-operate in the best interests of “customers”.

I think this is a tactical move for MSFT, after all Linux, and open-source software in general, has been gaining popularity with consumers and grabbing market share from Windows. So how do you stop an adversary’s advance on your turf? Make him your friend!

Meanwhile I was caught off guard by EBAY’s 3.5% run-up today. I can’t seem to find any news behind this drive so the impetus appears to be that the stock has broken through a key resistance level of $32. From a technical analysis standpoint once a stock breaks through a resistance after several tries, it often finds support around this price, i.e., the resistance now becomes a floor price. EBAY has tested $32 over the past week so it is likely to find support around this price going forward.

For added support EBAY’s 5-day moving average (MA), which crossed the 10-day MA to the upside on October 19th, has trended above the 10-day since. When shorter MAs cross longer ones to the upside, a stock’s upward mobility is more credible.

Earnings Fade into Distant Memories

It’s a bloody start to November. Earnings surprises continue to be on the upside but the bulk of S&P firms have now reported – as of last Friday 74% of 304 S&P firms had beaten the Street consensus. The earnings season really concludes this week so the attention of most investors shifts from earnings to economic indicators.

Now any bearish indicator is bound to spook investors. Today is a harbinger of things to come if indicators don’t hold up. The Nasdaq gives up 1.37% of the impressive 4.79% gained last month while the Dow heads south for the fourth straight session. Participation is strong as consolidated volume reaches almost 5 billion shares.

However, the killer chop could be Friday’s payroll numbers. If the numbers fall way below expectations the bulls will need to dive for cover.

ADBE stumbles into negative territory for the first time since I bought it. Not to worry. ADBE will definitely regain its footing in the quarters ahead as its slew of new products hit the market.

Only MSFT and SLV are spared in today’s market rout. SLV, just like gold, often benefits whenever the dollar weakens or is forecast to weaken; when the economy is slated for a slowdown; or when the oil price rises. Since the first two scenarios are all but guaranteed going forward, I expect SLV to trend upwards into much of 2007.

I suspect MSFT continues to defy gravity on expectations of the releases of Vista, Zune, Office, Server,..............

P&G Deserves the Benefit of the Doubt

Historically, October has always been a jittery month for the equity market. The stockmarket crashes of 1929 and 1987 happened in October. Furthermore, historians have noted that the market often bottoms in October, which actually makes the month probably the best time to go on a stock buying spree! Not this October though. Apparently it’s the best October in three years. This year the Nasdaq helps the market “flip the October script”.

Techs have been down for much of the year, especially in H1. But since September they’ve rallied and the Nasdaq has beaten the Dow and the S&P in gains almost every week. However, the October rally gets a little tired today as profit-takers take some money off the table to leave the indices really unchanged from yesterday’s session. Does this mean that the ghost of October has finally been put to rest in 2006? I doubt it but only time will tell. For now, Wall Street cheers for October 2006.

A folio stalwart makes the headlines today. Although PG results exceed expectations, and management increases guidance for fiscal 2007, investors still frown on the guidance for fiscal Q2, which ends in December. Wall Street can be so myopic sometimes! Why fret over “organic” growth, which excludes acquisitions, divestitures and foreign exchange effects, when the firm is in the midst of a core product reconfiguration that should boost organic top-line?

Look organic growth matters but I believe the integration of Gillette and unit growth in emerging markets will also do wonders for PG’s bottom line in fiscal 2007. PG is a well-run firm so management deserves the benefit of the doubt on organic growth.

For the month the folio hangs in there with the market. It manages to beat the S&P. Had I bought ADBE much earlier than last week, the folio would probably have rallied as much as the Nasdaq did over the month. Nevertheless, it’s a good workout for the folio in October. Here are the stats for returns for October followed by weekly returns:

Index	October	Week1	Week2	Week3	Week4
Nasdaq	4.79%	1.84%	2.49%	-0.64%	0.36%
Dow	3.44%	1.47%	0.93%	0.35%	0.73%
Worst-known	3.37%	0.40%	1.97%	0.75%	3.59%
S&P	3.15%	1.03%	1.19%	0.22%	0.64%

Investors Get Slightly Tired

Are investors tired of the market rally? After last week’s run-up in equities and a so-so earnings and economic data picture today, only tech stocks see much action, which suggests investors may be a little weary. The volume of shares traded is noticeably down to less than 4 billion, compared to almost 5 billion posted each day last week.

Investors seek bargains amongst tech stocks, which were battered for much of the first nine months of the year. The hunt for undervalued techs gives the Nasdaq some lift, though this is less than half the decline posted last Friday.

There seems to be continued rotation out of energy into techs and discretionaries, fuelled by a steep decline in the oil price and renewed forecasts of milder winter weather this quarter. Well have any weather forecasters been to the Northeast lately? It doesn’t feel like a mild winter in New York at the moment!

Regardless of a milder winter, the bottom is unlikely to come out of oil prices as long as OPEC acts. Oil peaked in July not on the back of fundamentals but on sentiment – primarily geopolitical worries and expectations of another “Katrina”. So oil may give up the odd gain but OPEC action and colder weather will continue to prevent a repeat of the collapse in price from July to September.

PG, the bellwether for consumer staples, reports fiscal 2007 first quarter results tomorrow morning before the opening bell. I expect the results to be good partly because Kimberly-Clark, a PG competitor, posted good results last week. The savings from the integration of Gillette should also continue to filter to the bottom line.

Techs Bleed!

The preliminary Q3 GDP year-on-year growth rate of 1.6% is weaker than expected – consensus 2.1%. Profit takers use this weakness as an excuse to consolidate some gains after a week-long run-up in the equity market. Even a rise in the influential University of Michigan consumer sentiment index can’t stop the moderate sell-off, which gets strong support on the consolidated volume side – more than 4.5 billion shares change hands. Tech-laden Nasdaq, which sheds 1.2%, bears the brunt of the sell-off. It’s good to see investors pause for breadth today after the rally this week.

PG is the only folio member that defies gravity – earnings are poised to beat expectations when revealed next Tuesday. ADBE and EBAY, which have the second-highest and highest beta respectively of folio stocks, take some beating; both give up almost all gains from yesterday’s trading, a testament to the idiosyncrasies of high-beta stocks!

Nevertheless the folio this week benefits tremendously from the following changes - made to position it for higher consumer spending and colder weather this quarter:

Stock	Previous Weight	Current Weight
ADBE	0%	8%
EBAY	2%	4%
IJR	2%	3%
IWR	2%	5%
PBW	2%	3%
COST	4%	5%
EEM	7%	6%
SLV	7%	4%
PG	16%	11%
MSFT	16%	18%
IGE	18%	13%
EFA	22%	22%

The techs - MSFT, ADBE, and EBAY - gain weights since consumers tend to spend a lot more on tech hardware and software during the holiday season. PG, a consumer staple, loses some folio weight for the opposite reason that techs gain. The weight losses for IGE and SLV are just reductions in the "overweight" nature of natural resources in the folio. For comparison, the S&P index is about 12% weighted in natural resources stocks. The Japanese economy is doing well while Europe continues to impress. Therefore EFA retains its lead within the folio.

The result of these changes is impressive! The folio, which really is a new one – with the addition of ADBE, this week easily beats the Street:

Index Week return
Worst-known 3.59%
Dow 0.73%
S&P 0.64%
Nasdaq 0.36%

Yesterday, during MSFT's earnings call no one asked about life after Vista and Office 2007. One analsyt came close with a question on capex but doesn't quite hit the nail on the head. Am I the only one who wonders what MSFT's going to do with almost $34BN in cash?!!

Almighty Microsoft: After Vista, Then What?

The rally on Wall Street continues as buyers jump in on any pullbacks in the major indices to mop up shares. Concerns about the broader market now being overbought have started to get louder but buyers aren’t trying to hear it. Earnings continue to fuel the gravy train. The reversal in oil prices also contributes to impressive gains across the board. Consolidated volume support is high, with more than 5 billion shares changing hands. Investors have gained more confidence since the Fed stood pat on the funds rate yesterday.

MSFT reports a higher-than-expected profit and revenue for the Q1 FY2007, which ended on September 30. Forward guidance is in line with the Street consensus. However, the upside earnings surprise doesn’t impress investors. Although it gains 14 basis points (bp) in live action, MSFT actually dips slightly in after-market trading.

What does MSFT have to do to impress investors? Ship Vista as planned and then find ways to monetize more assets and energize growth. I don’t understand why MSFT is sitting on a $34BN cash pile. MSFT is still viewed by many, me included, as a growth firm. A growth-oriented firm should not have so much green sitting pretty. It suggests MSFT is running out of ideas. While consumers and investors get sidetracked by Vista, I think MSFT needs to get really innovative again. Just trying to grab market share from Sony, Apple and Google won’t do anymore. There's bound to be some questions on life after Vista during today’s earning call. I’ll be all ears.

It's the Earnings, Stupid

There can be over a million interpretations of the statement that accompanies the Fed’s decision to leave the funds rate unchanged at 5.25%. My humble interpretation is that the statement is not so different from the one that accompanied the last FOMC meeting on September 20. The market seems to see it this way too as investors suck it all up in a restrained manner. The major indices close a shave higher on high volume.

The focus now shifts back to earnings. So far, almost 75% of S&P firms that have reported have beaten Wall Street expectations. Regardless, what matters most to investors now is not the last quarter but forward guidance: what the expectation is with regard to corporate performance next quarter and next year. This week will see majority of S&P firms report. So the earnings season is winding down. Phew!

In folio action a positive earnings report from Amazon (AMZN) rubs off on EBAY, which manages a 2.5% gain in live action. Actually EBAY appears to have broken through a resistance level – or ceiling price – over this past week. This means it is now likely to trend upward in the near-term.

ADBE boosts its fiscal Q4 earnings guidance and the stock responds positively. Its fourth quarter ends on December 1. It also holds a live webcast of a Q&A session on the side of a tech conference to give insights into current projects. ADBE’s product pipeline is very rich and the innovation fervor that drives this company will continue to propel this stock in the long-term, starting from next month when the first of its next-generation - or Web 2.0 - products emerges. ADBE really excites me. I believe this firm is really a diamond in the rough!

Techs Need Spark From Microsoft

Trading on days leading up to Federal Open Market Committee (FOMC) meetings is often circumspect because investors want to get a sense of where interest rates may be headed in future before playing the market. Although the Dow manages to close a tad higher, today is no exception to the cautious approach by investors. The S&P is really missing in action and Nasdaq suffers from no leadership today.

I think what tech stocks need right now is a spark from MSFT, which reports fiscal year 2007 first quarter results on Thursday. The movers and shakers of the tech sector need MSFT to get Vista and Office 2007 out not now, but right now. PC makers need the software because many consumers don’t want to buy a PC and then shed blood to upgrade software - today’s announcement to offer coupons to PC makers goes some way to allay such fears. Other software makers want to see Vista so they can build software to complement it or compete with it.

The broader tech sector also holds its breadth as many consumers that have to decide between that Plasma TV, for instance, and a new computer adopt a wait-and-see attitude before. If I had planned this holiday season to make a big purchase of electronic gadgets or even a top-of-the-line mobile device, I will not make any moves until I know what it will cost to upgrade to Vista. I’m sure there are many people out there who think like me.

So, all eyes are on MSFT right now. Over the past few days even the stock can’t seem to get any traction. The earnings guidance that MSFT will provide on Thursday for Q2 and the rest of FY2007 may light a bit of fire under the stock but the energy the stock really needs will come when Vista starts to ship in November.

Once Loathed eBay now Loved?

At least 150 of S&P's 500 firms have now reported Q3 earnings and over 70% of them have reportedly beat Wall Street expectations and offered bullish guidance going forward. A fear of losing out on the spoils prompts many investors that had been on the sidelines to rush the market.

The result is a broad market rally supported by strong consolidated volume. The high volume indicates wide support for the rally. A rally with no support on the volume side isn't that credible; it usually means many investors aren't convinced there is underlying strength to sustain it. The large caps benefit the most from today's rally as the Dow comes off the leash.

The consensus on the Street is that the Fed will leave the interest rate unchanged at 5.25% on Wednesday. This outlook has already been priced into today's rally; otherwise there wouldn't be a rally. So this week more buyers should enter the market based on the good earnings momentum, unless the Fed drops some hawkish hints on future interest rate moves after the meeting on Wednesday.

EBAY, which has traded as low as $22.83 this year, is suddenly a “darling” on Wall Street. Several analysts opine that on the site core (or auction) listings, which generate more money than store listings, have indeed been on the rise since EBAY in August raised prices for store listings. Now everyone wants a piece of EBAY. It jumps more than 4% in live action. EBAY’s weight in the folio has doubled to 4%.

MSFT reports after the markets close on Thursday so investors really hold fire on the stock today. Wall Street expects MSFT to meet consensus but not top it. Regardless of Thursday’s report i think MSFT is set for a rally this quarter. Why? Windows Vista will soon be here!

New Portfolio Ready for Year-end Sprint

Ever since I started to contemplate the addition of Adobe (ADBE) to the folio Apple (AAPL) has haunted me. Do I have an apple or do I add adobe spice? Lately, I’ve been seeing a lot more Macs around the way, so there’s no doubt that Apple is moving trailer loads of laptops. And I can’t help but feel like the only one in New York without an iPod. But won’t the iPod eventually go down the same memory lane as did the Sony Walkman? Also, Macs may be selling like hot cakes but the computer hardware business is less profitable than software. iTunes rocks, but its sector seems to have a low barrier to entry.

Meanwhile the list of vendors with platforms that run on ADBE’s products seems to get longer by the day…MSFT, Apple, YouTube (now part of Google), MySpace (now part of News Corp.), Yahoo, etc. ADBE’s revenue base is more diversified than Apple’s. So an apple a day may keep the doctor away, but I’d rather have some spice.

ADBE pulled back in trading yesterday so I jumped in to buy some. Better buy now than wait till November when ADBE starts to release all those new products in the pipeline. The addition of ADBE jolts the folio and some reallocation is induced. PG, IGE and SLV shed the most weight to make way for ADBE.

The worst-known manager often reallocates the folio to accommodate new entrants and to position the folio for seasonal changes. Technology and energy are probably the two sectors best poised to benefit from a combination of holiday season spending and colder weather this quarter.

The Organization for Petroleum Exporting Countries (OPEC) has surprised the market with a bigger-than-expected cut in oil production that takes effect from November 1, just as colder weather starts to eat away at those high crude and heating oil inventories that have kept oil prices down. Techs, in particular software players, do not feel as much squeeze from rising oil prices as consumer staples (PG) and consumer discretionary (COST).

Ok, so what's the tactic behind the Q4 shuffle? Voila:

Likely to benefit the most from high oil prices: IGE, PBW, SLV, EEM, and EFA

Likely to benefit the most from low oil prices: PG, COST, EFA, IWR, IJR, EBAY, ADBE and MSFT

Don’t care much about oil price: MSFT, ADOBE, EBAY, and EFA

Likely to benefit the most from higher consumer spending: COST, MSFT, ADBE, EBAY, EFA, IJR, and IWR

I can't wait for the new folio to get to work on Monday.

Portfolio Trumps Broad Market

The volatility in the market today is a tad higher than usual as stock options and futures expire. The ridiculousness of the Dow's price-weighted valuation shows as Caterpillar, whose capitalization is less than 10% of oil giant Exxon’s, another Dow component, is held solely responsible for the index's slip into red.

Anyway, the indices close flat as the broader market gives the bulls something to smile about with a slight move up in the home stretch. Despite the deluge of earnings, it’s really a lackluster week for Wall Street. The earnings rush continues next week.

Since its inception the folio this week trumps the market for the first time:

Index Return
Worst-known 0.75%
Dow 0.35%
S&P 0.22%
Nasdaq -0.64%

The market is theoretically the most diversified and neutral – in terms of volatility – so it is hard to beat. I know, I know. It’s only a week’s performance; nevertheless the worst-known manager is proud of this small achievement.

eBay’s Best Pal is PayPal

Earnings come out right, left and center today and Wall Street can’t keep up. Trading gets very erratic as the indices trade sideways for much of the session. The weak gain in the Conference Board’s leading economic indicators only adds to investors’ ambivalence. It’s already clear the economy will slow in 07, and the mixed earnings picture so far supports this view. The major indices edge up on steady volume.

In folio action, EBAY sizzles on the back of stronger-than-expected earnings and favorable guidance for Q4 and 2007. I’ve always suspected that EBAY’s near-term fortunes are tied to PayPal. After listening to yesterday’s earnings call, my conviction is stronger. The growth of the online auctions business has tapered off – especially in key markets of the US, UK and Germany. Emerging Markets is where it’s at now for their auctions business, but competition here is fierce, to put it mildly. BTW I’m glad EBAY’s decided not to cut and run from China like it did in Japan.

What about Skype, EBAY’s “communications” business? I’m still not convinced about how profitable this could be for EBAY. Not only does it face competition from guys like Vonage, the giant Telcos see Skype as nothing but a market grabber hiding behind the internet. From what I hear these “Ma Bells” have significant lobbying power in Washington. Regulatory uncertainty is a considerable risk for Skype and others like it.

Enter PayPal. It already accounts for 24% of EBAY’s top-line. This share is bound to increase as PayPal grows faster than the other two businesses. Right now, PayPal is the only EBAY business that is taking no prisoners in its sector. MoneyGram and Western Union are already feeling the heat. Watch out Visa and MasterCard! So the purchase of PayPal is the best thing that’s happened to EBAY since its IPO. However, PayPal alone won’t save EBAY. I’m sure management knows this, so am holding on to the stock. Unless something disastrous happens, like a sale of PayPal. Then I’ll file for divorce!

It’s Good to See Red

Inflation fears give investors an excuse to grab profits and send all the major indices down a shave. It’s about time! Once in a while the market needs to consolidate gains; a run-up with no brakes makes me nervous.

PG couldn’t have picked a better time than today to stop its bleeding. It’s been down in all sessions since Friday, October 6. However, it is the only folio stock that holds its ground today. It is helped by a little bit of “flight to quality”, which tends to happen when investors are rattled. It’s also helped by the fall in the price of crude, but I’m not betting on oil to keep falling. Colder weather is bound to put a floor under the price if not boost it.

EBAY reports tomorrow. Recently I dug into their 10-K to see what the future holds. It’s scary to read this document. It’s full of warnings about so many developments that could “harm our business”. Anyway I think PayPal is going to be very important to EBAY’s bottom line over the next few years. The jury is still out on the purchase of Skype, and many Skype users will probably jump ship once EBAY starts to charge for those free VOIP calls. What, did you think they were going to be free forever?!

BTW I love Yahoo! Finance's new interactive charting tool. Excellent tool!

Earnings vs. Indicators

It’s going to be wild on the Street this week! In addition to an earnings deluge that begins tomorrow, several important economic indicators will emerge. Will the market react more to earnings than to inflation-benign economic data? I really can’t tell but would think so, simply because earnings are the most fundamental signals of corporate health.

Anyway the market starts the week on a good footing. The rotation out of staples continues as more investors want to participate in the seasonal market run-up with more cyclical sectors. The indices all close higher on bullish expectations for corporate profits.

EBAY reports on Wednesday. If earnings don’t match or beat the Street consensus, it may mean that the tactic in August to raise fees for store listings has not had the desired effect of increasing auction listings, which bring in more money for EBAY. We’ll see.

I’m impressed by PBW’s performance since it joined the folio. This clean energy exchange-traded fund (ETF) has returned 7.62% since I bought it last month. That’s more than the 7.19% the Nasdaq has gained year-to-date (YTD)! I was a bit worried that its fortunes will be tied entirely to that of IGE, which is also a natural resource ETF, but the two haven’t always acted in concert. I bought PBW as an upside hedge on IGE.

I’ve still got three sector vacancies for the folio: Health-care, Financials, and Africa (excluding Egypt and South Africa). The search continues.

What's Wrong with Procter & Gamble?

Although the Dow closed last week on a record high PG, a member of the Dow, is the only folio stock that made no advances in any of the week's exuberant trading sessions. I've spent all weekend reading any business story or column that mentions PG but can't find any negative "publicly available" information. In fact PG insiders have been mostly purchasing stock over the past month. Also, none of the research or models I've seen suggests the stock is overvalued compared to its peers.

So I scratch my head. Then it hits me. It's the fourth quarter!

It's that time of the year, otherwise known as the holiday season, when Wall Street falls out of love with sectors like consumer staples and gets in bed with season blazers like tech, in particular, software stocks. Actually there have been some indications of this rotation out of staples. One has been short interest (SI), a bet that the price of a stock will fall going forward. In September the SI on PG was up 25% on the previous month. To be sure, PG is not alone. The SIs on other sector giants, namely Wal-Mart, Altria Group, PepsiCo and Coca Cola, were all up.

A more recent indicator has been the recent run-up in technology-heavy NASDAQ. After trailing the Dow and the S&P in gains for much of the year, the NASDAQ last week returned more than the other two indices combined.

So what is wrong with PG? Nothing really. In my opinion, it remains a solid stock with sound fundamentals, if you don't mind the sizable long-term debt on the balance sheet. It's just that time of the year. But, who cares? As long as I shave with Gillette am in it for the long-term with PG.

World Markets Set Record Highs

From Japan to Mexico, major stockmarkets around the world notch closing highs and/or touch intra-day trading highs. Japanese stocks set things off as the NIKKEI 225 surges to close at its highest level since May. London’s FTSE 100 catapults to a five-year high on the back of runs by natural resources stocks and encouragement from US equities.

Wall Street's ambivalence to benign economic data and GE’s results fails to hold back investors, who nudge the major indices up on light volume. Buyers seem to outnumber profit-takers. It’s a week for the bulls.

The folio shrugs off PG’s fall in six straight trading sessions, the first for any folio stock, to set a record return for the week; it beats the previous record of 1.82%.

Index Return

NASDAQ 2.49%
Worst-known 1.97%
S&P 1.19%
Dow 0.93%

Earnings Fuel Buying Frenzy

The Market comes off the leash as a slew of Blue Chip earnings energize Wall Street. Some short covering is undoubtedly involved as money pours into the market. Although volume is not unusual it’s a strong broad market rally; even for European markets. Technology-laden NASDAQ surges 1.6%. I think the stage is set for some profit taking tomorrow.

On the strength of impressive runs by COST, EEM, EFA, and MSFT, the folio makes its single biggest day gain yet. COST swings for the fences with a stellar 7.7% advance. During a bullish conference call with analysts it offers cautious guidance for Q1 2007 and fiscal 2007 that is in line with forecasts. This is just what the doctor ordered for COST. Recently, it’s been in the doghouse as investors sought direction from management.

I can’t fail to notice that Adobe Systems (ADBE), which I’m eyeing for the folio, gains almost 3%. As always, this is a double-edged sword because I may have to pay more for it.

Beta on my Mind

The minutes of Federal Open Market Committee (FOMC) meetings are so carefully crafted that one has to read between the lines to make head or tail of them. So I find the minutes boring and tend to base my judgment on the unanimity of the vote. Any dissension at all indicates that the decision taken on rates is not settled.

The market reacts negatively to the minutes of the September 20 meeting. Investors are still concerned the fed may raise rates. The indices close down marginally for the first time this week.

Wall Street also yawns at OPEC’s threat to cut production, which sends crude prices even lower. OPEC’s production, excluding Iraq’s, is already below its quota. So unless actual production, rather than the quota, is to be cut the threat is useless and the oil price will likely lose more steam in the absence of other supportive fundamentals.

Meanwhile, I’ve got Beta on my mind. Beta measures the volatility of a stock relative to the market, typically the S&P index. The market has a neutral Beta of 1. So if the market declines a stock with a Beta higher than 1 is likely to decline much more than the market does; a stock with a Beta smaller than 1 less likely so. The opposite is also true; when the market gains, high Beta stocks tend to do better than the market.

EBAY’s very high Beta of 3.45 and the seasonal Q4 run-up in software stocks make me think the folio needs a software stock with good long-term prospects and a Beta higher than MSFT’s 0.48 but lower than EBAY’s. I think Adobe Systems (ADBE) fits this profile. Over the next few days I will do more research on ADBE (Beta 1.88) with a view to adding it to the folio.