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.

Google is Spoiling Microsoft's Show

Alcoa, which unofficially kicks off the earnings season, sets a good tone for Q3 profits but doesn’t beat analysts’ forecast. Due to the market’s strong performance in Q3, Wall Street’s expectation for corporate profits has been set very high. So any company that deviates in the least from forecast is bound to be punished. The market still manages to close a shave higher.

Windows Vista. Office 2007. Zune. Xbox games galore. A pipeline of new products from a software giant usually excites Wall Street. So I’m baffled by MSFT’s decline in four straight sessions. It must be Google’s acquisition of YouTube, after all the video sharing portal does compete with MSN Video. The all stock deal is probably worse for Yahoo; nevertheless, it’s supposed to be all about MSFT right now. Once the Street digests the acquisition, I expect MSFT to regain its footing.

I look forward to COST’s earnings call on Thursday. Over the past month, the stock has been neither here nor there – 10 advances and 11 declines, and I expect some tough questions from analysts.

Wall Street to North Korea: So What?

How can tensions rise on the Korean Peninsula and investors not kick up a fuss? Earnings and Oil! The earnings season gets underway this week as Wall Street eagerly awaits corporate profits for the third quarter. Alcoa kicks things off tomorrow. To investors, North Korea's reported underground nuclear test is just an irritation at this point.

Also North Korea is not the second-largest oil producer within OPEC. Iran is. Wall Street is more concerned about the potential impact on crude prices of sanctions on Iran.

So investors shrug off North Korea's gambit and the major indices close slightly higher in muted market action. Google can't wait for the closing bell to announce its acquisition of YouTube. I like GOOG, but isn't it trying to be the jack-of-all-trades these days? I'm sure it's going to sell off many of these "ancillary" services in a few years.

Slowly but surely EBAY and COST continue their upward march. COST reports fiscal 2006 Q4 and fiscal year earnings on Thursday. Its steady climb could be derailed if it fails to meet expectations.

Thinking About Doing Business Deals?

Investing in Stocks and Bonds is good for your wealth. Investing in Businesses is even better. When it comes to business investing, I try to learn from the best. Phillip Green, the British Billionaire who controls some of the UK’s largest retailers, is undoubtedly one of the best. He offers 10 ground rules for doing business deals. Here they are:

• Assess risk rather than reward: “Don’t worry about the upside; that will take care of itself.”
• Work out your exit before you do anything else: As any business investor will tell you, always have an exit strategy
• Do not over-borrow: “Make sure you feel there is comfort in your financing.”
• Never buy a business based on the price you think you can sell it for: “Buy on the basis that you are prepared to own and run the business yourself.”
• Always stay in the area of business you know: “Stick 100 percent to your knitting.”
• Always meet the opposition on your home ground
• Be a tight timekeeper: “When you are in the middle of a deal, you don’t want to be left sitting around.”
• Sign the deal on the day you agree final details: “Once people have had a sleep, they wake up with a whole load of new ideas and problems.”
• Lead the principal negotiations yourself: “Do not leave two lawyers in a room on their own – they will only have an argument.” Enough said
• Keep a tight team around you.

Buckle Up for a Soft Landing

As usual on the first Friday of each month, payroll numbers emerge. The September numbers are neutral. I think Payroll and wage rate numbers are more credible than the unemployment rate, since the latter is based on a survey of “households”. Not everyone that is unemployed says so or is even looking for a job. Is someone without a job but not looking for one unemployed? Unemployment is notoriously difficult to measure.

Anyway the data seem to reaffirm the bullish “soft landing” in 07 scenario. The Bond market agrees as Treasury yields rally. Stocks close down marginally, probably due to profit taking more than anything else.

Soft landing. Soft landing. Hmnnn. Of the folio stocks COST is likely to be the most hurt by a soft landing in 07. Unlike PG, it is more of a consumer discretionary than a staple though foods constitute about a third of its business.

Google (GOOG) is rumored to be in talks to buy YouTube. I don’t see what this has to do with EBAY but investors seem to disagree. EBAY sheds about half of Wednesday’s gains. EBAY’s Beta of 3.45 makes it the most volatile of folio stocks so am not surprised it’s been in Brownian motion this week. Only SLV and IGE see green today. Even almighty MSFT sheds gains.

For the week, the folio doesn’t make a particularly strong debut:

Index Return

NASDAQ 1.84%
DOW 1.47%
S&P 1.03%
Worst-known 0.40%

ZZZZZZzzzzzz!!!!

Wall Street snoozes as investors hold their fire for tomorrow’s employment numbers. Few economic indicators move the market as much as payroll numbers and the outlook on inflation – and thus interest rates. If the numbers really disappoint, it could create a dip in this runaway market and an opportunity to buy. I'll stand by. Investors give short shrift to OPEC’s rumored threat to cut production to defend oil prices. The indices close flat.

In portfolio action IGE and SLV, the main beneficiaries of rising oil prices, rally. More analysts believe that core listings on EBAY are on the rise. It makes me more confident in the run-up I expect from EBAY this quarter.

EBAY Redeems Itself

Fed Chairman Bernanke speaks in Washington but really steers clear of bullish or bearish market moving statements in my opinion. Nevertheless, bullish sentiments on the Street move the market higher on high volume; the Dow closes deep in uncharted territory - whatever.

The stellar performances of both NASDAQ and S&P indicate a broad market rally. However, the ferociousness of this rally suggests the phenomenon of “momentum” is in play. I am nervous. Momentum investing is like asking for more drinks when you are already drunk. It is an anomaly and there’s bound to be some market correction in the days and weeks ahead. Investors seem to be laughing now to cry later. Regardless, I’ll take the gains.

The folio hops into positive territory after the negative dip yesterday. EBAY more than compensates for Monday’s loss with a respectable 6.1% gain. Actually, I think there’s more upside to EBAY and COST going forward than PG and MSFT. Why? Moving Averages. That’s why. Right now, EBAY and COST are trading above their 50-Day moving averages but still below their 200-Day averages. Both MSFT and PG are now trading above the 200-Day and 50-Day averages. I get the creeps when a stock strays too much, ceteris paribus, from its moving averages.

All the ETFs shine. Even IGE, battered and bruised from the drop in oil prices, manages a 1.2% gain. My faith in IGE remains strong. Small Caps (IJR) and Mid Caps (IWR) hitch rides on the back of the broad market rally to snap a four-day losing streak. What a relief! IWR’s performance over the past month has been woeful.

Entries You Missed

Monday, September 11, 2006

I’ve wanted to get into stocks for a long time, but never really had the financial muscle to dabble. Now thanks to the concept of “Dollar Cost Averaging” and opportunities to buy fractional shares at some online discount brokerages, I decide to jump in. I am more of a buy-and-hold strategist though won’t hesitate to sell if distress signals go off on a stock.

I do some research on stocks and exchange-traded funds (ETFs), set up my ‘fundamentals’ and Portfolio tracking spreadsheets and am ready to go.

Tuesday, September 12, 2006

The folio debuts with two stocks and three ETFs:

Procter & Gamble (PG) 20%
Microsoft (MSFT) 15%
Silver ETF (SLV) 15%
Natural Resources ETF (IGE) 25%
International Stocks ETF (EFA) 25%

PG: Other than its good fundamentals PG is a hedge on those annoyingly expensive Gillette Mach3 and Fusion blades I shave with

MSFT: Who wouldn’t hold MSFT?!! It has zero debt and is a global giant in a high-margin sector

SLV: My knowledge of the precious metals industry and the fact that Warren Buffet has stashed up on silver get me into this ETF. But I hear gains on Gold and Silver investments are taxed as collectibles at the max rate of 28%, rather than 15% on dividends and capital gains, so I won’t be bulking up on this puppy for a while. I decide to get indirect exposure to precious metals

IGE: This natural resources-centric ETF suits me just fine. A very nice collection of North American Oil and Gas, Oil Services, and Precious Metals firms. The long-term prognosis for the Oil Price is definitely up. Not too sure about precious metals. Anyway, get in while you can folks

EFA: Overseas is where the juicy growth is. This ETF offers exposure to developed markets of Europe, Australasia and the Far East

The investment strategy of the worst-known portfolio manager is to pick large-cap US stocks with sound fundamentals and international exposure, and to use ETFs to get exposure to regions or sectors that are too big to pick through.

The folio makes a gain of 5 basis points (bp) on its debut. Nothing compared to the 103bp gain for the S&P 500 though. MSFT gains carry the folio as PG and IGE dud. Phew! Long way to go as a portfolio manager.

Wednesday, September 13, 2006

The three major indices – Dow, S&P, Nasdaq - are on a mini rally for the week. But the rising tide doesn’t lift all boats. The folio gives up all of the previous day’s gains.

Thursday, September 14, 2006

MSFT takes a cue from Nasdaq and continues the week rally as the Dow and S&P snap. I hear on Bloomberg Radio that Q4 is seasonally the best for software sales. Maybe that’s what driving MSFT. The news tempts me to check out Electronic Arts (EA), the video games maker. But EA’s competitive environment is bloody. Gets me thinking about Small Cap stocks though. The folio duds for the second straight day.

Friday, September 15, 2006

TGIF. Don’t know why, but I always like to think of Friday as a bullish day for the market. Investors look forward to the weekend and this Friday feeling spills into some buying. This wishful thinking bodes well for the folio. It gains but not it’s enough to recoup the losses over the past two days. MSFT keeps a clean record for the trading week. Of the indices, only the Nasdaq and the German DAX do the same. German investors must love the new government and female Chancellor.

I definitely have to bolster and restructure the folio. Don’t like my position in SLV. Why hold both SLV and IGE? That’s “double-dipping” since IGE sports many producers of precious metals. The overweight in SLV and IGE combined is a drag on folio gains. I have to act.

No data releases to materially move the market this week.

Monday, September 18, 2006

Spruced up the folio spreadsheet over the weekend. They say if you can’t measure it then you can’t improve it. So I now track ‘declines’ and ‘advances’ each day for each stock and the overall folio. The aim is to catch any falling star before it hits the ground.

Also ran PG’s numbers through the spreadsheet. The ratios look good though the Gillette purchase has introduced a lot of long-term debt into the balance sheet. Does this bother me? No. PG’s management is efficient and margins are growing.

Today is lackluster for the market. Likewise it is mixed for the folio and the change in gains is flat. The week-long MSFT rally comes to an end.

The folio is about to get a new look. Here’s a look at the prospective newcomers and proposed weights:

eBay 4% (EBAY): I trade on EBAY and like the business model. Plus it has a global presence and an intuitive growth strategy. Yet to run the numbers though

CostCo 8% (COST): I was looking for a consumer discretionary with international exposure and/or ambitions and found it in COST. Would have picked Target (TGT) instead but it currently has no ambitions outside the US. Plus I hear that the many of COST’s club members are actually above-median income folks, contrary to popular belief. Any firm that serves a lot of rich people is worth holding! To be sure, I have to run the numbers to really know what am getting into

US Small Caps 4% (IJR): Small Caps have outperformed large-caps over the past few year so why not. This is no guarantee of future performance but a little exposure shouldn’t hurt. This ETF tracks the S&P SmallCap 600 Index

US Mid Caps 8% (IWR): Another ETF to gain exposure to a sector that is too big to monitor closely. IWR tracks the Russell MidCap 800 Index

Clean Energy 4% (PBW): I’m a firm believer in the long-term prospects for renewable energy, in particular solar, and any technology that lessens the dependence of American motorists on gasoline. This ETF is a carefully crafted collection of firms engaged in all sorts of clean energy technologies. It tracks the WilderHill Clean Energy Index. I didn’t even know there was a clean energy index

Emerging Markets 12% (EEM): Did you know that emerging markets have outperformed developed markets for much of the last decade or more, even with all the volatility? I believe emerging markets will continue to outperform mature markets for years to come. This ETF is heavily weighted in South Korea, Taiwan, Brazil, South Africa, China, Russia and Mexico; 20 emerging markets all told. Seems well diversified to me.

As a result of the newcomers, here’s what the folio will look like soon:

eBay (EBAY) 4%
US Small Caps ETF (IJR) 4%
Clean Energy ETF (PBW) 4%
CostCo (COST) 8%
US Mid Caps ETF (IWR) 8%
Emerging Markets ETF (EEM)12%
Natural Resources ETF (IGE) 12%
Procter & Gamble (PG) 12%
Microsoft (MSFT) 16%
Intl Large Caps ETF (EFA) 20%

Tuesday, September 19, 2006

Oh my goodness!! Everything is red in the market today and only the strong survive. The market awaits the decision tomorrow of the fed on the funds rate and discounts a rate unchanged. But inflation fears creep in and the market unwinds. PG and MSFT prove their mettle but their gains are not enough to save the folio from shedding gains. It remains in negative territory.

I often hear that the market seasonally bottoms out in September; or is that October. Anyway I eagerly await a bottom so I can buy. Is today the bottom? I don’t buy today so maybe I’ve missed a good chance to buy! Damn.

Wednesday, September 20, 2006

Feds funds rate is expectedly left at 5.25% and the market signals its approval. Stocks rise and the rising tide lifts all folio stocks. Well, almost. The falling oil price drags IGE down, which in turn keeps the folio from moving into positive territory.

Thursday, September 21, 2006

The market rally yesterday is short-lived as the Conference Board’s (CB) index of leading economic indicators falls for August. Suddenly the market sentiment turns negative and the talk of recession and “hard landing” permeates the air. All the major indices give up yesterday’s gains but the folio moves into positive territory, buoyed mainly by EFA and SLV gains. This uncorrelated movement of the folio to the market gives me some confidence that the folio is reasonably diversified. I hope the new folio will be just as resilient.

Friday, September 22, 2006

US stocks fall again and the malaise has spread overseas as European and Asian indices take hits. The folio erases some gains but remains in positive territory. PG is the star of the week, having maintained its rally despite the unfavorable market data from the CB.

It hasn’t been a good week for the market. Meanwhile overseas, Australian stocks extend their losing streak for a fourth day. What is going on down under?!

Monday, September 25, 2006

Over the weekend, I introduce an early warning system into the model (spreadsheet). Now, a distress signal goes off whenever declines double advances for any stock at any time.

After last week’s bloodbath on Thursday and Friday investors regain their composure today amid talk now of rate cuts by the fed possibly starting as early as December. In addition, oil prices ease due a combination of factors both fundamental and political. So there is euphoria on Wall Street and stocks gain across the board.

The folio moves deeper into positive territory, shrugging off an oil price-induced decline in IGE, and brings uneasy smiles to my face. A little nervous because am yet to buy, and it seems I really have missed a chance to get in on a low.

A friend describes the movements of the folio as ‘vague’. Well, I note gains and losses for the folio relative to cost, not by absolute amounts unless the change is significant. For instance, if folio cost (or total cost of all shares) is $20, then the Folio closes in positive territory if its market value at the end of the day tops $20.

Tuesday, September 26, 2006

Today is spectacular for the market. The CB's Consumer Confidence gauge for September increases more than expected from August and all indices build on yesterday’s gains. It must be the fall in gas prices for consumers. The talk on Wall Street is of a “soft landing” in ‘07 rather than a hard one. More “experts” predict a cut in interest rates by year end.

Good Lord! EBAY, a candidate for the new folio, rises more than 5% after an analyst reiterates a buy on the stock based on a forecast of stronger performance in Q1. This pushes the stock way above what I hope to buy it for, which is somewhere in the $26 - $27 range. I pray for the stock to come down to earth soon.

The folio has been on a positive territory rally since Thursday and the gains pile up. PG has performed even better. Its rally is now a week old. Most analysts believe that the integration of Gillette, purchased in October 2005, has been remarkably fast and successful. Though I agree the acquisition is a major coup for PG, I’d rather wait and see the numbers when the next annual report comes out. I intend to buy more shares of PG though. It’s an excellent defensive play for any folio.

Wednesday, September 27, 2006

These days, the government and private “research” outfits inundate the market with data on the health of the economy. It’s hard to know which ones to take seriously. I’m not too fond of government data, partly because there is often a huge margin of error associated with these data, and partly because I’ve chosen to take cues from just a few sources. The CB is one such primary source.

So a rash of mixed economic data emerges from ‘secondary sources’ and sends the market into schizophrenia. Wild upswings and downswings characterize the market as bulls come out to play and bears come out to slay. Finally the bulls win and the Dow flirts with its all-time closing high, set in the heady days of the tech boom back in January 2000, before it closes up.

Investors overseas have got in on the action from yesterday and all the major global indices close up. Japanese stocks do particular well as the NIKKEI index puts in a stellar performance. This reflects in a 76 basis points (bp) rise for EFA, which is heavily weighted in Japanese and British stocks. An unexpected rise in the oil price boosts IGE by 169bp. However, SLV, up 205bp, is the strongest performer today. Can’t really put my finger on why; must be partly related to the performance of IGE since these two ETFs are quite correlated.

Needless to say, the folio hits its highest level ever and I hope it will find a new base in positive territory to break out from. On the downside, I’ve definitely missed the best chance to buy before year-end so will have to get in with the new folio at higher than anticipated prices. This means the number of shares I’d be able to buy, based on dollar cost averaging, will be fewer. Too much of a good thing can be sometimes bad for you.

Thursday, September 28, 2006

The market seeks direction in a mixed economic news environment and finds none. But the Dow closes nearer to its all-time closing high. Where are all the profit takers?!

Anyway I find the fuss about the Dow’s push for an all-time high purely psychological. It is only 30 stocks, while the S&P 500 is a much broader index. The S&P is a better gauge of the economy.

EBAY shines again, putting in a 476bp gain on a respectable volume of almost 22 million shares. Its PayPal unit settles consumer protection lawsuits with regulators. Such settlements always benefit a stock. Who wants to engage in legal wrangling when there’s money to be made?

PG and MSFT, two stalwarts of the folio, take breathers to close with marginal retreats. The folio ends the day flat. Tomorrow is the last trading day of the week, the month, and the quarter – a rare coincidence.

To buy or not to buy before Q4: this is the question. I’ve already missed several opportunities in the market to buy. My patience is wearing thin but I need to act on reason not on emotion.

Later, I dig into Yahoo! Finance, a great resource, to research historical prices. Over the past five years – 2001-2005 – average prices have been highest in Q4 for COST, EBAY, MSFT and PG, with few exceptions. Wonderful! Have to put this information in a table as a quick reminder in future:

Year Highest Prices Lowest Prices

COST

2001 Q1 Q2
2002 Q1 Q4
2003 Q4 Q1
2004 Q4 Q1
2005 Q4 Q2

EBAY

2001 Q4 Q1
2002 Q4 Q3
2003 Q4 Q1
2004 Q4 Q1
2005 Q4 Q2

MSFT

2001 Q2 Q3
2002 Q1 Q3
2003 Q3 Q1
2004 Q4 Q1
2005 Q4 Q1

PG

2001 Q4 Q2
2002 Q3 Q1
2003 Q4 Q1
2004 Q3 Q1
2005 Q4 Q1

Prices are quarter averages.

The evidence is strong enough. Buy. Buy! Buy!!

Friggin tired of hearing about HP’s spying probe; really. Does anyone understand the whole thing? Now politicians are getting involved. Anyway, I don’t hold HP so don’t care.


Friday, September 29, 2006

Good news from the land of the rising sun. Japanese unemployment remains near its lowest level for eight years. This could benefit EFA, which is almost 25% weighted in Japanese stocks. Hope the new government can keep things rosy in the world’s second biggest economy.

Another assortment of mixed economic data hits Wall Street. The consistent theme to all these data is that the housing market is in trouble. Consumer spending accounts for two-thirds of the economy, so the market frowns upon an indication that it slowed in August. Stocks snap a four-day rally and the three main indices close marginally down.

To position for the seasonal run-up in prices in Q4 I jump in to buy and the new folio debuts. However, folio stocks, except IGE, take cues from Wall Street and give up some gains of the last four days. Nevertheless, the new folio closes in positive territory.

For the week - 09/22/06 to 09/28/06 - the old folio beat the S&P by 1bp:

Index Return
S&P 1.83%
Dow 1.83%
Worst-known Manager 1.84%
Nasdaq 2.30%

Overall, it’s a very good week, month and quarter for Wall Street. Overseas, Aussie stocks shine as the All Ordinaries Index keeps a clean slate for the week.

Brazilians elect a new President on Sunday. EEM is 11% weighted in Brazilian stocks. Not a huge chunk. But Brazil is a so-called BRIC (Brazil-Russia-India-China), the bellwether for emerging markets sentiment. So I don’t want a political deadlock like the one we had in Germany a few months ago or even like the sour grapes scenario that plays out in neighboring Mexico.

My thoughts on the health-care sector refuse to go away. Baby Boomers (1946-1964) will start retiring soon. It’s time to position for a boom in demand for health-care. However, I don’t want to mess with pharma, biotech, or even health-care services stocks since am not well versed in how these guys make money. Luckily, I get tipped off on health-care real estate investment trusts (REITs).

I keep hearing about Web 2.0., apparently the next generation of internet-based services. I wonder if MSFT and EBAY, the two large-cap techs in the folio, are already in on this.

Monday, October 2, 2006

Over the weekend the new folio restructures to account for the weight of SLV, which was omitted in the last reorganization.

First trading day of the week, month and quarter is a dud. The batch of economic data released only reaffirms the ‘soft landing’ in ‘07 consensus on the Street. The major indices close flat though technology-laden NASDAQ takes a comparatively bigger hit. Actually, the market may not budge much this week until Friday’s unemployment numbers.

In market action EBAY sheds just over 3% on rumors of an exit from China. Everybody is entering China. Why EBAY would want to exit beats me.

Actually, there is a dilemma with EBAY. By most measures of profitability and efficiency, fundamentals are on the right trajectory, just about. It carries no inventory, of course, and is debt free as of 2005. But which competitor(s) to compare EBAY’s numbers with? Amazon? Yahoo? Google? These guys don’t do much of what EBAY does.

These days one can’t rely just on fundamentals though. Accounting numbers can, and do, get manipulated. On Yahoo! Finance the regular checkup on background news and insider transactions (or Directors’ dealings) raises no red flags on any stock. But the short interest - number of shares shorted – shows a sizeable increase for PG in September. This bearish market sentiment portends a fall in PG prices moving forward. Maybe the short sellers have got it wrong. I’ll wait for the October sentiment.

Tuesday, October 3, 2006

Oil comes to the rescue of the market as the bottom comes off futures prices. Uncle Sam’s decision to suspend the filling of the Strategic Petroleum Reserves (SPR), a little-known weapon often wielded to influence crude prices, and a forecast of no major hurricanes this season, induces a gang-up on oil. The market sentiment continues to shift towards domestic and international large-caps, such as MSFT, PG, EBAY and EFA. The Dow closes at a new all-time high. I yawn.

IGE, which houses producers of petroleum and precious metals, and SLV, which is a hedge on inflationary pressures induced by rising oil prices, are crushed by the collapse in oil prices. As a result, the folio is dragged into negative territory for the first time in two weeks. I have to keep my composure. Oil should regain its footing as it gets colder.