We come now to the question on every investor's mind this weekend: What should I do about the election? Ah, that.
First, let's look at where we stand heading into it. The market went up quite a bit in September, then dropped quite a bit in October, rose last week, and now sits at a crucial testing point as far as the charts go. Most technicians see a drop next week. Here's the headline and teaser from Helene Meisler's column at Realmoney.com:
Get Ready for a Dip After the Election From a technical standpoint, that's how the market is setting up here.
That would almost certainly be the case if we end up back where we were in 2000 when it took six weeks to figure out who the next president would be. More than anything, the stock market hates uncertainty and few things create greater uncertainty than not knowing who will be president.
But what if a clear winner emerges on Wednesday? Conventional thinking holds that the market would rise on relief. The election cloud would lift and we'd be on our way to a winter rally.
Or would we? It's possible that the president has kept the economic house of cards standing just long enough to look acceptable going into Tuesday. When time's up, the props fall, the market gets a look at the real state of affairs, and the Dow drops. My old friend, Dan Denning at Strategic Investment, summed it up nicely in a note to clients yesterday:
If you believe in the Plunge Protection Team, then you'd be of the opinion that President Bush needs the Dow over 10,000 and a third quarter GDP growing at 3.7% going into next week. Once Monday's behind him...the floor falls out from under the Dow.
What's a person with money to do? In the sage words of the mafia hit man in Dinner Rush, "Keep it."
As in, keep it safe. If you've been following the advice on this site for any length of time, you should already be well-positioned in some cheap stocks and funds. If the market drops considerably, they won't drop as much and they'll benefit more when an uptrend establishes itself. That way, if all goes well next week and stocks line up behind Google on its way past $200 per share, you won't entirely miss out.
Then again, if all does not go well and the flush lever flips to its full downward position, your portfolio won't disappear in the swirl. Instead, you'll be able to pounce on cheaper prices and wait for happier headlines. That's my plan.
Now, let's take a look at last week's suggestions. I bought Maxtor at $3.25 and it promptly dropped to a low of $2.87 last Friday before closing at $2.96. You can now buy shares for about 9% less than I paid, a move that I believe will prove wise in the end, a time frame whose precise definition I'll wisely keep to myself.
I said that it would be a coup to get shares of UTStarcom under $17. It gapped down to about $16.50 last Wednesday and I bought. It closed Friday at $17.12, but I think you'll still be able to buy under $17 sometime next week.
Semiconductors rose last week, but it's not too late to get onboard that train. The election week should give us some volatility and the beauty of investing in a mutual fund, like Profunds Ultra Semiconductor that I mentioned, is that you can time your purchase to happen on a day when the market is down. When you place an order to enter a fund, the money buys at the price upon market close. If the market is dropping, you know the price will be lower. If it's rising, you know the price will be higher. It's not much of an edge, but handy nonetheless. When the bull rushes Wall Street for Christmas, technology will do well and this fund should be at the front of that trend.
I'll close with a note I sent to Peter, who wrote asking if it was time to short Sun Microsystems after its rise from $4 to $4.50 in the past two weeks. Or, he wanted to know, will it rise higher before dropping back down? That is the eternal question. Here's an excerpt from my reply:
You're putting me on the spot with this one. I always feel with Sun that buying below $4 is good and that buying above $5 is too late. So what do I say at $4.50 other than that it could go either way? Not much, so...it could go either way.
I have about half of my money in cash ready to pounce when we can finally get what I expect to be a winter rally going. What I can't tell now is what the election is going to do to the market. I haven't bought yet and can't say for sure when I will. I'm cautious, which means I'd rather wait.
Wish I could be more clear for you, but so much of investing is precisely about this. When things are not clear, don't make moves. When they are clear, do.
I began thinking of shorting Google at around $150 per share, then wrote after the market closed last Friday that I thought it could break $200, and that that should be the new place to start thinking of shorting. Now I'm wondering if it should be higher still.
Jim Cramer spoke about this subject on his October 22nd radio show. He said that although he doesn't necessarily think Google should trade higher or that it must trade higher, he believes that it could. He said that if somebody held a gun to his head and he had to choose whether to sell it or buy it at its current price of about $170, he would buy.
Then he presented his reasoning. Wall Street expects GOOG to earn $3 next year. Cramer thinks it'll earn $4. The question then becomes at what multiple should a leading internet company trade at? eBay trades at 80 times earnings. Yahoo! trades at 100 times earnings. Splitting the difference gives us 90. Run 4 times 90 and you get a target price of $360. That's a 112% rise from here.
Is that possible? Cramer's thesis is that people will pay almost anything for growth. Google is actually growing faster than either Yahoo! or eBay at the moment, so his target P/E of 80 might be on the conservative side.
The best thing to do now is watch. I haven't shorted yet and am certainly not planning to buy. If it shoots past $200 and keeps climbing, let it climb. If people are eyeing the two most expensive stocks on the market as Google's peers, it could be a long time before we see a correction. Let's watch and wonder.
The market's pre-election volatility is proving opportune to those of us assembling a portfolio with a look at improving fundamentals. The bird's-eye view is that earnings are quietly growing while prices are fluctuating around flat or sinking. Earnings season is not yet over, but the third quarter seems headed for an overall 17% increase. When earnings increase but prices stay constant or fall, values appear.
At some point, the market will recognize this imbalance and correct it. Some argue that valuations have been so rich for so long that most investors have forgotten what true value is. That's a compelling argument and one that I'm inclined to agree with as a philosophical view of the world. I grew up watching my parents bargain shop to feed a family growing to an eventual seven children, myself being the oldest of the bunch. I paid for most of my own belongings and education with money I earned at jobs ranging from dishwashing to food delivery. I'm a bargain shopper at heart.
Still, one can't ignore the fact that the market has risen against its own historic overvaluation for the past 20 years or so, depending on who's version of overvaluation you use. Within an environment of an overvalued market that just plain stays overvalued, one can still find the occasional bargain.
That's what I'm doing. That's why I bought Maxtor yesterday at $3.25, some 70% below the January price at which SmartMoney recommended buying it. That's also why I'm watching Sun, UTStarcom, and ProFunds Ultra Semiconductors for good buy prices. All are trading at low ends of their ranges over the past couple of years. See my October 20th article below for the prices I suggested.
I should also point you to my ever-present Dow portfolios. All three are down so far this year. The Dow itself is down about 7% and, true to form, my Double The Dow strategy is down almost 14%. This is the same strategy that returned 51% in 2003. The nice part about investing in the Dow is that it doesn't stay down forever. It'll be back. Now would be a good time to start your own Double The Dow strategy.
The market dropped today, but Maxtor rose nearly 2%. The bad news that drove it down was two-fold. First, its CFO quit after just two months on the job and that screamed "accounting scandal" to Enron-battered onlookers. On Wednesday night, the CEO and interim CFO assured listeners on the earnings call that the company's accounting is fine and that the CFO quite for personal reasons. On that same call, however, listeners learned that earnings were down and that the market looked bleak going forward. Sound the alarm bells and tank the stock.
Two weeks ago -- on October 7th to be exact -- Maxtor traded at $5.85. Yesterday, it hit a low of $3.10. Have the company's prospects dimmed so markedly in the past two weeks as to justify a 47% price cut? I don't think so.
Maxtor makes hard drives. They're used in computers and other appliances such as TiVos and PDAs. Look around you. Is the world becoming more digital or less digital? More, you'll probably agree. As it becomes more digital will there be a greater or lesser need to store data? More, you'll probably agree. Therefore, Maxtor's description of itself says a lot about its prospects going forward:
As the world becomes more digital, the need for storing all that digital data increases. Maxtor offers one of the most pervasive lines of reliable storage products to store the digital world. Maxtor products are found in homes, at work, and in large enterprise businesses. Maxtor is everywhere.
Before we get too excited, it's worth noting that the hard drive industry faces hurdles, mainly overcapacity. They've made and continue making more hard drives than the world is buying. But that's not new. Indeed, the last few years have been hard on the tech market and Maxtor has managed to keep its revenues going the right way:
Where's the problem in those numbers? I don't see one. My take is that we have a situation where the market has overreacted to some genuinely troubling news. Yes, there are clouds overhead, but they don't justify a 47% plunge in two weeks. Moreover, show me a time when deeply discounted prices accompanied happy headlines and I'll show you an empty bottle of whiskey in your hand. Low prices don't come from good news. Low prices come from bad news. Recent news has been bad and Maxtor's price is way down. I bought and I'll probably buy more.
I also suggested shorting Google at any point above $150. While I still think that will eventually prove profitable, recent euphoria leads me to raise the target price for shorting to $200. On strong earnings today, the stock rose 15% to $172 and is now double its $85 IPO price of just two months ago.
All this excitement led Prudential Equity Group analyst Mark Rowen to reiterate his "overweight" rating on Google and raise his price target for the stock from $130 to $200. From Reuters:
Rowen said his $200 share price target assumes a price-to-earnings multiple of 76 times his raised profit estimate of $2.62 per share for fiscal 2004, or 54 times his 2005 estimate of $3.67 a share.
It also assumes sustained 50 percent year-on-year compounded annual growth for Google to justify such a valuation in most investors' lifetimes.
Rowen said he has valued Google at a lower level than its Internet peers -- companies like Yahoo or eBay.
Yahoo, Google's closest rival, now trades at 105 times Rowen's fiscal 2004 estimate, he said.
Evidently it's time to party like it's 1999. If memory serves, there was one thing to do at the end of that party: short. Hence I reiterate my earlier suggestion to short Google. Instead of doing it at $150, let's start thinking $200 instead. At its recent rate of ascent, GOOG should reach that price within the first hour of trading this Tuesday. Can you wait that long?
That didn't take long. My limit order to buy Maxtor at $3.50 executed at $3.25. Remember, this is the same stock that SmartMoney recommended buying in January at $11. I just got a 70% discount. As of 9:44 a.m. in New York, the stock's at $3.26. It's not too late to buy some.
I wrote yesterday that I'm looking to get shares of Maxtor below $4. Last night, the company disappointed on earnings and gave a dour outlook going forward. The stock is trading at $3.60 premarket, down some 22%. I have a limit order in to buy about half of my target position at $3.50. It'll probably move fast, so you need to think about what you want to do and get to it posthaste.
We may very well be at or near the last opportunity to position your money for a year-end rally. I don't know how explosive it will be, but I do think we'll end the year higher than we are now. I felt the same way last year and rode Sun Microsystems up some 64% from October to February. Sometimes the "year-end" rally turns into a happy new year as well. Markets don't watch calendars as closely as we do.
Also, if a rising market keeps taking Google (GOOG) higher, consider shorting it at any time. It's a great company, but at $150 per share the stock has a day of reckoning on the calendar.
To see current quotes on all of the above, click here.
I can't resist mentioning that I'm suggesting buying UTStarcom at a price some 58% lower than the $40 it traded at in January when Kevin Landis, manager of Firsthand Tech Value, recommended buying it. It got as low as $12.59 in September. Now that there is a slew of insider buying giving a vote of confidence, I feel comfortable getting on board.
Maxtor was recommended by SmartMoney in January at a price of $11. Getting it at $4 would be a 64% discount.
You can read more about my watching these two new year's picks in an article I wrote last May.
I wrote on September 20th that I shorted Time Warner at $16.85 with a target of covering at $15.50 for an 8% profit. The stock has refused to fall below $16 even in the face of a market sell-off from rising oil prices and earnings warnings. So, it's wise to cover at the current $16.33 for a 3% profit.
In that same article, I mentioned that I was waiting for lower prices on Sun Microsystems and Maxtor. I suggested that you could still probably get Sun for less than $4 and Maxtor for less than $5 if you waited a bit longer. Patience paid. Sun closed Friday at $3.97 and Maxtor at $4.44. Building positions at these prices will pay off down the road. Maybe not at the next exit, mind you, but down the road.
I'm also watching semiconductors: the Philadelphia semiconductor index, the Dow Jones semiconductor index, the Amex Semiconductor Holders exchange-traded fund (SMH), and ProFunds Ultra Semiconductor fund (SMPIX). With Intel's earnings report last Tuesday blackening the already-dark sky above the sector, prices are getting tantalizingly cheap. If you know me by now, however, you know that I don't buy cheap, I buy absurdly cheap. As Bill Fleckenstein wrote about Intel at MSN Money, the future can indeed get worse.
I'm particularly interested in ProFunds Ultra Semi because it invests in the Dow Jones semi index using leverage to achieve 150% of the index's performance. That's both up and down, of course, so it's a risky proposition. The fund is down some 45% so far this year. The two-year chart looks like Mt. Fuji and the right-hand side is pretty close to the valley floor. The fund hit $11 in Feb 2003, $33 in January 2004, and is hovering around $15.50 now.
I don't see how anybody who watched the full debate could conclude that George W. Bush won. I do, however, see how a person reading editorials or reports on the debate could conclude otherwise. Here's my take.
Bush could not adapt to the question in front of him. His mode throughout the evening was to judge which of his soundbite fields best encompassed the question, and then rattle off those soundbites. It was embarrassing to see that he wasn't aware of how many times he re-used stock phrases. How many times did you hear that fighting in Iraq is "hard work" to euphemistically describe American deaths? How many times did he remind us of his idea that the world is "safer without Saddam Hussein"? Rather than emphasizing, Bush's repetition fatigued the ear and led to a natural tuning out of the same idea received once, twice, three times, four. He effectively muted himself.
Kerry, on the other hand, adapted quickly and crisply. When covering the same ground he came up with new evidence or at least a new phrase to drive a point home. He made it clear that whether or not the world is safer without Saddam Hussein is debatable and, moreover, NOT the reason we invaded Iraq. I wrote on July 12th that Bush's cowardly reaction to the dearth of WMD is what turned me against him. When he should have said there are no weapons here so we'll wrap up as quickly as possible and move on to the next front in the war, he instead changed the focus of the war from weapons to Saddam. By just changing the mission goal he could easily get to mission accomplished. That's unforgivable, in my view.
Kerry did not say, but rather showed that what the Bush campaign calls "flip-flopping" is actually careful analysis. One of the criticisms of Kerry's performance centers around his following some statements with the word "but" and then further information. For example, the Wall Street Journaleditorial page calls Kerry a "but-head" and lists several instances of this. You will note, however, that the Journal does not complete Kerry's lines of thinking. It always stops at the "but" as if that tells all there is to know about the argument. Let's look at one.
The journal shows this:
I have nothing but respect for the British, Tony Blair, and for what they've been willing to do. But . . .
The implication is that the "but" leads to Kerry reversing his position and saying that in fact he doesn't respect the British. That's not at all the case. Here's Kerry's point in its entirety:
The president says that I'm denigrating these troops. I have nothing but respect for the British, Tony Blair, and for what they've been willing to do.
But you can't tell me that when the most troops any other country has on the ground is Great Britain, with 8,300, and below that the four others are below 4,000, and below that, there isn't anybody out of the hundreds, that we have a genuine coalition to get this job done.
You can't tell me that on the day that we went into that war and it started -- it was principally the United States, the America and Great Britain and one or two others. That's it. And today, we are 90 percent of the casualties and 90 percent of the costs. And meanwhile, North Korea has got nuclear weapons. Talk about mixed messages. The president is the one that said, "We can't allow countries to get nuclear weapons." They have. I'll change that.
That's not a flip-flop, that's a further explanation of the issue. And who's being honest? Bush, who calls a team that's 90 percent American a coalition, or Kerry, who honors those who are helping us but points out that the war is overwhelmingly ours to fight?
It's not hard to isolate tidbits of speech to manipulate a speaker's message. Why we could even apply the technique to President Bush. He said:
I understand how hard it is to commit troops. Never wanted to commit troops. When I was running -- when we had the debate in 2000, never dreamt I'd be doing that. But . . .
Aha! He's a flip-flopper. The implication is that the other side of that "but" contains a mindless reversal. But it doesn't. Here's the full segment:
LEHRER: Mr. President, new question. Two minutes. Does the Iraq experience make it more likely or less likely that you would take the United States into another preemptive military action?
BUSH: I would hope I never have to. I understand how hard it is to commit troops. Never wanted to commit troops. When I was running -- when we had the debate in 2000, never dreamt I'd be doing that.
But the enemy attacked us, Jim, and I have a solemn duty to protect the American people, to do everything I can to protect us.
Folks, the word "but" is simply a conjunction used to connect related elements in a thought. It's a tool of our language. It CAN signal a change in position, but does not necessarily do so. I just used the word "but" in the previous sentence. Did I change my position? No, I completed a two-part point.
This speaks to the need of all voters to get to source material whenever possible. You cannot trust the judgment of others. You can trust only your own. Therefore, watch or read the debate yourself and decide which man you'd rather have at the helm.
As for me, I feel that President Bush means well, but that he can't see clearly through the complex issues facing America. John Kerry can.
