11/14 Kelly Letter Topics
Weekly market review
The bottom holds
Big bounce volume
Recession projections
The magic midpoint
LevMark Timer holds
Crocs is dying
Hope for Goldman
Importance of retest
It was the second week of consolidation in the stock market following November's strong rally. The consolidation proceeded in an orderly manner this week with the S&P edging just a tad lower, and never fluctuating more than 6 points a day. That's encouraging. I still expect that we'll move higher before year-end.
About the only big news this week was cold weather. Hard to imagine nobody saw that coming. It is, after all, winter again. I recently wrote an article for CXO Advisory Group on market forecasting in which I showed that most news supposedly affecting the stock market is actually just a close repeat of news we've seen before, and has no lasting impact. Weather is one of the major categories I noted, along with war, natural disasters, and mergers. I'll post the full article later in the week.
Back to our current repeating news. On Monday, a cold front sent oil over $60 per barrel for the first time in a month and January natural gas contracts hit a new high. That seemed as good a reason as any to stop buying stocks for a little while. Yet, what is it that's always brought up as reason to fear rising energy prices? The consumer's ability to buy things. Rather than focus on what's actually happening in stores, the market looks at the arrival of cold winter weather and the attendant jump in energy prices and then projects how it might affect what happens in stores. Let's not do that. Instead, let's look to the stores.
Wal-Mart reaffirmed its December same-store sales guidance of +2-4%. Target said that it expects December sales to be in line with its planned 4-5% increase. December consumer confidence rose more than expected to 88.7 on the Univ. of Michigan Consumer Sentiment index. It was only 74.2 in October. The consumer looks pretty healthy to me.
Oil got over $61 a barrel before heading back below $60 by week's end.
While the overall stock market saw a week of consolidation, we saw a week of advancement. Let's start with some outstanding news.
Our footwear maker is now up almost 52%, making it our best-performing autumn investment so far. The stock rose some 25% last week in a dramatic run that saw 7.1% on Tuesday, 6.4% on Wednesday, and 7.3% on Thursday.
On Wednesday, Piper Jaffray research analyst Jeffrey Klinefelter maintained an "outperform" rating and $30 price target on the stock, expecting to see the company's boots "under every tree" this holiday season based on talks with company management Tuesday.
"We believe the strong demand for [the boots] across a broad assortment of styles is an indication that [they are] becoming a strong brand versus a 'hot' trend in just one boot style," Klinefelter said.
The company is reporting strong sell-throughs across its assortment of slippers, clogs, and boot styles. In addition, the company plans to open a "design studio" in Italy in fiscal 2006 with the aim of adding higher-price-point luxury styles, which Klinefelter believes will reinforce a "halo effect" over the boot brand.
We first bought at $23 on Oct. 5 and then again at $17 on Oct. 28. The stock already hit Klinefelter's $30 target, closing the week at $30.35.
is continuing its gradual recovery. From its 10-K filed Wednesday evening:
We anticipate that the shift in our software business from license sales to subscription sales will continue during fiscal year 2006. More specifically, we believe license revenue will decline again in fiscal year 2006, but the sequential declines in quarterly license revenue should be at a slower pace as compared to fiscal year 2005 and eventually flatten out by the end of fiscal year 2006. We expect growth in subscription revenue over the second half of fiscal year 2006 to offset the declines in license revenue. We believe that our subscription services business has largely stabilized and services and other revenue will grow in fiscal year 2006, led by continued expansion of our consulting services and growth in our procurement outsourcing business. In summary, we expect these trends to largely offset each other, with total revenue remaining relatively flat on a sequential basis for the next few quarters. From an expense standpoint, our recent restructuring activities are largely complete, and we anticipate that costs and expenses over the next few quarters will remain relatively consistent with our costs and expenses in the fourth quarter of fiscal year 2005.
The key to making money in this stock was buying at a very low price, which we did. As you can see, the recovery is not going to be a dramatic, boot-under-every-Christmas-tree kind of jolt. Instead, it's a classic drip higher over time as costs get ordered and sales get realigned. We paid $6 a share on Sept. 13. The stock closed this week at $8.28, a gain so far of 38%.
On Tuesday, Amtech initiated coverage with a Hold and a positive bias. The firm set a $31 price target. That range is looking familiar. Just last week, Citigroup reiterated its Buy rating on the stock with a $32 price target. The Amtech report said they are waiting for some improved efficiencies before buying more of the stock. They see some potential for gross margin expansion from new capacity and expect the company to grow the PC market and finally gain share in the handheld device market.
Analyst reports never fail to raise an eyebrow. Why, for instance, if Amtech believes the stock is heading for $31, would they not buy more now when the price is around $26? They are waiting for improved efficiencies, but apparently they believe those efficiencies will come. Presumably they will bode well for the company and also be accompanied by a higher stock price. This begs the question, what price between 26 and 31 is Amtech waiting for?
As for us, we'll remain content with our entry price of $25.
The off-cue information on this company continued when the news said that the company disappointed on Thursday in its mid-quarter update. It narrowed Q4 revenue guidance to $10.4-10.6 billion. It had previously expected $10.2-10.8 billion, so the mid-point fell from 10.6 to 10.5. Consensus estimates were also 10.6. Does going from 10.6 to 10.5 strike you as cause for panic? Me neither and the market quickly recovered from its initial overreaction. After dropping 2.5% in after-hours trading Thursday, the stock gained 1.5% on Friday. So far, we're up 4.3%.
Our Japan bank finally saw some lift in its stock, rising 4.1% Tuesday and 3.2% Friday. So far we're still down 2.3%. Our computer storage company rose 8.1% Thursday. Last week saw our Japan market position rise 2.2% overall, with a 4.7% rise Friday. So far, we're up 27%.
All in all, very nice in a falling week. Too, our permanent portfolios fared well. They slipped, but just barely, and remain the place to be for the long term. In characteristic fashion, Ultra MidCap bested Ultra Dow. For the week, MidCap fell just 0.3% while Dow fell 1.9%. So far this year, MidCap is +21.2% while Dow is -1.7%. That Max MidCap continues to dazzle.
The Fed meets next Tuesday and much attention will be paid to its take on the inflation picture. It's expected to raise rates by 0.25%. Bill Gross at Pimco thinks the Fed will stop raising rates in January when Ben Bernanke takes over from Alan Greenspan. Mr. Gross projects that the economy will slow to a soft landing in summer of next year due to home prices leveling out. When people can no longer withdraw from their home equity like a giant ATM, cash levels will drop and people will buy less.
Looking for something to do? How about supporting our media stock by seeing The Chronicles of Narnia: the Lion, the Witch, and the Wardrobe? It opened last Friday.
The film cost more than $250 million to make and promote with a marketing campaign designed to woo almost every possible group to the film version of C.S. Lewis' children's books, which have sold some 100 million copies.
is betting this core constituency of fans will see the film and tell their friends about it. The company said its most extensive effort was aimed at schools. Last spring, it sent out 300,000 curriculum guides to try to convince teachers to include The Lion, the Witch, and the Wardrobe in lesson plans.
I grew up loving The Chronicles of Narnia and perhaps you did, too. Now you can see it on the silver screen and let's hope its sales follow the success enjoyed by The Lord of the Rings.
There is one more piece of news this week, I add with a blush. On Monday, CXO Advisory Group LLC published its list of tracked investment experts and the overall accuracy of their forecasts. The list was ranked from #1 to #24. Sitting at #1 with a 74% accuracy was...I.
Number two on the list was Ken Fisher at Forbes with 71%, number three was Marc Faber with 62%, and number four was Jack Schannep at Zacks.com with 60%. Famous names on the list included Don Luskin at Smartmoney (#7, 56%), S&P Outlook (#10, 52%), Jim Cramer at TheStreet.com (#17, 45%), and Jim Jubak at MSN Money (#24, 37%). The average accuracy of the group is 51%. You can see the full report.
As always, it's a pleasure to work hard for you. I'm pleased at this latest sign of our success. It won't be the last.
