3/14 Kelly Letter Topics
Weekly market review
Fed oversees banks
EU bails out Greece
China likes Treasurys
Consumers still down
CT suing Moody's, S&P
US AAA rating at risk
Strong retail sales
Topping oil prices
Index chart patterns
Households suffering
Market at 1150
What range top means
FMD shooting higher
Bluefin tuna ban
2010 EDITION
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
I hope you enjoyed Thanksgiving week. We certainly did here in our portfolio. The winter rally is rolling along and carrying our money with it. We had another excellent week.
At last, The Kelly Letter's footwear company moved into positive territory for us. We first bought on Oct. 5 at $23 then watched it drop. The investment media, true to form, began fretting over its future and one pundit even called for a $5 stock price as a target to consider for buying. We ignored that wall of worry and bought again on Oct. 28 for $17. The stock closed this week at $21.63, putting our overall position up 8.2% so far.
Meanwhile, recent buys are up 4.6% and 7.2% respectively. All individual positions with the exception of our pharma company are steadily moving higher. That company, which happens to coincidentally be one of our individual positions and this year's Dow 1 component, is a long-term recovery play and I don't expect a sudden surge upward anytime soon.
Japan, however is screaming along. Our Japan market investment via is up 16.4% since we bought. Our Japan banking pick is still down 5.4% but the company is performing remarkably well.
On Thanksgiving day in the U.S., the bank posted strong earnings results for the half-year through September due to lower bad-loan write-off costs.
The healthy results are the latest indication that Japan's banks are on the mend after years of losses writing off mountains of nonperforming loans that piled up during the slowdown that started in the early 1990s.
Since the bank was created Oct. 1 through the merger of two other large banks, earnings results were broken down between the two.
One of the former banks said its group net profit for the six-month period rose 75 percent to 300.7 billion yen ($2.5 billion) from 171.7 billion yen the same period a year earlier. Sales rose 11 percent to 1.4 trillion yen ($12 billion) from 1.26 trillion yen.
The other posted a group net profit of 411 billion yen ($3.5 billion), a sharp recovery from the 674 billion yen net loss it suffered the same period the previous year.
"We had a good start in financial terms," the bank president told a press conference.
For the fiscal year through March 31, 2006, the bank expects to post a group net profit of 520 billion yen ($4.4 billion), up from the 400 billion yen it had projected earlier.
The bank has total assets of around 190 trillion, or $1.6 trillion, topping Citigroup's $1.55 trillion, based on the most recent company figures.
Earlier this week, Japan's other mammoth banks also reported upbeat results. So, everything is looking just grand for our bank and I remain cheery about the stock. Eventually the stock price will catch up to the good news and we'll enjoy watching the red arrow turn green, just as we've done with several other positions so far in the rally.
Let's not forget our trusty Double The Dow and Maximum Midcap portfolios, the heart of this site's investment approach. They keep humming along year after year with little maintenance. You just keep sending more money month after month. At last, Double The Dow has pushed into the green for the year and is up 1.2%. Maximum Midcap, per usual, has vastly outperformed its larger-cap sibling and is now up 20.7% so far this year. When you have a chance, take a look at Maximum Midcap's recent performance on my strategy page. If that's not a picture of a portfolio you want on your side, I don't know what is.
On Tuesday, a retail sales group said that the sales outlook looks brighter for this year's holiday season.
The National Retail Federation, the world's largest retail trade organization, raised its growth forecast Tuesday for the Christmas season to 6 percent from its September forecast of 5 percent.
"When we had made the forecast, Katrina had just hit," said Rosalind Wells, economist for the Washington-based trade group. "Everything looked pretty gloomy." But she said since then, she has seen strong economic indicators.
Wells cited stronger-than-expected retail sales in October and falling gasoline prices as the catalysts for upgrading the holiday forecast.
"We have so much momentum going into the holiday season, so much more than we anticipated," she noted.
NRF's move marks the first time that the association has officially upgraded its forecast during the holiday season.
Indeed they appear to be on the right track. After Thanksgiving day's official sales frenzy and Friday's enormous turnout, sellers reported great results. Several major retailers, including Wal-Mart, Sears, and Macy's, as well as mall operator Taubman Centers, estimated they drew bigger crowds for the official holiday season launch compared with last year.
Lena Michaud, spokeswoman at Target Corp., which had a strong holiday season a year ago, said traffic was at least as heavy.
Also on Tuesday, Microsoft's new Xbox 360 debuted in North America. It will arrive on store shelves Friday, December 2 in Europe, and Saturday, December 10 in Japan. This is the first time that a game console will be launched in three territories in the same time frame. In preparation for what is expected to be massive worldwide demand for the new system, Microsoft announced that Xbox 360 manufacturing is under way, with state-of-the-art facilities producing millions of units ultimately bound for frenzied gamers' homes from Osaka, Japan, to Oxford, England, and Orlando, Fla.
Yet again on Tuesday, we got a jolt of excitement from the Fed when it released the minutes from its Nov. 1 meeting. They stated that "some members cautioned that risks of going too far with the tightening process could also eventually emerge." The minutes clearly expressed concern that recent increases in energy prices might lead to broad based inflationary pressures, but they also recognized that core rates of inflation remained low and that long-term inflationary expectations remained contained.
This made traders happy as that means that a series of further rate hikes is no longer guaranteed. It will depend on the data. If the core rates of inflation pick up, the Fed might keep raising rates as expected. But if the economy shows signs of faltering and the fears about high energy prices prove baseless, we may at last see an end to the increases, which would be very good for the stock market.
I'm still looking to get into . It rose a bit this week, but not to a point where we need to fret about missing the opportunity.
Sales and bookings for new microchip-making equipment fell in October from September as chip producers were hesitant to expand capacity during peak months ahead of Christmas, a global survey showed on Wednesday. That helped to keep this target stock's price down. I think it will do well between now and spring, though, and am looking for a good price to add it to the portfolio. It will round out our tech holdings nicely.
There aren't many days when I'm unhappy to live in Japan, but this is one of them. I don't hear anybody bustling about in the kitchen at 6:00 a.m. getting the turkey ready to start the long, best-smelling stint in the oven. I don't smell the aroma that has filled my memories since I was a tike growing up in the Colorado Rockies. Finally, I don't get to sit down to a table filled to the edges with dish after dish prepared by my mother and sisters and even myself here and there, if you can count mashing and stirring under Mom's watchful eye as cooking. It's just another day here.
What I do get to do, though, is express thanks. I'm grateful for wanting very little in the way of material goods. I'm blessed with enough money to live my life the way I want to live it and to be able to pass along a few lessons of careful money management to my readers. I'm grateful to be from a wonderful country and to have been welcomed with smiles into another wonderful country. I'm grateful to be able to see through daily headlines to the truth: the world is a beautiful place with more good people than bad. I'm grateful to be healthy, and loved, and just plain alive after having nearly died of cancer at age 12.
I'm grateful that my mother decided to adopt two sons when everyone around her said that she lacked the means to do so. On the adoption form that she filled out twice, she checked that she would take any healthy child. In America, that means you're going to get black boys because they are the least desired of the children up for adoption. So into our lives came Daniel and Charlie Kelly, my two youngest brothers, age 12 and 10 respectively. What a courageous mother I have. What a fine pair of young brothers I have. What a fine community I'm from in Estes Park, Colorado where not a single one of the oft-predicted incidents has occurred.
One more thing before you rush off to that aromatic kitchen, you lucky dog: I'm grateful for you. Yes you, the one who reads what I write here, buys my books, subscribes to my newsletter, asks me challenging questions, thanks me for helping out, calls me to task for an occasional mistake, and even sends me photos of your family events. It's an honor to work for you, and a pleasure to know you.
Happy Thanksgiving, America. Now send me some turkey, would you?
The winter rally is well under way and we're keeping up with it. This past week saw nearly all of our holdings perform well, chief among them which gained 5% and 7% respectively.
In addition, we picked up shares of at $25 on Wednesday. Coupled with our position in bought last week at $29, the new position gives us a solid footing in old tech to further boost returns as this rally continues. So far, we're up 3% and 1%.
The October consumer inflation report included no big gains in the core component despite the surge in energy prices which helped to leave a 14-year high in September's annual CPI growth. Actually, the tiny 0.2% core rise followed 6 months of smaller gains. While it's true that annual core growth returned to 2.1% year-over-year, weaker growth over the last 6 months leaves a small 1.7% annualized rate over that period. It looks like the long steady rise in energy prices has not spilled over into other areas.
So, that's good for the economy.
Also, fears that the hurricanes would crack the country have proved unfounded. Although GDP growth should slow to roughly 2% in the fourth quarter, that will be temporary. Growth should return to nearly 4% in the first quarter of 2006.
We've already seen in retail reports that consumer spending is fine. High heating bills this winter will crimp that a little, but gasoline prices at the pump are now below pre-Katrina levels and that will help to offset those heating bills.
The inflation scare related to Katrina has also receded. Not only have energy prices backed down, but inflation has shown no uptrend at all.
Too, it's no small matter that earnings growth has been swell. Operating earnings for the S&P 500 rose 13% for the third quarter, and a similar increase in the fourth quarter is probable.
As economic and inflation fears subside, investors will pay more attention to valuation and earnings growth. That will allow the traditional year-end animal spirits to run loose, and is why I expect the rally to continue through New Year's.
Are there any other stimuli? You bet. Barron's pointed out the $2 trillion cash hoard sitting in the coffers of U.S. corporations. Naturally, companies are expected to use that cash in ways that prove beneficial to investors, like boosting dividends and repurchasing stock. Just last week, announced a $25 billion share repurchase program and a 25% increase in its quarterly dividend.
In sum, the U.S. economy is looking fine.
Last week, said it will start selling Apple's iPods. It already sells iPod accessories, but now the player itself will join the shelf. We also learned that T. Rowe Price has an 11% stake in the company. It never hurts to see other smart investors heavily into something you own. So far, we're down 7.7% on the stock, but I'm confident that it will prove to be a long-term winner. If you haven't bought yet, it's not too late. You can get it for less than I paid.
I wrote to subscribers last week from Kyushu, the southernmost of Japan's four main islands. I mentioned that I was further researching the recovering economy there and would get back to them on what I found.
On Tuesday, Nov. 8, the Japanese government said Japan's index of leading economic indicators fell to 50 in September compared with 100 in August. A reading above 50, which looks at 12 economic indicators that predict future economic developments, signals growth over the coming six months. A level below 50 suggests contraction. Banking stocks fell, including our holding, , which shed 1.8%.
In Kyushu, however, I heard news of a restaurant chain growing faster than it has at any time in its history because of companies spending more to take employees out to eat. Further, the island is bustling with new construction, including a bullet train spur down to the far reaches of the island. Buildings are leased out. There are Starbucks shops every six minutes as you walk around downtown Kumamoto. In short, life looks pretty prosperous down there. The trip reinforced my view that Japan is on an upward trajectory.
Then this week after I returned to my office outside of Tokyo, more national news hit the papers. Bloomberg reported on Tuesday that Japan's current account surplus widened in September as exports rose to a record high. The surplus rose 6.5% from September of last year. Exports climbed 8.9% from a year earlier. It looks like global economic growth is stoking demand for Japanese goods. Rising exports combined with climbing domestic spending and corporate investment will help the economy sustain this latest expansion.
Stefan Worrall, an economist at Credit Suisse First Boston in Tokyo, said, "As we approach 2006 we have domestic demand, which is strong and being built up by employment growth, and businesses becoming more confident, and at the same time you have external demand becoming quite strong." Those are nice factors to have coming together.
So far, our investments in Japan are down 4% and up 14% respectively.
As usual, there are several stocks I'm watching, chief among them this week being a maker of tools to produce microchips. It would complement our old tech holdings and further prove how much I believe in the recovery of the chip sector.
On Wednesday the company forecast flat profits and slowing order growth for its current quarter, and its shares fell. The company also posted a quarterly profit that fell by nearly half, but beat expectations as renewed demand for the chips found in everything from computers to cars began to fuel a recovery from the industry's latest downturn.
"Some investors are still concerned that this is a one or two quarter blip and then there will be a downturn," said Suresh Balaraman, an analyst with ThinkEquity Partners.
The company's chief executive brushed aside Balaraman's concern. He pointed to strong demand for memory chips, such as those found in Apple's iPod, as proof that this is not a temporary uptick.
Taiwanese contract chipmakers have started buying more equipment and there are signs of life in China, which bought about $1 billion from the company in 2004, but very little this year.
"We think that the fundamental factors will allow us to continue growth. I wouldn't even start talking about a peak at this point," the CEO told analysts on a conference call.
The company trades at a discount to its main rivals. It has a P/E ratio of 22.4 for the 2006 fiscal year, compared with 26.1 for Tokyo Electron, 23.1 for Lam Research, and 26.7 for KLA-Tencor.
We would be wise to look past short-term concerns and focus on strong prospects for next year. I'm eyeing $17 as a good place to get in but have not placed an order yet. I'll let subscribers to The Kelly Letter know if and when I do.
Now's a good time to subscribe, by the way. The rally's just far enough along to be sure that the the falling is finished, but not so far along that there are no gains left. I'm offering the first month free and after that it's just $4.95 a month, so give it a shot. Many of my subscribers say that The Kelly Letter is the cheapest top-flight investment letter they've found.
I've been saying for two months that we'd get a November-December rally in the market. At last, November is here and the rally is right on schedule. The Dow gained 1.2% this week and the Nasdaq gained 3.8%, its best weekly performance in 14 months. Our winter rally is under way.
You can feel the change in tone. Just last week the focus was on negatives. This week it was on positives. There were a number of glowing articles about the immediate future of stocks. Typical were these comments by David Callaway, editor-in-chief of CBS MarketWatch:
With oil futures now below $60 a barrel, corporate earnings running better in the third quarter than the second, and the Federal Reserve Board at least nearing the end of its year-and-a-half rate increase cycle after indicating that inflation remains contained, conditions are ripe for a year-end market rally. There's a lot of pessimism out there right now about the market heading over a cliff. Maybe it's just the holiday air, but it seems to me it's already been to the edge and now is heading back. We've had our disasters for this year already. Look for the markets to end higher in 2005 on a strong year-end rally.
October same store sales for retailers were strong almost across the board. Wal-Mart reported at 4.3%, well above the 2% to 4% range they had originally forecast. Costco reported an incredible 10.0% increase, also above expectations of around 8.5%. Target then added to the healthy climate with a 5.7% gain, also above the expected 4.8% increase.
Even smaller specialty chains reported strong numbers. American Eagle had a 17.3% increase, Chico's FAS 17.9%, Gymboree 18.0%, and Nordstrom 6.4%. All beat expectations. It was impressive, to say the least, both in terms of good gains as well as beating expectations.
Alas, the American consumer is not dead after all and the holiday season may prove to be a profitable affair. This will help two of our holdings, . Indeed, both have begun their upswing already.
Before that, some good economic news. New claims for unemployment for the week ended October 29 were a low 323,000, and of that 18,000 were hurricane related. Underlying claims are near 300,000, which reflects a strong job market. Third quarter productivity was up 4.1%, a strong gain that helps keep inflation in check by keeping unit labor costs low.
The Federal Open Market Committee voted unanimously to raise the benchmark federal-funds target rate by a quarter-percentage point to 4%, putting rates at their highest level since June 2001. Economists expect the Federal Open Market Committee to continue hiking rates by a quarter-percentage point at the two meetings left before Fed Chairman Alan Greenspan retires on Jan. 31. In fact, making his last testimony in front of the Joint Economic Committee this week, Greenspan said that while the economy is retaining "important forward momentum" as economic fundamentals remain "firm," "uncertainty surrounds the outlook for inflation," words that confirmed the Fed will continue to ratchet-up rates.
The big question now is whether incoming chairman Bernanke will put the lid at 4.5% or keep going up to 5%. If you know the answer, let me in on it.
We sold on Monday for a 1% gain just before it plunged 11% on Tuesday. That looked brilliant until Wednesday when it spiked up 18%. I missed the one-day chance to get back in under $100, which was my re-entry price target. The stock closed the week at $114. I'll keep watching and hope to find a good re-entry.
We bought on Thursday for $13.90. I had hoped to get it at $12, but buying into Japan now is all about buying into the momentum of a fast-recovering economy. I paid more than I wanted to pay for as well. More often than not, lower prices are left in the dust. To wit, these two closed the week at $14.07 and $49.32, putting us up 1.2% and 4.5% respectively so far.
The third stock I've targeted to round out our Japan recovery portfolio is financial firm . I intended to get it at $90, then thought it'll never reach there so I'll raise the bar to $95. Then on Friday, it rocketed up 11.46% to close the week at $109.50. See what I mean? They just keep marching higher. We may get a little settling back next week, but probably not much. I'll keep you posted as to if and when to buy.
A new potential buy came onto my radar screen this week when Symantec disappointed with its earnings numbers and announced that one of its executives was departing. It looks like there might be genuine trouble at the firm, but its implosion unfairly took competitor down 13% to $26 on Tuesday. It's a leader in the growing anti-virus and cyber protection market which has a bright (grim?) future as the internet proliferates and more of our lives get wound up in computers. It boasts a 14% profit margin, a P/E of 19, annual revenue growth of 14%, and a $1.2 billion cash hoard. The stock closed the week at $27.58. I'd like to get in below $27.50. Stay tuned.
This week, our stocks did well. Various holdings rose 1.5%, 4.5%, 1%, 3.4%, 4.1%, 2.1%, and 3.4%. Our primary strategies also did well. Double The Dow rose 1.7% and Maximum Midcap rose 4.1%.
Then there's . The stock closed the week at $3.36, putting us down 21% so far. We'll double down at $3 if it gets that low. Several of you have written asking what I see in this dud. Fair question.
Without a doubt, it is beleaguered. The profit margins are negative, the growth is slipping, and it seems to forever lose ground to superior competitors . What we can say in its favor is that it's cheap. Its price-to-sales ratio is just 0.21. Thus, we are not buying a great company like Coca-Cola. We are buying a technical stock opportunity. That means that the stock looks ripe for a solid rebound as news improves around it. The computer storage industry is consolidating for a move higher once inventory issues are worked out. When that happens, the rising tide should lift all boats and it will lift this stock, in terms of percentage gains, the most. Going from $3 to $6 is a 100% gain and would still leave the stock cheap compared to its competitors. Further, who knows, they might even improve their margins and become an honest recovery story. If so, the stock could conceivably get to $12 or $15. That's a long shot, though.
What is not a long shot is that the improving industry takes all competitors up a few bucks. A few bucks from $3 is a 100% gain. That's exactly what happened in last year's rebound cycle. Have a look at this one-year chart:
It shows that from last November to June, our stock gained 100% while its main competitor gained only 65%. Neither is anything to sneeze at, but our stock significantly outperformed purely by virtue of departing from a lower price. I expect to see something like that unfold again, hence the holding at these depressed prices and the plan to buy more at $3.
I'm happy to see the winter rally arriving on time. Your patience over the past two difficult months is about to pay off.
