It looks like you did the right thing to flag [the homebuilder we want to buy] at $16, but you blew it by not actually buying when it went there. You do this all the time. You set a target price, then wait on the sidelines as it's breached, keep waiting, and ultimately end up missing what you correctly flagged as a good target price. I know from your results that you get more than you miss, but it doesn't feel like it right now.

• Most video content at this stage is bad, made mostly by bored teenagers
• It's a lot harder for an advertiser to make a good video commercial than it is for them to type a text ad
• Video content is more subjective than search keywords, making it harder to keep ads relevant
• Anybody who spends much time on YouTube is not part of a desirable demographic, by virtue of their having nothing better to do than watch mindless amateur videos

Well, we were baffled at how Mary could be so amazingly bullish, so, on a tip from a reader, we checked her numbers. And it seems Mary may soon be revising her estimates. Why? Because, in advertising lingo, "CPM" means "Cost Per Thousand" not "Cost Per One." When Mary updates her model to divide by 1,000, her numbers will look a bit different.

What happens to Mary's estimates when you do the math right? Well, that $4.8 billion of gross revenue becomes $4.8 million, and the $720 million of net revenue becomes $720 thousand. So if, as Mary suggests, Google can float ads on top of 20 million streams a month, secure a $20 CPM, and keep 15% of the gross revenue, the overall impact will actually be, as we suggested yesterday, immaterial.

Labels: GOOG

Because many institutions are highly leveraged, the difference between "model" and "market" could deliver a huge whack to shareholders' equity. Indeed, for a few institutions, the difference in valuations is the difference between what purports to be robust health and insolvency. For these institutions, pinning down market values would not be difficult: They should simply sell 5% of all the large positions they hold. That kind of sale would establish a true value, though one still higher, no doubt, than would be realized for 100% of an oversized and illiquid holding.

In one way, I'm sympathetic to the institutional reluctance to face the music. I'd give a lot to mark my weight to "model" rather than to "market."

Liquidity is not about physical cash; it is mainly a psychological state. Subprime problems have consumed only trivial amounts of global cash but already have burst bubbles by shocking lenders. Clever financial engineering effectively had convinced lenders to ignore risk, and not just in subprime. A major hedge fund participated in a loan to one of our companies, but sent no one to a due diligence meeting. So I called the senior partner to thank him and tell him about the non-attendance. He responded, "I know. For a $10 million commitment, it wasn't worth going to a meeting."

The present $200 billion of delinquencies will grow to $400 billion or $500 billion next year because $570 billion more low, teaser-rate mortgages will reset to market and consume more than 50% of the borrowers' income. Therefore most of the loans will be foreclosed or restructured. Probably 1.5 million to two million families will lose their homes. Meanwhile, few lenders will put mortgages on the foreclosed houses, so the prices will plummet. Despite these tragedies, total losses will probably be less than 1% of household wealth and only 2% to 3% of one year's GDP, so this is not Armageddon. However, even prime jumbo mortgages will be more expensive and more difficult to obtain.

I was around in 1987, and that crisis was more disruptive and much more alarming than this is. So was the 1998 foreign-debt crisis. It's not all bad news now. There's still liquidity in the markets. There's plenty of investor money in China, Russia, the Middle East, as well as the U.S.  The rest of the world has developed to the point that, if the U.S. goes into a recession, I don't think we'll have a global recession. I don't think a recession is going to happen, but it's what our central banks have to worry about.

These sorts of things are what's known to the academics as "endogenous to the system"--that is to say, they're normal. They happen usually every three to five years. So we had a freezing up of the market for corporate credit in the summer of '02. We had an equity bubble just before that. In '98 we had Long-Term Capital. In '94 we had a mortgage collapse like we're having right now. In 1990 we had an S&L collapse. In '87 we had a stock market collapse. These things flow through the system, and they're part of the system. I saw one quant quoted over the weekend saying, "Stuff that's not supposed to happen once in 10,000 years happened three days in a row in August." Well, I would think that you would learn in Quant 101 that the market is not what's known as normally distributed. I'm not sure where he was when all these things happened every three or five years. I think these quant models are structurally flawed and tend to exacerbate this stuff.

But these events represent opportunities. When markets get locked up like this, it's virtually always the case that you'll have opportunities if you have liquidity. Instead of worrying how bad it's going to get, I think people should be thinking about where the opportunities might be.

The NYSE financial index is probably the best barometer of what's to come. The financials tend to be a very good indicator of where the market's going. They tend to lead the market because they're the lubrication for the economy. So I think the financial index will tell you if this thing is over, and so far it's telling you it's not over. It's still falling. But just as financials lead on the downside, they will lead on the upside.

Historically, when an industry goes through a retrenchment like this, you have two or three big companies going bankrupt and most of the companies in the industry losing money for a year or two or three. Well, we haven't gotten anywhere near that in the homebuilding business, so I think that bottom is a long way off. As far as the credit bubble, we have another several months, if not more, of mortgages that are going to reset and people who are going to find themselves with even higher monthly payments. There are many, many more losses to come, most of which we won't know about for weeks or months.

Normally you have markets go down 10% or so every couple of years. We haven't had a 10% correction in the stock market in nearly five years. I don't know if this is the beginning of it, but we've got a lot of corrections coming. It wouldn't surprise me to see a little bounce--say if a central bank cuts rates. But that will just lead to the markets falling further late this year or next year. It would be better for the market, it would be better for investors, and it would be better for the world if we went ahead and cleaned out the system. If they do cut rates in the U.S., it would be pure madness. Because the market's down 7% or 8% from an all-time high? My gosh, what's that going to say about the dollar? What's that going to say to foreign creditors? What's that going to say about inflation? The Federal Reserve was not founded to bail out Bear Stearns or a few hedge funds. It was founded to keep a stable currency and maintain its value.

I have been and continue to be short the investment banks and the commercial banks. If they bounce up, I'll probably short more. I'm certainly not buying anything. The market's only down 8%. I don't consider that a buying opportunity. The things that I'm short, some people probably think are buying opportunities, but I don't. I've been short the banks for close to a year, and for a while it was not fun. But I added to my positions, and now it's a lot of fun.

There is a lot of pain still to be had in the equity markets, particularly aimed at the risky end of the spectrum. We think the fair value on the market is about a third lower in the U.S and EAFE from today and about a quarter less in emerging markets.

Most of that is not because P/E's are high. The great weakness in equities is that profit margins are off the scale globally. They're off the scale for the same reason that the risk premium got so low--that we've had wonderful global conditions, wonderful global growth, wonderful global liquidity, wonderfully low inflation. That will do it every time, without fail. So the profit margins went steadily up under a constant series of pleasant surprises: Global growth was always a little better than expected, consumption in the U.S. was always a little stronger than expected.

Pleasant surprises are the key to profit margins. If you can put together three years of constant pleasant surprises, you will have fabulous profit margins. It isn't to do with productivity, it isn't to do with China or India. It's to do with pleasant surprises. And of course, the longer the pleasant surprises, the higher the hurdle. The hurdle is now desperately high. It is virtually impossible to pleasantly surprise the world now. And profit margins will of course drift or drop down to normal and below. That's the pressure on the markets. That is what causes the market value to be a third less than it is today.

And people don't get that. People always look at P/E and take great comfort. Often it's perfectly fine to do that. But today it's horribly misleading because the main pain is in profit margins.

In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist.

Labels: Market Timing

Next, ask yourself how much of the U.S. economy housing represents. By the tenor of the news these days, you'd think half of the U.S. gross domestic product comes from the housing market. It doesn't. Housing accounts for a mere 5% of the economy. Even if housing slipped by 50%, the overall economy would suffer only a 2.5% loss. That's not nothing, but it's not the stuff of The Big One. Besides, housing is nowhere near falling 50%, so we're actually looking at a hit to the overall economy of maybe 1%.

Folks, this is no disaster. The stock market is not finished. We're not seeing the front edge of a storm that will demolish all we've built over the years.

Your comments on the fraction of GDP are quite correct, but what do they have to do with perception in the market?

When the dot-com bubble burst, the whole market fell 30%. Why? Did people stop buying soap, toothpaste, or food? Did IBM add a dot to its name? Were the dot-com companies 30% of the US economy? Hardly!

So, why are you giving the cold facts? They are just confusing the issue. The market had been going up for a very long time without a correction, and the sub-prime issue is a fine excuse to have one.

Is the economy in bad shape? Not at all. Is the job market collapsing? With 4.6% unemployment, it isn't even close. Have companies stopped turning a profit? No, but the rate of increase has slowed down and will presumably stop at some time. If Americans weren't so bad at math, they would realize that any growth rate of 30% has to stop way before it reaches the size of the national budget. House prices increasing at 20% to 30% per year is unsustainable even in the not-so-long run.

But, then, I am making your mistake, using facts to justify my arguments.

A much better issue is why a family with an income of $145K/year buys a house for $900K with $0 down. Income of $145K/year is not chicken feed, but is not enough to pay a mortgage more than six times its value, unless the residents live a life of pork and beans, Goodwill shopping, a 20-year-old jalopy, etc. That's hardly what one expects from people buying a $900K home. And, guess what? They lost the house.

So, is there an explanation for this situation? I can think of three: greed, stupidity, and bad math, none of which is fixable, especially the second. Cases like these are nationwide and it will take a while before we see all the consequences.

In the meantime, the market will gyrate and hopefully offer some real bargains as in the post-dot-com collapse.

Labels: Beginners, Market Timing

The past four weeks have provided a great example of stock volatility within a downward trend. No sooner did the Dow set an all-time record on July 19 by breaking 14,000 than the markets went into a volatile tailspin: Up-days and down-days have several times exceeded 200-300 points, but overall the market is down about 6%-7% since July 19.

This provides a terrific real-time opportunity to think about market volatility, corrections, and downdrafts -- and then to act in accordance with your conclusions. In short, what's the best thing to do right now?

Let's set out a few facts:

• The current tailspin was begun by sub-prime mortgage lending in the USA. Defaults on such loans have caused the mortgage market to partially seize up, meaning that less money is available, and only under more stringent conditions, than before the situation developed. It is fair to say that the mortgage market went into a bubble, and that the bubble is now deflating or collapsing.
• The sub-prime mortgage mess began a chain reaction that has spread through the credit markets and out into the stock market. Important links in the chain include:
  • Sub-prime mortgages were bundled into packages ("securitized") and sold to hedge funds, banks, and other investors.
  • Hedge funds (in particular) not only purchased these securities, but did so with high leverage: As much as 70% or more with borrowed money.
  • As mortgagors have defaulted on loans, the collateral supporting the mortgage-backed securities has collapsed.
  • Thousands of variable-rate mortgages will reset to higher interest rates over the next few years. We can expect that as they reset, some owners will default, unable to make their new higher monthly payments.
  • The difficulties in mortgages have spread to other credit markets. For example, the loans banks made to hedge funds were themselves sub-prime, although nobody called them that. In other words, because of the risk inherent in the hedge funds' investments in securities based on sub-prime mortgages, hedge funds have run into debt crises of their own. A few have already collapsed, and others can be expected to follow.
  • The country's largest mortgage lender, Countrywide Financial, has veered near the edge of bankruptcy, nearly running out of money to continue normal operations, until it borrowed a massive amount of money last week to be able to continue. Smaller lenders have already failed. Some others can be expected to fail, including possibly Countrywide itself.
  • The problem has spilled over into the stock market via several paths. One is that margin calls have gone out, predominantly to hedge funds who own highly leveraged stocks. Forced to raise cash, the hedge funds have been forced to sell stocks, contributing to the market's overall decline. A second is that hedge funds (and others) have been selling stocks that they "own short," because those positions have turned badly against them (i.e., they are in what is known as a short squeeze). Beyond that, many investors have panicked, particularly about financial stocks (banks, mortgage lenders, etc.), sending their prices into a disproportionate tailspin. Yet further, private equity deals are grinding to a halt, as the money to finance them becomes unavailable (private buy-outs are usually highly leveraged). Many market-watchers agree that private buy-outs helped fuel the market run-up earlier in the year. That propulsion is over, at least for a while.
• National banks around the world, fearing a liquidity crisis, have been injecting massive amounts of money into the financial system to stave off panic and illiquidity. The Fed has done so several times over the past week or two, sometimes quietly, other times with fanfare and press releases.
• On Friday, the Fed surprised by lowering its discount rate (for direct loans to banks) by 0.5% to 5.75%, which is another way of adding money to the economy.
• But so far, the Fed has not lowered the more important Federal Funds Rate, the one that impacts most other interest rates and serves as a benchmark for millions of consumer and business loans. The Fed has kept that rate at the same 5.25% level it has maintained for over a year. The Fed's next scheduled meeting is in September, although the Fed can act at any time. Many economists are expecting the Fed to lower the Federal Funds rate to further ease the economy. But the Fed, by its own statements, has been reluctant to touch that rate, because it is trying to keep inflation to about 2% or less. (Lower interest rates tend to encourage inflation.) Besides, overall the economy is considered to be in good shape.
  
• Pundits, economists, and investors are split about the big-picture importance of the credit crunch. Some maintain a "not too worried" stance, pointing out that the mortgage market is a tiny fraction of GDP, and that even in a worst-case scenario of massive defaults, the economic impact will be small -- much less than the impact of the savings-and-loan crisis of the 1980's. They feel that the markets will work the problems out on their own, and some believe that the government has already gone too far in "bailing out" lenders and borrowers who participated in ill-advised loans. At the other end, some experts feel that the crisis is going to get much worse, last much longer, and affect a wide swath of the economy. Supporting this "very worried" position, they say that we don't yet know the depth of the crisis, how many huge sub-prime loans banks may have in their portfolios, how tight credit may really get as lenders pull in their horns, nor how consumer and investor confidence -- and ultimately the entire economy -- are going to be affected.
• Many stocks, because of the downturn, are at very low valuations, and many pundits believe that we have reached a once-a-decade buying opportunity despite potential short-terms risks.
• Economic and company-specific fundamentals are fine. The just-ending earnings season showed strong results. Many excellent companies are doing well, are growing in a healthy fashion, depend little on debt, and have no weaknesses on their balance sheets.
• Warren Buffett, Hall of Fame investor, has said, "The first rule is not to lose. The second rule is not to forget the first rule." Most stocks have lost quite a bit in the past few weeks; investors would have been better off in cash rather than stocks, although that (of course) is old news now. Buffett has also said, "...Attempt...to be greedy only when others are fearful." Obviously, there is some tension between these two principles. Those investors who are fearful are fearful because their stocks have been losing money and they cannot see a clear end to that.

What does this all mean to the average individual investor? Is it time to be greedy or fearful? Is it time to protect against further losses (by selling stocks), or is it time to purchase first-class companies at rock-bottom prices? Are the past few weeks the beginning of a bear market, or just a "correction" that will reverse itself as the credit mess unwinds and as investors regain confidence in the fundamentals? Will the Fed ride to the rescue, on the one hand, or on the other hand (1) limit their intervention and allow the markets to penalize stupid investors or (2) focus too much on fighting inflation to the detriment of the economy and the stock market? What is investor sentiment likely to be, short-term, medium-term, and long-term?

What would Warren do?

The subject is risk management. That means taking actions to safeguard your money from the possibility that any investment decision is wrong -- including decisions not to invest (which can cost you money you would have made had you invested) as well as decisions to hold onto investments or to invest even more.

If the subject is risk management, what are the risks right now? I'd say these are the top three:

• The credit problem, already something of a crisis, will turn into a catastrophe. There are probably many dangerous loan situations out there that we don't know about yet, and the trend will be for the credit markets to seize up for many months to come. That will continue to spill over and negatively affect the economy and the stock market.
• The economy will tip into recession. That will also negatively impact the stock market. Companies will fall not only in stock price, but in actual performance. Rather than get conservative, some companies will throw risky Hail Mary passes and lose.
• The Fed will make the wrong moves (which could be inaction or over-reaction), or it will wait too long to make the right moves.

Risks usually have counterparts: potential rewards. What are the possible opportunities given what we know now? My top three:

• The worst of the credit crunch is already over. The credit machinery of the economy will emerge stronger, as lenders and borrowers learn from their mistakes and reinstitute old-fashioned sound lending standards, to the long-run benefit of all.
• The Fed will make the right moves at the right times. The economy will continue growing, and no recession will result from this situation.
• Many stocks are extreme bargains right now, and investors should consider this a buying opportunity -- but be willing to withstand some short-term volatility (i.e., paper losses) for a month or three while the market settles down. It is a good time to purchase the stocks of companies that are sure to weather this storm, not to sell out. In a few months or a year, the market will return the prices of excellent companies that are now in the bargain bin to more rational levels. Today's buyer will be tomorrow's winner, not those who flee.

Prediction: The second list -- the list of opportunities -- is more likely to occur than the first list, although that is certainly not a slam dunk. Reasons for thinking this:

• Investors are likely to recognize that the credit crisis is limited in size even as they cannot be sure about its duration nor about exactly where it is going to continue to pop up in the coming weeks.
• The low valuations on many excellent companies are likely to prevail over the fear that the credit crisis will ruin the economy.
• By its injections of money into the economy over the past week and by its rate-lowering action Friday, the Fed has signaled recognition of the importance of maintaining not only actual liquidity, but also the appearance of liquidity, in the economy and the markets.
• The strength of practically all economic and company fundamentals -- other than the credit crunch itself -- is likely to prove persuasive on investor sentiment over the impact of the credit crunch.
• The credit crunch -- whether the worst is over or not -- is already reversing, what with the Fed's action Friday, the shuttering of some hedge funds with the worst difficulties, the reinstitution by banks of more traditional and conservative lending standards, and so on.

Conclusion: What is likely to happen over the next six months:

• There will continue to be revelations of serious credit problems in various areas, both in the mortgage markets and in other credit markets.
• More hedge funds will collapse. Some banks and financial institutions will be revealed to have more exposure to "worthless" credit assets than previously thought. The stocks of these companies will fare poorly even if the market as a whole rises.
• Lending standards will become tighter for mortgages, commercial loans, loans to hedge funds, and the like. Cash-rich companies (who have no need for credit) will benefit in comparison to companies which need a high debt load to operate.
• Investor sentiment will yo-yo as different revelations come to light. As a result, the stock market will remain very volatile for a while longer. Up and down days of 200+ points on the Dow will be fairly common.
• The Fed may abandon (for a while) its tunnel-vision focus on keeping inflation to 2% if that proves necessary to head off a recession. They may or may not lower the Federal Funds rate, depending on conditions as they unfold. They will continue to take other actions to insure liquidity in the economy.
• Investors will be all over the map on whether this is a time to be fearful or greedy, but on balance, the tilt will be towards seeing this as a buying opportunity. This "blended sentiment" will be based on the extremely low valuations (bargain status) of many excellent companies.
• As a result of overall willingness to buy, the stock market will be higher in six months than it is now, perhaps back to its July 19 level if not higher.

Action steps:

• To the extent you have cash to invest (either new cash or the proceeds of stocks you have recently sold), look for excellent companies with strong balance sheets to invest in.
• If you use sell stops to protect on the downside, either set them wider than normal, or don't set them at all, putting your faith instead in the foregoing analysis. The wider sell-stops are to allow room for the likely market volatility over the next few weeks or months.
• Because the conclusions above are not slam dunks, limit your stock investments to 1/2 or 2/3 of your available "stock money." Neither be fully invested nor flee the market.

Labels: Market Timing

Stratfor views the world through the prism of geopolitics. Not all events have geopolitical significance. To rise to a level of significance, an event -- economic, political or military -- must result in a decisive change in the international system, or at least a fundamental change in the behavior of a nation. The Japanese banking crisis of the early 1990s was a geopolitically significant event. Japan, the second-largest economy in the world, changed its behavior in important ways, leaving room for another power -- China -- to move into the niche Japan had previously owned as the world's export dynamo. The dot-com meltdown was not geopolitically significant. The U.S. economy had been expanding for about nine years -- a remarkably long time -- and was due for a recession. Inefficiencies had become rampant in the system, nowhere more so than in the dot-com bubble. The sector was demolished and life went on. Lives might have been shattered, but geopolitics is unsentimental about such matters.

The measure of geopolitical significance is whether an event changes the global balance of power or the behavior of a major international power. Looking at the subprime crisis from a geopolitical perspective, this is the fundamental question. That a great many people are losing a great deal of money is obvious. Whether this matters in the long run -- which is what geopolitics is all about -- is another matter entirely.

When the subprime defaults started to hit, the banks that had loaned money against the mortgage portfolios re-evaluated the loans. They called some, they stopped rollovers of others and they raised interest rates. Basically, the banks started reducing the valuation of the underlying assets -- subprime mortgages -- and the internal financial positions of some hedge funds started to unravel. In some cases, the hedge funds could not repay the loans because they were unable to resell their subprime mortgages. This started causing a liquidity crisis in the global banking system, and the U.S. Federal Reserve and the European Central Bank began pumping money into the system.

Told this way, this is a story of how excess emerges in a business cycle. But it is not really a very interesting story because the business cycle always ends in excess.

There currently are three possibilities. One is that the subprime crisis is an overblown event that will not even represent the culmination of a business cycle. The second is that we are about to enter a normal cyclical recession. The third, and the one that interests us, is that this crisis could result in a fundamental shift in how the U.S. or the international system works.

We try to measure the magnitude of the problem from the size of the asset class at risk. But we work from the assumption that proved true in the S&L crisis [of the 1980s]: Financial instruments collateralized against real estate, in the long run, limit losses dramatically, although the impact on individual investors and homeowners can be devastating.

The S&L crisis involved assets of between 8% and 10% of GDP. The final losses incurred amounted to about 3% of GDP, incurred over time.

The size of the total subprime market is estimated by Reuters to be about $500 billion. This is the total asset pool, not nonperforming loans. The GDP of the United States today is about $14 trillion. That means this crisis represents about 3.5% of GDP, compared to between 9% and 10% of GDP in the S&L crisis. If history repeats itself -- which it won't precisely -- for the subprime crisis to equal the S&L crisis, the entire asset base would have to be written off, and that is unlikely. That would require a collapse in the private home market substantially greater than the collapse in the commercial real estate market in the 1980s -- and that was quite a terrific collapse.

Unlike commercial real estate, in which price declines force more properties on the market, home real estate has the opposite tendency when prices decline -- inventory contracts. So, unless this crisis can pyramid to forced sales in excess of the subprime market, we do not see this rising to geopolitical significance.

From this, two conclusions emerge: First, this is far from being a geopolitically significant event. Second, it is not clear whether this is large enough to represent the culminating event in this business cycle. It could advance to that, but it is not there yet. We cannot preclude the possibility, though it seems more likely to be a stress point in an ongoing business cycle.

Labels: Geopolitics, Market Timing, Real Estate

I wrote a couple of weeks ago that housing prices in Colorado were no bargain. Now I see that they're no bargain in southern California, either. The popping of the bubble, the bottom of the market, the slump, or whatever else the media wants to call their phantom news story about housing's demise, is nowhere. True bargain hunters are holding cash, because bargains are hard to find.

I had dinner with another friend of mine, a fairly wealthy investor who's always on the lookout for something new. His circle of friends, he told me, are watching real estate and waiting...and waiting...and waiting. They've been waiting for three years. The media keeps reporting a fire sale, but nobody's seen any smoke.

What I've concluded is that the general real estate market is not a buyer's paradise.

Labels: Real Estate

I've held shares in Informatica (INFA) for a little over a year now and have been continually frustrated by the lack of positive movement in the share price.

It seems that the positive news that comes out of their quarterly CC's has little effect on the movement of the stock. In their latest quarter, they reported, on an adjusted basis, earnings of 16 cents per share, which was in-line with analyst expectations, and they beat revenue forecasts by $1 million. Their previous quarter was 90% good news also.

They recently announced an OEM agreement with SAP, one of the giants in the business software industry, to embed their market-leading software "into SAP performance management and analytic applications and the SAP NetWeaver platform for master data management and business intelligence," according to the press release.

On the message boards, there is speculation that Informatica is a likely acquisition target for SAP or some other big player, e.g. Oracle.

The financials of the company look very good. According to PR/Newswire:

Informatica said that during the quarter its service revenue posted solid gains compared with the year-ago period, adding about $8.5 million to $52.4 million, while its license revenue increased by about $5 million to $41.8 million.

The company also gained 66 new customers during the quarter, and said it signed repeat business with 210 customers.

A few months back, one of the reporters on thestreet.com interviewed Informatica CEO Sohaib Abassi on the direction and plans of the company. The very positive video was available on TheStreet.com's website.

Jason, none of this positive news/notice that Informatica is generating seems to be making the right kind of difference in the share price. I'm contemplating buying more shares because of the implications of the recent partnership deal with SAP and the real possibility that SAP might eventually acquire INFA. If you have some spare time, could you take a look at Informatica and give me your professional opinion? Thanks.

In short: I don't like it.

There've been only three years since the company was founded in 1996 that it hasn't lost money. It competes in a field dominated by some of the world's best IT companies (IBM, Oracle, et. al.) and any sort of break-throughs it achieves last for a couple of months at best.

Its return on investment has improved recently, but it's still one of the industry's bottom performers over the long haul.

I think EDS looks better in that sector.

Labels: EDS, INFA

Swing trading in the medium term is a good way to make money. I've done quite a lot of it in The Kelly Letter, actually, by owning something for 4 to 6 months and getting 60% out of it.

That's not where the truly big money happens, though. Look at the list of giants in the investing business and you'll see that all of them bought at great prices and held and held and held with no sales to incur capital gains taxes, little stress, and the power of compounding sending their worth to the moon. I'll take Hansen's Natural five years ago over a half-year swing trade any day. $10k invested in Hansen's five years ago is worth $860k, and that's down from a year ago when it was worth a cool $1 mil. The stock is currently up 8,500% in five years, but who heard of it and who wanted it back then? Almost nobody.

I understand the theory of the long-term approach. But that has its pitfalls too. You can identify a great stock but then feel it's time to move out of it too early.

I noticed your pick of DECK. Great stock. Made 40%. But had you stayed in, it would be five or six times that and still climbing. If you -- someone who knows much more than me -- jumped out of a big gainer when there was still a lot more life in it, I certainly can make the same mistake (or overcompensate and hang on too long).

Yes, we all want the Hansen's Natural 8,500% gain. It's a home run. It's a grand slam. Bottom of the ninth, walk-off World Series ending grand slam. But that's not everyday life. Everyday life of everyday people like myself is grinding out singles. Getting on base. Doing little things.

When I was eleven years old, my grandfather explained to me in less than ten seconds why he invested in stocks. We sat by his pool in Arcadia, California and he read the stock tables. I asked why he looked at all that fine print on such a beautiful day. He said, "Because it takes only $10,000 and two tenbaggers to become a millionaire." That didn't mean much to me at the time, but it does now. A tenbagger is a stock that grows tenfold. Invest $10,000 in your first tenbagger and you have $100,000. Invest that $100,000 in your second tenbagger and you have $1 million. That, in less than ten seconds, is why everybody should invest in stocks.

Labels: Beginners, DECK

You are misreading "self-evident truth that all are created equal." This simply meant no one should be entitled to be king by right of birth. Our forefathers never intended nor thought possible equality of life. Equality and happiness were not guaranteed as a right in the Constitution; only the freedom to pursue them was guaranteed.

No matter what ism, there will always be those who get better doctors, better treatment, and the best technology available. If you want the best health care here in the USA, become President.

The only problem with health care here in the USA is the socialism already mandated by the federal government. And, I believe you will find the reason for the $5 prescription is because we are with our $500 prescription subsidizing the socialist health care system.

The Constitution just might be the most well thought out document ever written. I firmly believe the genius found in those few pages will never be equaled.

Sadly, it was annulled by the founders' descendants with what was supposed to be a temporary federal income tax for the funding of WWI. It is still with us 90 years hence. A review of history will show the Constitution was read with original intent until that time.

With this new found power of the purse, it became convenient for politicians to argue and expand the meaning of the Constitution for the sole purpose of satisfying their desires and the wants and wishes of their favorite constituents. Thus, we now have cradle-to-grave politicians.

Our forefathers not only feared such a centralized government but they feared any large institution with unchecked power. They would be the first to nix the idea of a federalized education system, a federalized health care system, etc. They intentionally saw the role of the federal government as very limited and via the Constitution tried to assure it remained limited.

Their genius was knowing a free people and a free market system would in itself -- with no directed funding or mandates from a government -- make the best use of resources in the most efficient manner.

Bottom line: there was no problem with health care here in the USA until politicians mandated there be a problem. Doctors in all communities charged according to the means of the patient, and a majority of the hospitals were non-profit institutions to which the wealthy contributed money for lavish buildings and the latest technology (provided a plaque was attached with their name).

The more the government is involved, the less we have to be involved with one another. Lose your job? The government has your check. Need daycare? Ask Uncle Sam. Hollywood elites and their ilk are nearly all lefties because it assuages their guilt. Power to the government liberates them from having to get personally involved.

The Founding Fathers knew full well the evils of government. The Bill of Rights, in fact, was never meant to have any sway over state and local governments. None. It was entirely aimed at the Federal Government. They knew well the corrupting influence of power and wanted power over our lives to be as close to the governed as possible.

The health care system could be healed by getting lawyers out of the system, by reducing governmental involvement to the absolute minimum, and by ending illegal entry to the country. What's happened is that the government has broken both our legs and is now offering a wheelchair. If we take it, we will never walk again.

There are more pharmaceutical lobbyists in Washington than there are Congresspersons. These Big Pharma companies have tons of money to contribute to the campaigns of our elected officials.

If you put all the 100,000 pharmaceutical reps in the United States in one place, they'd make a medium-sized city. Their job is to influence the prescription writing habits of medical doctors by "educating" them while supplying them and their staffs lunches (and pens, and pads of paper, and other office supplies) for free.

One of three commercials on TV in the U.S. is a drug ad.

This country has well trained doctors, and takes more medications than anyone, yet we rank 37th among industrialized countries in health care. Why? Because we focus on sickness instead of health. The system is geared towards pouring vasts sums of money into crisis care, and very little into prevention and true health care.

Nearly a quarter of the Medicare budget is for diabetes, a disease that is often preventable and manageable through diet and lifestyle changes, especially "early" changes (when folks are younger).

Half of the bankruptcies in the United States are due to medical bills.

Labels: Health Care

Your article on Panera got me interested enough to "score" the stock according to the framework that I use.

Points you mentioned and my interpretation:

• I agree that Panera is not threatened by McDonalds. They serve different markets. But Panera does face competition in the "casual dining" or "comfortable dining" segment. The few times I've gone there, I would not rate them as highly as some of their competitors for that level or type of dining experi