5/11 Kelly Letter Topics
⇒ Weekly Market Review
⇒ Food as security threat
⇒ Baltic dry index forecast
⇒ GOOG gets upgraded
⇒ Katz on a 2008 recovery
⇒ AMD's report
⇒ Innovation at Dell
⇒ First Marblehead
⇒ Ballmer at Microsoft
⇒ Peak oil
If there's one place an investor can find clear direction in a sea of opposing opinions, it's BusinessWeek. According to the following excerpt, we're in for some tough times:
Stocks are swinging up and down more often and more violently than at any time since the Great Depression. As recently as 1995, the Standard & Poor's 500-stock index traded all year without once changing 2% in a day. But [recently], it gyrated that much or more on 52 days -- once in every five trading sessions -- the most since 1938. The tech-laden NASDAQ now swings by at least 2% on two days out of five, vs. just once every 10 days nearly 30 years ago.
...fundamental changes are taking place that will likely alter investing and the very structure of the market for years to come. Millions of ordinary buy-and-hold investors, who have been a major stabilizing force in the stock market, are bailing out. If history is any guide, those investors won't jump back in quickly... "This is a new, rapid-fire trading kind of environment that just stymies average investors," says James W. Paulsen, chief investment officer at Wells Capital Management. "Old dogmas like 'buy and hold' just don't work."
In fact, says Richard Bernstein, chief U.S. equity strategist at Merrill Lynch & Co. (MER), a big reason for the recent market volatility and falling stock prices is that investors are just beginning to see how vulnerable stocks are to unpredictable corporate earnings. "Investors have been underanticipating risk," he says. Sooner or later, they'll become less willing to pay up for stocks with more volatile earnings and wild price swings. And they'll demand lower share prices as compensation for the extra risk they're taking. "Even if a cyclical bull market reappears, it's likely to be modest," says Charles Pradilla, chief strategist at SG Cowen Securities Corp.
On top of all that, the markets have to deal with heightened geopolitical risk.
We aren't necessarily condemned to a multiyear bear market. But perhaps investors should be prepared for several "mini-bear" and "mini-bull" swings of at least 20%, which occurred in the five years preceding the 1973-74 bear market and in the eight subsequent years. There are, of course, big differences today: Inflation is nowhere near the heights it reached then, interest rates are low, and the Federal Reserve has been proactive.
In any case, many average investors are again paralyzed by market uncertainty. Hiding behind decimated portfolios -- or cash, if they're lucky -- they're afraid to jump back into the fray.
That doesn't look good, eh?
Before you get too nervous, ask yourself when it was written. Last weekend? Before the lows in March? Before the lows in January?
Nope.
Try the March 10, 2003 issue, just before the spectacular recovery from the dot com bust got underway in earnest. Here's how the S&P 500 did after the article:
+37% in one year
+44% in two years
+57% in three years
+88% through last October's high
+69% through yesterday's close
Folks, if you never invest until there's an all-clear signal, you'll never invest.
Dave Van Knapp of SensibleStocks.com has just published a new e-book called The Top 40 Dividend Stocks For 2008: How (and Why) to Build a Cash Machine of Dividend Stocks.
Like all of Dave's work, it presents the case in logical steps that build a staircase to understanding and action. Dave is not about flash and show; he's about getting the job done.
The book shows:
What dividends are
Why they're a big part of succeeding in stocks
Characteristics that define the best dividend stocks
How to create and manage a dividend stock portfolio
The 40 best dividend stocks for 2008
From page 10:
In 1934, Benjamin Graham and David Dodd wrote in their classic Security Analysis, "The prime purpose of a business corporation is to pay dividends to its owners [emphasis added]." Many investors agreed, considering the possibility of stock price increases to be speculative in comparison to a steady flow of dividends.
But 66 years later, by the end of the bull market of 1982-2000, there was far less interest in dividends among investors. The humongous rise in share prices during the long bull market dwarfed dividends' contribution to total returns. Many investors' interest in dividends dropped to near zero.
But times change. The bursting of the bubble from 2000-2002 sobered up many investors. There has been a rekindling in appreciation for dividends. Investors realize that a dividend stock portfolio can lower risk, grow principal, and steadily increase income over time.
Dividends are stocks' secret weapon. Studies show that -- despite their relatively small contribution during the bubble years -- dividends have accounted for half or more of the total return of the stock market over very long terms. This may be surprising considering how little publicity dividends get. There is no widely followed dividend index that gets the kind of publicity bestowed every day on the Dow, the S&P 500, and the NASDAQ -- all of which reflect price changes only, and therefore give a very incomplete picture of "how stocks are doing."
Dividend stocks are attractive as a core investment for anybody. Common misperceptions are that dividend stocks are slow-growing, boring investments; that a company's payment of dividends is a sign of weakness, that the company cannot think of anything better to do with the money; and that dividend stocks are good only for retirees needing income. These are all incorrect, unless you consider steady income and wealth-building to be boring.
In fact, dividend stocks may just be the best investment that anyone can own.
Dave explains his Easy-Rate scoring system for assembling the best dividend stocks. It looks at earnings, revenue growth, debt, and dividend history to assign points based on their values. A stock's points make it easy to see if it's Excellent, Good+, Good, Fair+, Fair, Poor, or Bubble.
Dave then runs his own system to come up with the top 40 current dividend stocks, presented in four tables for easy reference: alphabetically, by quality score, by total score, and by current dividend yield.
You may be surprised by some of the stocks not on the list. A sampling from that group:
Boeing (yield too low)
Citigroup (average 5-year return too low; cut its dividend)
ExxonMobil (yield too low)
Pfizer (made list of finalists but was outscored by others)
Among the 40 winning stocks, the highest yield is 9.0% and the lowest is 2.1%. The book includes completed Easy-Rate Scoresheets for each of the 40 winners.
To read more about the power of dividend stocks and the book itself, head on over to its page at SensibleStocks.com.
Some of the most popular features of my stock book and The Kelly Letter are the permanent portfolios. The one I emphasize is Maximum Midcap, a strategy that seeks to double the performance of the S&P Midcap 400 index, a market segment that's one of the best-performing over time.
The strategy is dismissed by investment advisers as forcefully as part-timers praise it. Why? Because it returns more than almost every expert and proves that they are unnecessary. They don't want that message getting much play.
Which is the reason I get hundreds of gloating emails whenever the market takes a turn south and my permanent portfolios, which are always invested, head south as well. "Hah!" goes the typical note. "Not so smart now, are you? One of these years maybe you'll come to accept the necessity of timing."
What they miss is that the occasional plunge to the depths, when coupled with a disciplined investment plan that adds more money on the cheap, is precisely what gives the portfolio its power. If you're a long-term investor, you want volatility. Without it, you're in a bank account. How much will that grow over the years? Not much. After inflation, not at all.
The first quarter of this year found the timing adherents in full plumage. They couldn't find enough ways to say they told me so, but were at a noticeable lack of words when pressed for when. "Back when I called the top," they'd begin. "When?" I'd ask. "When I called it." Ah, gotcha. A lack of specificity is a sure sign of hollow claims.
Aside from the fact that there is no long-term "top" because the market will eventually rise higher, there's the niggling inconvenience that nobody's able to identify the short-term ones until after they've happened. Lot of good that'll do you. Also, the guy who got it right this time probably won't be the one who gets it right next time, so this whole exercise is best suited to those who need to gamble but can't afford enough gas to get to Vegas -- and who can these days?
If you'd rather invest wisely and leave the games for something less important than your future wealth, take a look at my permanent portfolios.
For all the shouting about the end of the world arriving -- yes, again -- and how "this time it's different because the amounts of money involved are so staggering" (again), Maximum Midcap has quietly climbed nearly back to break-even for the year so far.
I'm not kidding. The end of the financial world as we know it lasted all of two months from the March lows.
In that time, Maximum Midcap gained 32% and is now just 1% below break-even for the year. Wow, guys, that was some crisis you cooked up there. Money we invested near the lows per our regular schedule has increased nicely without any of the undue stress experienced by those trying to second-guess Armageddon's timetable.
Sure, they'll be back with their feathers on display again down the road when the market goes through another of its down times. What they'll fail to point out is that all one has to do to keep a cool head when others panic is realize that the market falls 1/3 of the time and rises 2/3. The odds favor the longs, and the odds are completely in the favor of one who keeps investing during the 1/3 down times.
For now, though, they've been reduced to saying that this rally never should have happened, that it's a blip in a longer-term down trend, and that the Big One that didn't happen this time is just around the corner.
Funny thing about that Big One is that it's lived "just around the corner" ever since I got my start in the market 15 years ago. The best glimpse I had of it was the dot com bubble burst when the Nasdaq lost 78%.
Even in that, though, a person investing in Maximum Midcap at the worst possible moment, the very peak before the great crash, would have recouped their principal in just five years. A year and a half after that, the strategy was up 21% overall while the Dow was up just 11%.
Anybody astute enough to keep investing in the strategy while it plumbed its depths recovered far more quickly thanks to a 127% gain from March 2003 to March 2004. Remember, we're discussing what was likely the worst bear market of our lifetimes, and even through that the strategy survived and thrived.
Last Thursday, I wrote an article called What The Dell Is Wrong In Round Rock? referring to the city where Dell is headquartered. The article is here.
I was surprised to receive two friendly notes in response: one from Dawn Lacallade at Dell's IdeaStorm.com site which was created for the express purpose of gathering ideas from customers, and one from Richard at the Direct2Dell.com public relations blog.
Dawn agreed that the pace of innovation has been too slow, but said the company is hard at work changing that. She then pointed me to two exciting products that prove what Dell can do:
The Dell Crystal Monitor: A 22-inch widescreen flat panel display made of ultra-clear tempered glass, with a 1680 x 1050 high-definition resolution and a 98% color gamut to reveal more shades and tones. It won the highest design honor at the Consumer Electronics Show, the CES Best of Innovations 2008. See it here.
The XPS One: An all-in-one computer similar to the iMac, but Windows-based. It features an elegant display with built-in 2-megapixel webcam, integrated Hi-Def sound system, wireless keyboard and mouse, a smoked glass display base, a finished back, and a clean one-cord wire consolidation. See it here.
Richard wrote that Dell is "a work in progress" and pointed out, "This is not a short-term fix and we are not in a short-term game."
He clarified that the Vostro line of notebooks is not supposed to compete with the MacBook Air, but is a gutsy alternative for small businesses that want power and speed in a little package.
He referred me to a review at Laptop Magazine that awarded the Dell XPS M1330 its Editors' Choice designation and said it's "a remarkable notebook for a very reasonable price."
The review concludes: "So let's review: top-notch screen, keyboard, performance, design, portability, and features, all for under $2,000. Sure, it's not as thin as the MacBook Air or ThinkPad X300, but the XPS M1330 has more features than the former and a much lower price than the latter. This is the ultimate sweet-spot notebook for consumers."
First, that two Dell employees took the time to compose thoughtful, polite replies to what was a fairly pointed critique from me. Both Dawn and Richard seemed proud of their company's accomplishments. Such dedication to company success and attention to customer satisfaction is important.
Second, that the products they showcased in Dell's defense are worthy. I particularly love the Crystal Monitor and would enjoy seeing it on my desk. That qualifies as a kind of product lust, I suppose.
This experience, combined with my recent experience of finding Dell to be the best choice for a family member's new notebook, makes me think that however slowly it's happening, Dell is indeed turning around.
Thanks to Dawn and Richard for taking the time to write!
We've been well ahead of the mainstream media on the issue of who will be running against McCain. On March 23, I sent to Kelly Letter subscribers the following:
The idea that Clinton and Obama are neck-and-neck in the race for the Democratic nomination is a media driven fiction. It makes for great edge-of-the-seat reading, but is wrong.
Clinton has almost no chance of winning.
Even her own campaign says she can't win more pledged delegates at this point, and any calculator will tell you the same thing. Even if she wins every single contest remaining with 60% of the vote -- a margin of victory she's attained only three times so far -- she would still trail Obama in the delegate count.
That leaves Democratic superdelegates to reverse the popular vote in Clinton's favor. Clinton is banking on winning the primary popular vote, at least, to lobby superdelegates to make the nearly inconceivable decision to tell her black opponent and his grassroots army that, despite his winning the count with voters, the candidacy will be given to the white person.
The notion that Hillary's demise is inevitable is finally taking hold in the mainstream media. Charles Krauthammer wrote in today's Washington Post:
There's only one remaining chapter in this fascinating spectacle. Negotiating the terms of Hillary's surrender. After which we will have six months of watching her enthusiastically stumping the country for Obama, denying with utter conviction Republican charges that he is the out of touch, latte-sipping elitist she warned Democrats against so urgently in the last, late leg of her doomed campaign.
Are any other Dell shareholders wondering what's going on at Dell headquarters in Round Rock, Texas?
It was all the way back in November that Michael Dell said he wanted to create "product lust" the way Apple does. So far, the only things remotely lusty on Dell.com are the colors available on new PC models -- and I can think of several products better suited than computers to creating lust from color choices.
Apple's utter dominance of electronic product lust requires no further comment. But even non-hardware companies are running circles around Dell. Have you taken a gander at Amazon.com's Kindle? It's amazing and it was conceived and created by an online store. Why was Amazon.com able to flank Dell on this one?
There's no Dell cell phone, no Dell MP3 player, no Dell brand-new-category anything. There are just the same old PCs they've always made, presented on a website that doesn't have anything except price to differentiate it from other PC box websites. To Dell's credit, its machines are still price competitive.
Compare this long, long, long wait with nothing even mildly titillating announced by Dell with the eyeblink speed with which Howard Schultz is getting Starbucks back on its feet. If you listened in on the conference call, then you know what I mean when I say that it was hard to keep up with all the innovations on the way, and they just make drinks, for crying out loud! That a drink maker has found more ways to innovate in the last 14 weeks than an electronics device maker has found in the past two years is a disgrace -- to the electronics maker.
At this point, people usually raise a hand and ask what ideas I have for Dell. Rather than just complain, can I offer a suggestion?
Sure: get beyond the box.
Dell was always a PC box maker, and that was once a fantastic business because it figured a way to do it cheaper than others. That advantage is gone now because all major computer makers get their supplies from the same channels, everybody can deliver direct, and now Dell sells in stores anyway.
What's even worse, though, is that the rise of the internet has made which computer we use less important. It doesn't really matter what people buy, certainly among all the PC makers but not even between an Apple and a PC anymore. As long as they can get online, users don't care what's in front of their face because nearly everything is happening online.
Side note: That's why Apple has such a bright future -- if people now have the freedom to choose anything, why not go with the best?
Dell is trying to make its models stand out, but so far it has only marginal improvements to list. For example, the aforementioned color choices and a clear side panel on upcoming floor towers. Even that description reveals the problem. Floor tower? Come on. Look at a floor tower and then look at an iMac and if your head's not shaking then you're officially the most boring person at the party.
Even over at Dell IdeaStorm, you won't find much sign of lust on the way. You know what that fun-loving crowd has come up with on the innovation front? Keeping Windows XP an option instead of forcing people into the Tenth Circle of Hell known as Vista (be still my beating heart), changing packaging to be more environmentally friendly (how about focusing on what's inside the package to be more future friendly?), and making the Vostro laptop smaller (hot and bothered to the core...until I realized it's nowhere near as thin and light as a MacBook Air).
Ah, Dell. Head to a mountaintop with a team of future scenario builders in tow and really think about what could make people crave something from you again.
It's not a box, not even a clear one. It's a way to do the things we've always done in ways that excite us and make us say "ooh!" and want to own the device that makes it possible. It's new capabilities that we never even thought about, until you invented them, made them beautiful, and proved to us that we can't live without them.
As is, your idea of lust is about as appealing to me as an ice bath with Sister Mary Elephant.
It's wrong to consider Microsoft down and out in the race for the Internet just because it walked away from the Yahoo bid. I think that was a good decision because it saved $40+ billion and avoided a multi-year company integration that would have likely failed to produce anything on a par with Google's properties anyway.
When we look at Microsoft history, what is it that has consistently put it on top? Innovation? No. Most of its products are obvious knock-offs not as well-done as the original. Customer loyalty? No. Almost everybody hates the company, but it's hard to get a day of work done without using one of its products. Computer users are loyal to Microsoft the way North Koreans are loyal to Kim Jong Il. What choice do they have?
The way Microsoft has won in the past was by copying the creator of a popular product category, then outspending and outmaneuvering that creator. Think Lotus 1-2-3 being trumped by Excel, WordPerfect by Word, Netscape Navigator by Internet Explorer, and the Apple OS by Windows (but that story isn't over yet). Microsoft has managed to work its way into home gaming against Sony, a tough competitor, as the Xbox grows in popularity against the PlayStation. It could do so because it has a nearly bottomless bank account.
If Microsoft taps the power of that bank account with the old Bill Gates kind of smarts instead of the ever-more-disappointing Steve Ballmer kind of smarts, it seems to me that it would be able to damage Google tremendously in one fell swoop. Are you ready? Here it is:
Offer free advertising.
Remember, advertising is all of Google's revenue. That's all it does, which is fine and not without precedent. It's like saying the only way Krispy Kreme makes money is by selling doughnuts and the only way ExxonMobil makes money is by selling oil. That's their business. Google's business is selling ads.
The difference is that nobody can take all of Krispy Kreme's doughnut lovers away by offering free doughnuts at a different store, nor can anybody take all of ExxonMobil's customers away by offering free oil. Why? Because no company can afford to give away doughnuts or oil. Microsoft, on the other hand, can afford to give away advertising.
For now, it has a fabulous income from its hard-drive based software franchises Windows and Office. Google has no other income streams beyond advertising. Microsoft can bankroll its online efforts with its software business, make Live.com better, put more content up, and otherwise increase page views.
At this moment, Live.com and MSN.com are ranked 4 and 5 in Alexa's Global Top 500 websites, behind only Yahoo.com, Google.com, and YouTube.com. Microsoft gets more traffic than MySpace, Wikipedia, Facebook, and everywhere else online except for Yahoo and Google. So, it's not like Microsoft is a no-show on the Internet. It's third in the world.
That's why from day one advertisers would be there. For free, why not? I'd put ads up. I'd stop campaigns in other places, try the free ads at Microsoft, and see what impact it had on my business. It's possible that free ads at Microsoft would not create enough business to be better than paid ads at Google, but I'd sure give them a shot. So would millions of others.
Google's revenue would plunge, people would use Microsoft's properties more even if just to see their own ads showing up, and mind share and maybe even actual market share would increase. If enough traffic came from the effort -- and presumably other marketing efforts run in parallel -- then Microsoft could later begin charging modest fees or look into other ways to monetize all those advertisers.
Giving away a competitor's product is a classic way for a dominant company to win. To Microsoft, advertising is not important yet. To Google, it's everything.
If I were in charge of Microsoft, I'd press my advantage.
I read in several places that we face a "moment of truth" in the market right now. I thought that was back at the March lows when the financial system didn't melt away and smart investors (like your readers!) bought. Why are we facing a moment of truth now?
Most talk now about a moment of truth is coming from technicians, that is, investors who analyze charts to determine the odds of future direction.
They will tell you that the S&P 500 is currently caught between two key levels: support at 1,400 and resistance at 1,425. A week ago, they referred to 1,400 as resistance, but the market pushed through that last Thursday, so the former resistance became support.
Another way of analyzing the market examines its percentage position above or below its respective low and high. Right now, the Wilshire 5000 (the broadest measure of U.S. stocks) is parked just below the level representing a 50% retracement of its decline from the October high. It fell 19% from its October high to its March low, and since that March low it has gained 11%. If it gains another 11%, it'll be right back at its October high.
So, the idea with this being a moment of truth is that the market's direction in the next few days will determine its fate for the next month or so.
However, I wouldn't put too much stock in this idea, so to speak. I don't think I've ever spent a day researching stocks when I didn't run into somebody saying "we'll know more tomorrow" or "this is the decision point" or here we are at the "moment of truth." Isn't it always a moment of truth of some sort? The evidence is in, we all have an opinion, then we step back to see what really happens.
Generally speaking, there are five moments of truth in every trading week. They come on Monday, Tuesday, Wednesday, Thursday, and Friday.
We sold our shares of Yahoo the week before last when the price hit our safety stop, which we were forced to place by the uncertainty surrounding a deal with Microsoft.
Microsoft CFO Chris Liddell said in the April 24 conference call: "Our initial offer was an extremely generous [one].... The strongest argument that I've heard on why we should increase our bid, simply that we can afford to, is not one that I favor. We've yet to see tangible evidence that our bid substantially undervalues the company."
In response to Mr. Liddell's comments, I sent to subscribers last Sunday:
You can see why investors began thinking that maybe Microsoft will walk away from the deal with Yahoo.
Walking away now doesn't mean walking away forever, by the way. Remember that Microsoft tried to get Yahoo a year ago. That didn't work, so it waited a year and tried again. Maybe it won't work this time, either, but we could see it come back in six months when Yahoo's share price is $17 and shareholders have so pressured Jerry Yang for missing the chance to get $31 that the deal can happen at, say, $25.
We're at the end of Microsoft's deadline, so it has to decide soon whether to up the offer, launch a hostile proxy battle, or walk away.
It has said it doesn't want to up the offer because there is no reason to do so. It believes its offer is full and fair. Raising the offer now would be odd, and would leave Mr. Liddell with some explaining to do after his comments in last week's conference call.
A proxy battle looks senseless. It would drag on for months and the very talent that Microsoft seeks to get with Yahoo would flee the situation in droves, going to the open arms of internet firms around Silicon Valley. Both Microsoft and Yahoo would be distracted from their businesses while Google continues going to town.
That leaves walking away looking like a good option.
Should Microsoft cancel the offer and we see YHOO drop like a rock, there's a small chance we'll re-invest at lower prices if the partnership with Google looks like it might become something and/or a later offer by Microsoft appears likely.
Despite Mr. Liddell's saying that Microsoft's initial offer was "extremely generous," it got even more generous. On Friday, Microsoft upped its offer from $31 to $33 and it appeared that we'd made a mistake to have sold YHOO the week prior. Then, late last night, Microsoft withdrew its offer entirely.
Steve Ballmer said, "Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer. After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal."
Jerry Yang wrote, "This process has underscored our unique and valuable strategic position. With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history..."
Soleil Securities analyst Laura Martin said she expects shares of YHOO to fall $8 on Monday. Other analysts have predicted a swift return to $19, which would represent a 36% drop from their Friday after-hours price of $29.70.
What now?
Of course, we're glad to be out of YHOO shares. That's the immediate reason to raise a glass. Longer term, I continue to think this near match-up between Microsoft and Yahoo makes it clear that Google is the place for online investment dollars. It's the company that Yahoo is turning to for help in its comeback, and it's the company that scared Microsoft into offering more than $40 billion for Yahoo.
I think this saga isn't over yet. I think we'll see Yahoo struggle for a while longer and I hope very much that it succeeds. Our belief that it could was our reason for investing in the first place. However, Jerry Yang's 100 days for a turnaround ended a long time ago and we haven't seen much. The increased shareholder pressure now that the deal with Microsoft is off might light a fire under Mr. Yang -- or burn him out of his position entirely.
Regardless, if Yahoo gets back on its feet, it appears that it will do so with the help of Google. That will benefit Google. If Yahoo fails, I imagine that Microsoft will show up again with a lower bid for Yahoo and that it will succeed because Yahoo shareholders won't let it pass by again.
Through all this, Google's search share will grow, its progress with gDocs will move closer to offering an alternative to Microsoft Office, and we may even see a downloadable internet-based operating system from Google as the first potential threat to the Windows franchise.
Before the hate mail comes pouring in, realize that I do not expect Google to displace Microsoft before summer is out. That's not what I'm calling here. What I'm observing is that the Microsoft/Yahoo drama illustrates that the old guard is in a precarious position against the new, and that it gets even more precarious with each passing month.
Clearly, the old guard itself realizes that as well. If Microsoft is to remain a necessary part of computing, it's going to have to get online applications figured out quickly, build hooks to its online properties into its online applications, and hope that an integrated Microsoft web search capability from within its online application family can gain it some of Google's growing market share -- and the advertising revenue that goes with it.
Microsoft is now facing a future where more is done online than off, and where it has a spotty track record in the areas that matter. It had hoped that Yahoo could help it catch up. With that hope gone, it had better begin reconfiguring itself soon.
With an extra $40 billion in its wallet, the possibilities are tantalizing.
Is it true you guys bought financial stocks at the very bottom of the drop after Bear Stearns? A friend of mine is a member there and claimed that, but you know how claims can be.
Indeed I do, which is why we maintain a complete archive of every note sent to subscribers. Any member can browse through past issues chronologically or read content grouped by label on the subscriber site.
As for our buying of financial stocks at the "very bottom," it's somewhat true. We researched exhaustively to find what we thought was the best one of the big banks and brokerages, but couldn't find anything really compelling to differentiate one from the other. Unlike Jim Cramer, we did not find Bear Stearns to be attractive.
Ultimately, we decided that buying the whole sector with leverage to get twice the bang out of a recovery was the way to go. We never believed the crap about subprime and credit concerns spelling the end of the financial system as we know it. (Surely you didn't fall for that!) Anybody who's studied the market for a while knows that financial stocks get a washout about once a decade, it's always called the end but it never is, and those who buy at the point of maximum pessimism do very well in the recovery. Think back to the S&L Crisis of 1990, the Asian contagion of 1997, and the collapse of Long-Term Capital Management in 1998. They were all supposed to be the end, none were, and we knew without a doubt that this time wasn't the end, either.
We chose ProShares Ultra Financials as a simple way to leverage the Dow Jones Financial Sector index. We bought shares at $24.20 on Monday, March 17, which was a magnificent entry price due partly to luck, to be honest.
The ETF closed the previous Friday at $27.42. In that weekend's note to subscribers, I wrote about the bottom of the financial crisis being close, and we placed a good-til-cancelled limit order to buy at $27.
All hell broke loose in Asia on Monday, and after the storm hit New York, the ETF opened at $24.04, we bought at $24.20, and it ended the day at $26.44. The 52-week low of $24.01 was set that very morning, so we're very pleased with our entry price. See the chart.
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