Week 8 Performance - Up 0.52%

Week 8 Performance
Broader market gain/loss: -1.7% Dow (10717), -1.6% S&P (1248)
LIVEROCKET gain/loss: +0.52%

Year to Date Performance (since inception Nov 3rd)
(Nov 3rd - Dow closed 10522, S&P closed 1219)
Broader market gain: 1.9% Dow, 2.3% S&P
LIVEROCKET gain: 9.52%
(Note: I miscalculated the Week 7 Update – we closed at 9% not 7.2%. So this week is a 0.5% gain NOT 2.3%.)

Weekly Performance
LIVEROCKET beat Dow/S&P: 5 out of 8 weeks
Dow/S&P beat LIVEROCKET: 2 out of 8 weeks
LIVEROCKET tied Dow/S&P: 1 out of 8 weeks

Individual Stock Performance
Stock growth >20% 2 out of 14
Stock Growth >10% 2 out of 14
Stock Growth 5%~10% 5 out of 14S
tock growth 0%~5% 3 out of 14
Stock growth <0% 2 out of 14
----------------------------------------------------------
Week in review:
A slow week in general.
ACL – Down 3%. Still hurting from that lawsuit. We hit our stop loss of $130 for a whopping 10.3% LOSS.
BCSI – Up 5% thanks to being added to S&P Small CAP (broader buying base because some investors buy the index)
GILD – Down 6% from its high 2 weeks ago!!!! As mentioned previously, GILD stubbornly wants to stay in the $50~$55 range. But it does this. Look at the last year, for example. It runs up after earnings release, then drifts for 2 months. I expect it to break out of the $55 level and stay above in the next 3 weeks.
JBLU – Flat for the week but down 9% from its high last week. Lots of positive news on airline stocks the last week. When I first discussed JetBlue (Nov 10th), I called out my belief that it would explode from higher margin holiday traffic and moderating fuel costs.
JLG – Down 5% for the week and 7% from its high last week.
JOYG – Up 1% for the week but down 4% from its high last week.
MDR – Up 4% for the week on very strong volume (~2X). MDR also touched a new 52 week high today.
MRVL – Down 1% this week and 8% from it’s high 2 weeks ago.
WFMI – Up 1% thanks to being added to S&P 500 (broader buying base because some investors buy the index)

Notice a pattern? Most stocks had fantastic news and surged to new highs in the last 2 weeks, only to pull back 5%~10%: JBLU, JLG, MRVL, GILD, WFMI, JOYG. I like the upside movement and direction. I don’t mind the profit taking and end of the year positioning. I see these stocks as continuing their climb.

But this does beg the question – should we trade more aggressively to lock in profits. The answer is yes, but that is not the focus of the current portfolio.
The LIVEROCKET Test Portfolio is intended for the average person who has limited time and will do light trading.
I am happy to set up a second portfolio for the more aggressive trader who is willing to assume the additional risk and effort. Please let me know if that is of interest.

2005 was not a bull market. In fact, only 1 year out of the past 5 has been a bull market: 2003. I think that we are still paying for the dotcom excess (aka 7 fat years and 7 lean years).

Shares Price Stop
JOYG 242 37.17 38.5
MDR 211 42.74 41
BCSI 227 39.5 42
WFMI 68 146 75
GILD 200 50 51.5
MRVL 200 49 53
JLG 263 38 44J
BLU 810 12.3 14.5
Cash $22,817

History of trades for 2005

Summary of Buy/Sell Activity
Started with $99,539
Shares Price Net
BCSI 200 50 10000
DESC 1150 8.5 9775
PWR 751 13.3 9988.3
GYI 114 88 10032
CERN 114 88 10032
WFMI 136 73 9928
GILD 200 50 10000
MRVL 200 49 9800
JLG 263 38 9994
JBLU 810 12.3 9990
(Note: For simplicity, am using JBLU post split adjusted figures)

November 15th
Sold BCSI at $45 for a loss of $1000.
With the $9000, promptly bought back 227 BCSI shares at $39.5.
Remaining cash position $34
Shares Price Net
BCSI 227 39.5 10000
DESC 1150 8.5 9775
PWR 751 13.3 9988.3
GYI 114 88 10032
CERN 114 88 10032
WFMI 136 73 9928
GILD 200 50 10000
MRVL 200 49 9800
JLG 263 38 9994
JBLU 810 12.3 9990

Dec 11th
Sold
GYI ($89) for $10146 (gain of $114)
DESC ($9.2) for $10580 (gain of $805)
PWR ($13.7). for $10289 (gain of $300)
Total net gain $1219.
Total cash $31014

Purchased
Shares Price Net
ACL 55 144.9 7970
JOYG 242 37.17 8995
MDR 211 42.74 9018
Total cost $25983
Total remaining cash: $34 from BCSI plus $5031 remaining = $5065

Dec 15th
Sold
CERN ($93) for $10602 (gain of $570)
Total cash position is: $5065 + $10602 = $15667

Stock positions
Shares Purchase Price
BCSI 227 39.5
WFMI 136 73
GILD 200 50
MRVL 200 49
JLG 263 38
JBLU 810 12.33
ACL 55 144.9
JOYG 242 37.17
MDR 211 42.74

Portfolio value as of 12/28
Equity $94,208
Cash $15,667
Total value $109,875
Starting value $99,539

Farewell Scrooge

As we close out one year and start another, this is as great time to look at where we are in the business cycle.

THE GHOST OF CHRISTMAS PAST
Sometime in 2001 the last cycle came to a sudden halt, after almost 9 years. A helluva run. In some ways, the cycle had run well past its expiration date, prolonged thanks to Greenspan shenanigans and the pre-Y2K splurge of spending that continued into 2000.

Greenspan and Bush through everything but the kitchen sink at the economy, including massive reductions in the interest rate and tax cuts. It worked, but it came with a price. A stock market bubble was transformed into a real estate bubble.

THE GHOSTS OF CHRISTMAS PRESENT
I believe that the housing bubble is tugging us down in one direction while the manufacturing sector is tugging us upwards in a different direction.

First, the good news. Capital spending will continue in 2006. Here’s why.
In the run up to 2000, US manufacturing firms were on a capital spending spree. This slowed in 2001 as reality sunk in, and spending sank with it. Much of this spending was tied to dot.com growth and productivity gains. IT growth was specifically tied to Y2K and dotcom fever. (M = manufacturing, IT = Information technology, U= utilities, F=finance/insurance, MOG = mining/oil/gas )

US Census Capital expenditures $B
M IT U F MOG
1999 194 123 40 24
2000 213 160 61 131 33
2001 192 146 83 131 40
2002 163 89 67 126 42
2003 150 82 55 125 51

Not until 2004 did total spending reverse the decline.

What caused the timing of the turnaround in 2004 and what will drive it further into 2006? Not only the tradition that manufacturing investment lags recession recoveries. But also the 5 year amortization schedules. Basically, by 2004, massive dotcom spending was finally starting to be fully depreciated. 2005 saw massive replacement of equipment purchased in 1999/2000 which in turn was possible due to capacity being soaked up again.

Why do I think that the capital spending will continue?
Clearly, 2001 was a sign of over-buying. Capacity utilization sank amazingly low. Compare the low utilization levels of the two recessions: 74% (2001) vs. 78% (1991). To some degree, that suggests that some of that capital will not get replaced at all. Add to it the major and permanent manufacturing shift offshore (currently to China). This pushes against capital spending

But dig deeper. Manufacturing and mining/oil/gas are global in nature, so US spending does not define total actual demand. US manufacturing has dropped 25% ($63B), but it has been replaced offshore - so I see growing demand. Mining/oil/gas has grown in the US $18B, and much more globally (more mining and oil exploration outside of US than inside).
The real story is in IT where spending collapsed 50% (~$100B) mostly because of Telecom spending drops. I see this demand reversing dramatically this year thanks to several factors.
* iPOD – Bandwidth demand will surge partly from Video on Demand and partly from the humble demand for downloading movies and TV shows to the iPOD. This will spark much greater program availability and accessibility beyond the iPOD. The iPOD will be the poor man’s VOD, but it will spark availability that in turn will drive demand for more storage and bandwidth. The Killer Application VOD has arrived.
* Obsolete equipment – The Cisco paradigm follows the Wintel paradigm wherein equipment is obsolete within ~7 years.
* Competition – Cable and wireless companies will scare the Telecoms into spending again.

The turd in the punchbowl is consumer spending. The Housing Bubble is about to pop. We have yet to pay the price of a serial bubble (stock market bubble turned into housing bubble). We are entering a transitioning period where some signs point up and some signs point down.
Actually, only one sign is pointing up: housing prices continue to advance
All other signs indicate a looming slow down: November housing volume sales dropped 11.3% sequentially versus October, the biggest drop since 1993. Volume of unsold housing in Silicon Valley increased 20%+ in November. Indeed, Silicon Valley houses are staying much longer on the market versus same period last year. Also rates are rising, driving affordability in California to an all time low of 14%.

Experts predicted a slowdown with prices stabilizing. But the Housing market is dropping further and faster than the experts thought it would. In the face of 30% fewer sales, will they revise expectations about pricing as well?

The key to all of this is momentum. Real estate prices always have amomentum that takes a while to reverse (at the low and high ends). I see April as being a milestone when prices will begin to be rolled back. Housing is emotional and prey to psychology. It is worth only what people are willing to pay for it, and that includes expectations about future price movements. If prices begin to slacken, people will wait to buy and that will add downward pricing pressure as well. Supply will hit the market as well thanks to massive building (townhomes and condos) as well as speculators unloading. Supply will begin to outstrip demand.
Housing prices will not enjoy their current premium in light of townhouse price drops – never has, never will. They are substitute goods.
The Housing market slowdown will not happen in a vacuum. As is already occurring in Great Britain, consumer spending slows. And consumer spending is the backbone of our economy.
The first to slow will be luxury goods, cars and household durable goods.
At the same time, people who made windfall profits in real estate will be plowing those funds into the stockmarket.
But this will be unwinding towards the middle and late end of the year. That means the negative impact of housing bubble crashes won’t appear until 2007.
In the meantime, hello bull market of 2006.

GHOST OF CHRISTMAS FUTURE
I see a solid 2006.
Sectors to avoid:
Retail – Consumer confidence is strong enough to boost many retailers. And certain items like flat panel TVs will show rapid growth. But I don’t like getting into retail at this point in the cycle because I expect a slowdown soon.

Financial – A tightening of money flow, interest rates, and a looming housing bubble do not look promising. I see a flurry of activity as homeowners begin swapping out ARMs, but re-financing won’t be the same as massive new spending.

Housing – Beware. If you don’t know who the sucker is at the table, that means it’s you.

Sectors I like:
Telecommunications & Storage – Both personal (PSP, iPOD, Cell Phone) and commercial. I like Marvell because they have feet in all key growth areas – they make chips for the iPOD, make chips for disc drive storage, and make chips for telecommunications. Content delivery will be king. So I like BCSI for secure IP data flow and Akamai because they provide the delivery system for iTunes – and that business is just growing. Flash data storage is also booming, something Sandisk continues to ride as will disc drives, for which Seagate looks good.
Cisco and Juniper will also be poised for success


Mining Equipment – The biggest capital investment growth has been in mining and related equipment. And this equipment breaks – rocks have a way of causing wear and tear. We have JOYG and JLG for this one.

Energy – Like mining, this was another area of massive capital investment. If Telecommunications will begin infrastructure investing because they waited too long, energy is investing because the prices make it worthwhile. Energy is here for a while given ongoing near-term strong demand. I don’t like volatility from energy prices, so we have MDR as an energy equipment and infrastructure play.

Healthcare – Aging boomers. Trends will be to cut costs (generics like TEVA), offer alternative drugs and treatments (GILD, ISRG, ALC), care for the aged (SRZ), as well as a shift away from healthcare and more towards illness prevention via healthy living (Whole Foods, and eating/exercise facilities that are low impact and more elderly friendly – whatever those may be).

Transportation – I see global airline integration happening and I think JetBlue is poised to be a major player. When Heathrow opens up, watch for RyanAir or some other equally fierce player to tie in with JetBlue. Trucking is also going to improve – internet retail makes warehousing and shipping more centralized and flexibile shipping more valuable in the economic chain. Hence, truck shipping. USAK is poised for strong upsides.