Drinks & Dividends Update

The results are in from the last DD get together.

At the May Get together, we all chose stocks. The results for the 1 month contest are as follows
1st Place DIS - up 7.5% Will Chu
2nd Place TIE - Kasey
3rde Place PARL - Stephen

Will - pls get in touch with me to get your winnings
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For the June Month, the following were the picks
ESV - Andrew
EXPW - Ray
PLT - Wade
CMG - Stephen
DO - Kasey
DGX - Senthil
CMCSA - Mohan
BAC - Jamileh
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At the last meeting, the discussions were about what is happening.

The idea was presented that we may be expecting a recession. Exploring that idea, we talked about the dependencies of other economies on the US (especially China & Japan). We considered how the housing market and consumer productsd market would collapse in a recession.

In the face of growth topping 4% in the US, I would be hard-pressed to say that a recession is around the corner. There are signs of a slowdown:
1. Inventories increased fractionally
2. Housing sales are slowing down (construction jobs were responsible for 30% of the jobs during the recent boom)
I believe that slower growth and slowdown are different. We are barely 4 years into this business cycle.

LiveRocket Turbo Week 2 Performance - Down (-3.1%)

A mixed bag of results. As with any portfolio of high risk investments, we could see a sudden change at any time.

AMX - Flat for the week. As money flowed away from developing countries, AMX was affected.
DO - Up 2%.
GRP - Up 4%
NUAN - Up 11%
RFMD - Down 10%
STX - Down 6%
TTI - Up 3%
ZOLT - Down 12%
ZRAN - Down 7%
BMHC Puts (Dec $25) - Up 10%
TIE Calls (Dec $50) - Down 13%
TRID Calls (Jan 22.50) - Flat

All in all, the options will add the most volatility.
I am not interested in making any trades until earnings release

Week 32 LiveRocket Performance - (-0.76%)

Week 32 (versus previous week)
Dow 1.13%
S&P -0.08%
NASDAQ -0.23%
LiveRocket -0.76%

YTD
Dow 2.78%
S&P 0.24%
NASDAQ -3.4%
LiveRocket 19.12%

Since Inception (Nov 4, 2005)
Dow 4.7%
S&P 2.6%
NASDAQ -1.8%
LiveRocket 30.46%

Despite a strong 2 day gain mid-week, the markets are still down. Five weeks of negativity have shaved 8%+ off the Dow and Nasdaq. The overselling peaked early in the week and we saw on Tuesday the beginning of money selectively returning to the market. The key word being selective.

We missed most of the crash because of our stop limits pushing us out of stocks and into cash. In retrospect, the mistake I made was getting into the market prematurely 2 weeks ago. I believed that the rebound had come. Instead it was a dead-cat bounce. It's not often one experiences a 4 week 10%+ drop in the DOW when the economy is strong and there are no real shocks (i.e. compared to the damage of Hurricane Katrina).

What continues to catch my attention is the chorus of voices from the Fed, all of them singing the song of more rate hikes to fight inflation. I think that the market has digested the worst case scenario (a 0.5% cumulative hike). As always, the smart money is rolling in and now is the time to begin placing bets on the right investments.

From a stock picking point of view, it is clear that the market is negative on technology (especially consumer gadgets like PCs), on housing and on infrastructure. Any earnings releases that are strongly positive will be treated as a last gasp before a slowdown.

I think the next few weeks will be dominated by 3 milestones: Fed meeting in late June, July 4th holiday, and the 2 earnings releases. Not a lot of buying pressure, but I think money managers are placing their bets as we speak.

I have seen resilience in a lot of stocks and am analyzing. I also think that a bunch of the stocks that comprised our portfolio are bargains. For example, off-shore oil rig companies (DO, ESV) are raising prices. That means a lot of upside.

We were stopped out of Zoran this week.
We are sitting on a cash position of $119,551.02. I do see selective investing next week. I may suggest playing the volatility and market softness by doing rapid trades (get in, lock in a gain, get out).

DIS - Flat for the week. Disney was hit by the lost court case where they have to pay $125M to Michael Ovitz. Disney was also downgraded on slower growth, especially at theme parks. At the same time, I see a lot of positives.
* TV - Advertisers are increasing the rates they pay to Disney.
* Digital Downloads - Disney has strongly embraced iTunes and is finding an enormous revenue source for existing entertainment shows. That's almost 100% pure profit.
* Movies - Cars, Pirates & Toy Story. Cars was not a new record setting Pixar movie but it depends on longevity. You can't beat movies for cheap entertainment.
* Theme Parks - Disney announced plans to consider a new theme park in Malaysia. They will get a boost in the stock just by moving forward.
* Increased Interest - Disney may benefit from a flight-to-quality as certain investors look for less volatile stocks

Is It Over??

It's no surprise that Bernanke said nothing yesterday to calm the markets. He is waiting for today's inflation reports. The Nikkei plunged 4.4% as fear based selling continues.

But inflation is mild, and Best Buy is announcing good news.

Nevertheless, I don't think the markets care. First, they want a clear signal. Bernanke's tough love has not won him any fans. Second, deeper than expected cracks are appearing in the housing market. Hovnavian announced that cancellations are much higher than expected. They walked away from $5M+ in deposits on options to buy property.

The fundamentals of the market are strong. They really are. But the stock market is spooked and money is not going to suddenly flow in, imho. Far too many investors have been burned by the recent plunge for them to rush back in.

One way to play this is to sellwhenever a 5% gain can be locked in, and set a 5% STOP.

I see signs that we are bottoming, not that we have bottomed. I won't get in until I see us bottomed.

Why the market keeps dropping

Another day of heavy losses.

If this were truly inflation related fears, then the worst would already be factored in after a 8% DOW correction and a 13% NASDAQ correction.
There isn't even an external shock like a Hurricane Katrina.

Something else is going on. This is more than just an ordinary correction where stocks that have had a great run-up get pulled back. Far too many stocks are below the 200 day moving average.

Consider oil stocks. Oil consumption is not going down, recession or not. Global demand is simply too high and alternatives don't exist and won't exist for 3~5 years. Nevertheless, prices for oil equipment (GRP, JOYG, DO, ESV) are down dramatically.

There are no buyers at this time. There isn't a flight to value - every market and every industry is being hit. technical levels are being ignored. Analysts - as usual - are quiet and not willing to step in and make any predictions. Everyone is heading to the door and not looking back.
In short, nobody knows what is going on.

Today could be because of last minute jitters before the inflation reports come out. But today is just a blip within the broader context.
Here's the thing: if inflation data comes out positive, the markets rebound a bit and the short sellers could get surprised on Friday, which is an options day.
If the news is negative, look for more price deflation.

I do believe that consumer spending is strong - Best Buy will release numbers to show that.

Bear Market or Correction

If you read the commentaries and analysies, the consensus is that this is a bear market. The paid columnists are all in agreement that the economy is about to slow and that the market is going to continue to reflect this by heading south.

While I am not convinced, the fact is that market sentiment is powerfully negative. Given all the recent pain, I am more willing to cash out and wait on the sidelines rather than play the volatility.

Housing Bubble Update - worse than it appears

This is an anecdote - but I think it is very indicative.

Friends of mine own a house in San Carlos. They paid ~$650K for it. In March they bought a bigger home for a lot of money on an interest only loan. They began selling their first home.

MARCH - MAY: BUYER? WHAT BUYERS?
The house was listed at $950K, what the comps said it should be. At the time there were only 2 houses <$1M on the market in their area.
With limited inventory, they were counting on a fast sale. In fact some 50 people came through to look. Not one offer was made.

Eventually an offer was made and accepted for ~$900K.
Meanwhile, they have had to spend ~$4K per month out of pocket for the mortgage which is now no longer tax deductible.
Total profit: $900K - $12K in mortgage payments - $54K real estate agent commission -$650K original purchase price = $184K

JUNE TROUBLES
The buyer backed out.
My friends have re-listed the house for $850K. They deliberately selected a lower price to try and bring in more buyers and create a bidding war to get them >$900K.

They have received a few offers BELOW ASKING.
Meanwhile, they will expect to pay another $8K for 2 months of mortgage (this month and a 30 day escrow).

At the same time, inventory has skyrocketed. There are ~30 houses now on the market in their area at or around the $850K price. Many of them are in nicer locations or are nicer homes. For an extra 10%, significantly better houses can be found.

This is in the middle of prime home buying season, and they are selling below the comparables, and they still can't unload their house.

CONCLUSION
My friends have dropped the price 12% and incurred a further 2% cost due to the 5 month sales cycle. They have been following the standard methodologies: prices based on comparables and housing appraisals.
They must sell, they can not rent and cover costs. If they are able to sell for $850K, their net will be $128K ($52K sales commission, $20K mortgage, $650K purchase price). That's a great profit.

But it is also a hell of a lot less than the expert real estate professionals told them to expect.

1. Housing prices are coming down dramatically - another 5% for May/June is my expectation. that would make the Year-over-year prices negative for the first time.
2. Predictions are off - prices are plunging faster than experts expected.
3. Sudden changes - the swiftness of the price drops is illusory. The April buying figures showed a 7.3% drop in prices versus March. In reality, April reflects housing activity from February and is therefore the first report for this year's homebuying season. Look at interest rate changes over the past 12 months (5/1 ARM).
June 2005 5%
Sept 2005 ~5.3%
Jan 2006 5.7%
June 2006 6.3%
In 12 months, the cost of money is up 26%.
In 5 months, it is up 12%
From the end of the last housing to the beginning of this one, the cost of borrowing is up 20%!
Prices had to come down to reflect the higher costs of borrowing. And they had to come down quite a lot.

As house prices come down and this is this becomes the expectation, more buyers will stay out of the market and more sellers will come into the market.

This will be a vicious cycle accelerating as September arrives.

LiveRocket Turbo Week 1 Performance - Down -8.1%

The debut of LR Turbo was terrible.
For this, very aggressive portfolio, I am not setting STOP prices. I expect incredible volatility and STOP prices will be self-defeating.

Stay tuned.

Week 31 Performance - LiveRocket Down -8.61%

Week 31 (versus previous week)
Dow -3.17%
S&P -2.8%
NASDAQ -3.79%
LiveRocket -8.61%

YTD
Dow 1.63%
S&P 0.32%
NASDAQ -3.17%
LiveRocket 20.03%

Since Inception (Nov 4, 2005)
Dow 3.5%
S&P 2.7%
NASDAQ -1.6%
LiveRocket 31.46%

An ugly week as we were stopped out of everything except Disney (DIS) and Zoran (ZRAN).

Sadly, most of our stocks came under pressure because they have had the most run-ups and they are the likeliest targets when it comes to locking in profits.

The 4 week carnage is this: the Dow is down 7.5%, the S&P is down 6%, the Nasdaq is down 11.3%. I was completely wrong when I said 1 month ago that I expected a strong bull market for the rest of the year. Let's re-visit my reasoning and my assumptions, because I am very wrong and I want to know why.
To begin with, the stock market has not reflected the economic performance since the recovery. Although 2003 was a strong bull market, it actually was just a recovery from the over-selling of 2002. I also don't really regard 2004's 3.6% performance as evidence of a bull market.
2000 Dow -5.3%
2001 Dow -10.4%
2002 Dow -20.8%
2003 Dow +21.5
2004 Dow +3.6%
2005 Dow -0.5%

I don't want to get into a technical discussion of Bull and Bear markets. My point is that this economic cycle has not been reflected in the Dow. The Dow has been fixed between 10,500 & 10,900 for 3 years.
It's a simple matter of history - markets rise during boom years and drop during bust years. I look around me and see that we are seeing boom years in the US and elsewhere: Brazil, Chile, India and China. Some of this is cyclical in nature (raw materials in Chile, Brazil etc.), but some of this is also very real and very permanent growth. China and India have arrived as world economies. India lags but will continue to play a role.

I see nothing but strength with pockets of vulnerabilities, not a soft economy with pockets of strength.
* World economy is strong, albeit still dependent on the US
* US economy is strong: unemployment is low, GDP is 4~5%, interest rates are high because the economy is strong

I also don't think that the stockmarkets are overvalued.
* Corporate earnings are strong despite interest rate hikes and higher prices for gas and raw materials. Last quarter, a massive majority of companies had higher than expected earnings. Many raised expectations for this quarter.
* Historically speaking, P/Es are also very reasonable: around 18. The P/E of the Dow hasn't been below 15 since 1991, and that's because of inflation controls and greater global market integration. Could it contract further? Well, even 18 is higher than the highs of previous economic boom time peak P/E. In fact, the P/E has been contracting since the cycle began and has fallen already in half.
* Interest rates are at a historical low. While not as low as they were, they are still mild.

How then to reconcile the strength I see with a market that did an abrupt softening?
I point to exactly two pieces of evidence:
1. Run up in commodity prices and the market AFTER BERNANKE BECAME FED CHIEF
2. BERNANKE HAS BEEN SILENT IN THE FACE OF A 11% NASDAQ CRASH.

In my estimation, this is a running duel. The markets tested the new kid, and he is firing back.

The conclusion I reach is that Bernanke wants to kill asset appreciation: housing, stockmarket, and commodities if and when they threaten the economy. At this time, the commodity price increase is a threat because it raises inflation. Ironically, for the average American, housing prices have had the biggest inflationary impact. Housing's share of disposable income has risen dramatically: 25% of the US population now spend 50% on housing. Housing prices until the 90s matched overall CPI. That is not the case.

In any case, Bernanke is lobbing a shot across the bow with the message: I will do what it takes to stop inflation, damn the economy. The markets see this as more interest rate hikes and possible slowdown in consumer spending.
Their biggest worry is recession (which won't happen - we are barely 4 years out of the last one and the world economy is much stronger).
This means uncertainty, so the institutions are taking money off the table to lock in profits - highfliers being the hardest to get hit. This isn't a flight to value. In addition, the end of loose money always means a reduction in underlying asset value.

The real threat I see is the housing bubble deflation. It is happening. Just as an asset bubble sparked consumption, asset deflation will lower it because the equity in housing will drop dramatically at a time when interest rates are rising. Not only will folks feel not as wealthy, a few million households will be spending a lot more to keep their house.

MY APPROACH
1. Volatility continues. WE STILL HAVE 12 DAYS BEFORE THE NEXT FED MEETING.
2. Institutions will be investing this week as they deal with the end of Q2 and position for Q3.
3. Energy especially oil is and will continue to be a place to invest

I am in no hurry to put down money right now. I am analyzing stocks to see where instutions are putting down money. I am very pro-oil drilling (GRP, ESV, DO, TTI), as well as mining (JOYG), and coal/alt fuels (CCJ, MDR).