After the Nasdaq was the clear leader in the first two weeks of January, it has gotten hammered in the last two days. Money clearly started moving out of energy and commodity stocks and into technology. But we still obviously have a confused market dominated by the traders and not clear convictions by investors. Hence, it is more likely now that the Nasdaq will enter a trading range between 2,390 and 2,510 from now into late February. Hence, buy targets for adding new money will now be between 2,390 and 2,400.
But the downside is still likely to be very modest and we do expect the Nasdaq to lead the next strong move now that the advance from late July of 2006 seems to be cresting. The next strong move is likely to come from March into September or October.
Thursday, January 18, 2007
time to sell tech? really?
Hopefully this will work to communicate stock ideas, recommendations and suggestions between the two of us.
Tonight I heard on Cramer that he was negative on tech stocks. He said to sell almost all now and would re-buy in August. This was based on seasonal factors.
For the last two years, tech has been weak between Jan and Aug. However, in 2004, QCOM rose from $30 to $35. 1998 was another exception, QCOM rose from $2.80 to $3.85. And wouldn't everyone had hated to be out of QCOM in 1999 during this period. The shares skyrocketed from $4 to $20!
I think the good news is that the pendulum has completely shifted regarding technology. Loved beyond reason in 1999, they are now hated, despised and discarded.
For long term investors, many tech stocks represent excellent value as they sell at low relative PEs, with no debt, rising earnings, increading dividends and tremendous upside potential.Like 1999, 2007 may be a tech surprise year.
Tonight I heard on Cramer that he was negative on tech stocks. He said to sell almost all now and would re-buy in August. This was based on seasonal factors.
For the last two years, tech has been weak between Jan and Aug. However, in 2004, QCOM rose from $30 to $35. 1998 was another exception, QCOM rose from $2.80 to $3.85. And wouldn't everyone had hated to be out of QCOM in 1999 during this period. The shares skyrocketed from $4 to $20!
I think the good news is that the pendulum has completely shifted regarding technology. Loved beyond reason in 1999, they are now hated, despised and discarded.
For long term investors, many tech stocks represent excellent value as they sell at low relative PEs, with no debt, rising earnings, increading dividends and tremendous upside potential.Like 1999, 2007 may be a tech surprise year.
Why stocks
Stock and Market Notes
Kauai 2007
Investing for 2007: U.S. Stocks Undervalued When Compared to Bonds
Posted on Jan 18th, 2007 with stocks: IYY, SPY
Jeff Miller submits: Readers who have been following the market valuation series on "A Dash" understand the basic conclusion: U.S. equities are undervalued when compared to bond returns.
Bill Miller of Legg Mason recently made this point (and thanks to Abnormal Returns , one of our featured sites, for making sure we did not miss it). He points out that private equity is "buying the cheap asset, which is stock, and selling the expensive asset, which is debt." This is the smart money, and that is how they are playing it. Individual investors should take note.
Please also note that the ongoing bearish predictions about the economy, employment, housing bubble impact, inflation, interest rates, hyped earnings, etc., have been wrong for three years and counting. We are in the midst of a multi-year expansion of corporate earnings at compounded double-digit rates. Estimates have been revised up, not down. The 1970's comparisons look worse with each passing quarter.
Anyone who looks at our series with an open mind can see several important conclusions:
* Despite the records in the Dow, the overall market remains undervalued. It is not too late for the individual investor to participate for major gains.
* Some stocks are fairly valued or overvalued. That means that many stocks are grossly undervalued.
* Stocks that are linked to economic growth are the ones that have lagged. The cycle of negativity, the recession hype (overstated probability and impact), and the punishment of any company that does not give a rosy forecast combine to provide a real investment opportunity. If the market is undervalued by 40%, many of these stocks (which we obviously like) currently trade at a bigger discount. What if this is the fourth inning of expansion instead of the ninth inning?
* The analysis helps us understand why the market has not had a big correction despite recent gains. Just as selling continued ad nauseum during the 2001 decline, there is underlying support for undervalued stocks in this market. Many participants-- individual investors, mutual fund managers, and hedge fund managers -- are under-invested. A continuing rally will exacerbate this feeling.
* Valuation helps us to see the risk/reward in the market. The current levels have discounted a major decline in forward earnings and/or a major increase in interest rates. It takes very extreme assumptions on either or both to view the current market as fairly valued. This provides a lot of support for a rally.
* Individual investors at the retail level are not current players. When sentiment changes (what will be the catalyst?) it can provide the basis for a major move. Rookie hedge fund managers who are playing the tired theses of the "spent up" consumer and the housing market collapse will be scrambling to cover short positions.
If the long-term sentiment indicator is correct, this is not a question of "if" but "when."
We will continue the series with criticisms and problems related to the "Fed Model," a discussion of possible catalysts, and some exploration of stocks most likely to gain as investors gain confidence in the Fed and the economy.
Fresh Off Streak, Bill Miller Thinks U.S. Stocks Are Cheap
By SHEFALI ANAND
January 12, 2007
The usual "we-beat-the-markets-again" party was missing this year from Bill Miller's calendar.
But the mutual-fund manager -- whose $19.4 billion-in-assets Legg Mason Value Trust fund finally failed to beat the Standard & Poor's 500-stock index last year, ending a 15-year streak -- says he is more optimistic now about U.S. shares than he has been in the past two years.
"The stock market is still cheap," Mr. Miller says.
That may sound unusual, given that some market indexes are at or near records. Just yesterday the Dow Jones Industrial Average set a new high, closing at 12514.98 points.
Mr. Miller argues that the stock market, especially large companies, is worth about 20% more than its current trading levels. The market and the economy appear to be firing on all cylinders, he says: Corporate earnings are strong, interest rates are steady, merger-and-acquisition activity is booming, and commodities prices are falling from overheated levels.
"Unless you believe something's different from what's out there today, it's hard not to be bullish," the 56-year-old manager says.
Adding to the mix, Mr. Miller says that in recent years investors have been taking more risks buying bonds, but haven't shown the same fervor for stocks -- making them a relative bargain today. One sign of that: Traditionally, investors demand much higher returns for riskier debt, but today returns for even some of the riskiest debt (so-called junk bonds), aren't much higher than the returns on very safe bonds, such U.S. Treasurys.
This partly explains the current boom in private-equity deals, he says.
Private-equity investors -- who typically purchase listed companies, taking them private and financing the deal through debt -- are "buying the cheap asset, which is stock, and selling the expensive asset, which is debt," Mr. Miller says.
He attributes investors' reluctance toward U.S. stocks right now partly to the market psychology of the past half-decade or so. Research suggests that investors feel the pain of a loss twice as much as they feel the pleasure of a gain, says Mr. Miller, who is a student of this kind of research as it pertains to market behavior. In the past five or six years, bonds have provided safety and decent returns, whereas stocks had three years of negative returns following the technology-stock crash of 2000-01.
"Everybody loves bonds because of what bonds did recently," he says.
One of his concerns in the coming year is whether in some cases private-equity groups are buying public companies at prices that are too low, shortchanging existing investors.
Mr. Miller says he is paying close attention to management practices and corporate-governance issues. In fact, a team in his office is preparing a best-practices list, covering an array of governance issues, that they will use to help evaluate investments. The list, which is still being drafted, may include guidelines such as a minimum time during which a company's top executives wouldn't be allowed to exercise stock options, for instance.
The most recent issue at a company he owns: The exit last week of Home Depot Inc.'s chief executive, Bob Nardelli, under pressure for his large and controversial pay package. Mr. Miller says he was surprised that Mr. Nardelli left, considering that he had done a good job of improving the company. "I was sorry to see him go," he says.
Meanwhile, Mr. Miller and co-manager Mary Chris Gay continue to dig around for companies that fit their definition of stocks that are trading at a price they consider below their estimated value. The fund ran into trouble during the past year partly because of holdings in Internet companies like Amazon.com Inc. and eBay Inc.
Stocks of home builders, like Pulte Homes Inc. and Centex Corp., and health-care companies Aetna Inc. and UnitedHealth Group Inc. also hurt, as did the lack of energy stocks, which have done well in recent years.
The fund returned 5.9% for 2006, trailing the total return of the S&P 500 (including reinvested dividends) by 9.9 percentage points, according to Morningstar Inc. The failure to maintain his 15-year streak of beating the S&P 500 was a disappointment, says Mr. Miller.
"It would be far better if we had outperformed the market," he said, but at the same time he joked that it is "a relief" that it might finally put an end to questions about the streak.
Observers had keenly been watching whether the fund would turn around in the last few weeks of the trading year -- as it sometimes has done in the past. In fact, there is an internal joke at Legg Mason Capital Management where Mr. Miller sometimes is compared to Silky Sullivan, a race horse in the 1950s that was famous for shocking come-from-behind victories.
While Mr. Miller's fund stumbled last year, it has done well in the long run. Over the past five-year and 10-year periods ending Jan. 10, the fund has been a top performer among its peers, returning an annualized 7.8% and 12.14% respectively.
Mr. Miller, whose office has a framed image of a Sports Illustrated cover from 1958 featuring Silky Sullivan, says: "We keep him around for good luck."
Kauai 2007
Investing for 2007: U.S. Stocks Undervalued When Compared to Bonds
Posted on Jan 18th, 2007 with stocks: IYY, SPY
Jeff Miller submits: Readers who have been following the market valuation series on "A Dash" understand the basic conclusion: U.S. equities are undervalued when compared to bond returns.
Bill Miller of Legg Mason recently made this point (and thanks to Abnormal Returns , one of our featured sites, for making sure we did not miss it). He points out that private equity is "buying the cheap asset, which is stock, and selling the expensive asset, which is debt." This is the smart money, and that is how they are playing it. Individual investors should take note.
Please also note that the ongoing bearish predictions about the economy, employment, housing bubble impact, inflation, interest rates, hyped earnings, etc., have been wrong for three years and counting. We are in the midst of a multi-year expansion of corporate earnings at compounded double-digit rates. Estimates have been revised up, not down. The 1970's comparisons look worse with each passing quarter.
Anyone who looks at our series with an open mind can see several important conclusions:
* Despite the records in the Dow, the overall market remains undervalued. It is not too late for the individual investor to participate for major gains.
* Some stocks are fairly valued or overvalued. That means that many stocks are grossly undervalued.
* Stocks that are linked to economic growth are the ones that have lagged. The cycle of negativity, the recession hype (overstated probability and impact), and the punishment of any company that does not give a rosy forecast combine to provide a real investment opportunity. If the market is undervalued by 40%, many of these stocks (which we obviously like) currently trade at a bigger discount. What if this is the fourth inning of expansion instead of the ninth inning?
* The analysis helps us understand why the market has not had a big correction despite recent gains. Just as selling continued ad nauseum during the 2001 decline, there is underlying support for undervalued stocks in this market. Many participants-- individual investors, mutual fund managers, and hedge fund managers -- are under-invested. A continuing rally will exacerbate this feeling.
* Valuation helps us to see the risk/reward in the market. The current levels have discounted a major decline in forward earnings and/or a major increase in interest rates. It takes very extreme assumptions on either or both to view the current market as fairly valued. This provides a lot of support for a rally.
* Individual investors at the retail level are not current players. When sentiment changes (what will be the catalyst?) it can provide the basis for a major move. Rookie hedge fund managers who are playing the tired theses of the "spent up" consumer and the housing market collapse will be scrambling to cover short positions.
If the long-term sentiment indicator is correct, this is not a question of "if" but "when."
We will continue the series with criticisms and problems related to the "Fed Model," a discussion of possible catalysts, and some exploration of stocks most likely to gain as investors gain confidence in the Fed and the economy.
Fresh Off Streak, Bill Miller Thinks U.S. Stocks Are Cheap
By SHEFALI ANAND
January 12, 2007
The usual "we-beat-the-markets-again" party was missing this year from Bill Miller's calendar.
But the mutual-fund manager -- whose $19.4 billion-in-assets Legg Mason Value Trust fund finally failed to beat the Standard & Poor's 500-stock index last year, ending a 15-year streak -- says he is more optimistic now about U.S. shares than he has been in the past two years.
"The stock market is still cheap," Mr. Miller says.
That may sound unusual, given that some market indexes are at or near records. Just yesterday the Dow Jones Industrial Average set a new high, closing at 12514.98 points.
Mr. Miller argues that the stock market, especially large companies, is worth about 20% more than its current trading levels. The market and the economy appear to be firing on all cylinders, he says: Corporate earnings are strong, interest rates are steady, merger-and-acquisition activity is booming, and commodities prices are falling from overheated levels.
"Unless you believe something's different from what's out there today, it's hard not to be bullish," the 56-year-old manager says.
Adding to the mix, Mr. Miller says that in recent years investors have been taking more risks buying bonds, but haven't shown the same fervor for stocks -- making them a relative bargain today. One sign of that: Traditionally, investors demand much higher returns for riskier debt, but today returns for even some of the riskiest debt (so-called junk bonds), aren't much higher than the returns on very safe bonds, such U.S. Treasurys.
This partly explains the current boom in private-equity deals, he says.
Private-equity investors -- who typically purchase listed companies, taking them private and financing the deal through debt -- are "buying the cheap asset, which is stock, and selling the expensive asset, which is debt," Mr. Miller says.
He attributes investors' reluctance toward U.S. stocks right now partly to the market psychology of the past half-decade or so. Research suggests that investors feel the pain of a loss twice as much as they feel the pleasure of a gain, says Mr. Miller, who is a student of this kind of research as it pertains to market behavior. In the past five or six years, bonds have provided safety and decent returns, whereas stocks had three years of negative returns following the technology-stock crash of 2000-01.
"Everybody loves bonds because of what bonds did recently," he says.
One of his concerns in the coming year is whether in some cases private-equity groups are buying public companies at prices that are too low, shortchanging existing investors.
Mr. Miller says he is paying close attention to management practices and corporate-governance issues. In fact, a team in his office is preparing a best-practices list, covering an array of governance issues, that they will use to help evaluate investments. The list, which is still being drafted, may include guidelines such as a minimum time during which a company's top executives wouldn't be allowed to exercise stock options, for instance.
The most recent issue at a company he owns: The exit last week of Home Depot Inc.'s chief executive, Bob Nardelli, under pressure for his large and controversial pay package. Mr. Miller says he was surprised that Mr. Nardelli left, considering that he had done a good job of improving the company. "I was sorry to see him go," he says.
Meanwhile, Mr. Miller and co-manager Mary Chris Gay continue to dig around for companies that fit their definition of stocks that are trading at a price they consider below their estimated value. The fund ran into trouble during the past year partly because of holdings in Internet companies like Amazon.com Inc. and eBay Inc.
Stocks of home builders, like Pulte Homes Inc. and Centex Corp., and health-care companies Aetna Inc. and UnitedHealth Group Inc. also hurt, as did the lack of energy stocks, which have done well in recent years.
The fund returned 5.9% for 2006, trailing the total return of the S&P 500 (including reinvested dividends) by 9.9 percentage points, according to Morningstar Inc. The failure to maintain his 15-year streak of beating the S&P 500 was a disappointment, says Mr. Miller.
"It would be far better if we had outperformed the market," he said, but at the same time he joked that it is "a relief" that it might finally put an end to questions about the streak.
Observers had keenly been watching whether the fund would turn around in the last few weeks of the trading year -- as it sometimes has done in the past. In fact, there is an internal joke at Legg Mason Capital Management where Mr. Miller sometimes is compared to Silky Sullivan, a race horse in the 1950s that was famous for shocking come-from-behind victories.
While Mr. Miller's fund stumbled last year, it has done well in the long run. Over the past five-year and 10-year periods ending Jan. 10, the fund has been a top performer among its peers, returning an annualized 7.8% and 12.14% respectively.
Mr. Miller, whose office has a framed image of a Sports Illustrated cover from 1958 featuring Silky Sullivan, says: "We keep him around for good luck."
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