WHERE SHOULD YOU HAVE PUT YOUR MONEY IN 2006?

A weekly newsletter based on the fact that stock market sectors are made up of industries, that industries are made up of individual stocks, and that individual stocks in the same industries and sectors move as a group. The proven best way to profit from the stock market is to keep your funds invested in the stocks of top performing sectors/industries at all times, and the best measurement of performance of these sectors/industries is their price movement over the previous six months. Below you will find commentary of Sectors, Industries, and Stocks based on the most recent 6-month period as well as updates on the past week’s action...

May 12, 2006

Caterpillars, Butterflies, and Sector Rotation

From 1931 to 1959, US Steel (X) climbed from $2.50 to $75. Since then, the stock hasn't been much of a profit maker for stockholders except for a brief show of strength in 1974 and 1975. The rest of the time it wallowed around in the low double digits as domestic steel went into a nosedive. That was until recently. From its bottom in 2003 of around $10, the stock has climbed steadily until it hit $77.77 on Thursday. 
Up until the mid-1980s, telephone utilities were the stocks of widows and orphans, as they say. Steady dividend payers, but in a word - Dull. Then something happened unbeknownst to most investors. Steadily, these once-stodgy stocks began to come alive. By the 1990s, telephone utility stocks were rebranded Telecommunications stocks, fully ready to take advantage of the Internet runup. 
The fact of the matter is that we seldom understand or appreciate what is happening beneath our noses. Only in retrospect do we see what we should have seen. Whether is was telecom stocks a decade ago, or a basic industry stock a few years ago, the message of the market always is "change."
This is not acceptable thinking to indexers or long-term-buy-and-holders. They want to believe that once a decision to invest in the stock market is made, there's nothing else to do except sit back and enjoy the ride, bumpy as it is. They refuse to accept that strong industry and sector groups come and go. They don't realize that to get their beloved "average" return, some areas of the market must outperform and some must under perform. You should always be concentrating your funds in the "outperforming" groups.
Five years ago you couldn't have given gold stocks away even if you threw in a free toaster. Today, you can't get enough of them. Call it Schumpeter's "creative destruction" if you will, but an easier term would be simple sector rotation.  Fads and herding are a basic part of the human psyche, and the stock market is no more immune than are Beatle Boots, Leisure Suits, Beanie Babies, and SUVs. Profitable stock market investors understand the landscape they walk on and are ever aware of the changing financial/economic scene. 
What'll be the leading sectors of a year from now? Only a fool would even try to make that prediction. But the best places to have put your money will be telegraphing their strength in the charts long before they become #1. So don't step on that caterpillar because it'll be a butterfly before long. Like USG (formally US Gypsum) which rose from $3 in 2003 to $120 last week thanks to favorable court rulings and a resurgent building sector. Renewal and decay are always the order of the land, and the stock market.
An interesting side note came out of the Berkshire Hathaway annual meeting recently when both Buffett and Munger remarked that at one time in their lives they believed in the concept of bulletproof franchises. Sadly, they've gone the way of the Dodo bird...that is if they ever existed in the first place. Their bulletproof franchises, newspapers for Buffett, and GM for Munger, are being supplanted by the next new thing. And so it will ever be.

Growth or Value

The question frequently arises as to which area one should put their money. Media analysts constantly weigh in with their favorite, recommending either one or the other. We must never forget that a profit is accomplished when you purchase a security for a lower price then sell it at a higher price. Profit knows not growth, value, cyclical, or dividend payer. Profit knows only the  math of addition and subtraction. 
Simplespreaders would be well served by putting their hands over their ears when in the presence of such debates. A strong stock in a strong industry in a strong sector is a good potential profit regardless what class of investment it falls into. So, as you listen to the various comments by the media analysts, don't lose sight of market reality. 

Parabolic Curves

Joe Granville popularized the notion that an increasingly vertical price movement (parabolic curve) signaled the imminent end of a rally. If a parabolic curve isn't what we've just witnessed in the Metals, Energy, and some Construction stocks, then I don't know what it is. 

FOR THE WEEK...Whacko!

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