Simplespread

LR: Time. One of our favorite subjects of discussion here at the Simplespread Institute. Selling calls. Selling time-wasting assets.

TM: No. In this case we're talking about the length of investment duration. The time you hold an investment. I see a new attack on "short-termism" emerging from the financial press. Quite a few articles and discussions center on castigating the short term viewpoint.

LR: Is that a new term? "Short-termism?" I don't recall hearing that word before.

TM: It comes up every so often. Long-termers use it to disparage investors who take profits when they have them instead of holding on forever. Do you know who the two main groups are that benefit the most from the long-term mode of thinking?

LR: The government would be one. It taxes me more on my short-term profits than on my long-term profits. So it must favor the long term.

TM: True. But you're missing where the laws came from in the first place. If the government were acting solely for itself, wouldn't you expect it to be in favor of taxing whatever would bring in the most revenue, long or short? Remember that each new law is pushed by a specific constituency, or else it wouldn't become law. There has to be an impetus.

TM: Two groups - Mutual Funds and the companies that issue the stock themselves.

TM: If you buy stock in McDonald's, how long do you think McDonald's Corp. hopes you hold onto it?

TM: Right. In Warren Buffett's terms - forever. Since companies want their stock's price to rise, why would they ever want you to sell it?

TM: Right. Mutual Funds hate it when you redeem your shares. Sometimes it forces them to sell their stocks just to raise cash in order to return your money to you. Also, another more important reason is that if they can convince you of the idea of "the long term," then they aren't held accountable for anything less than the long term. And in their view, the long term would be forever. If you buy into the long term being decades in length, what right have you got to complain about bad performance over the next few years? Their argument would be that you and they are partners for the long term, and that the long term is a long way off. So, don't worry about "short-term" reversals, just keep your eyes on those "long-term" "historical returns" of whatever percent is favored by the financial press at the time - 8%, 10%, 5%, 15%. Whatever the return has been recently.

TM: Quoting Keynes: "In the long run, we're all dead." Also remember that any long term is made up of a series of short terms. But, seriously, the problem with glossing over "temporary" short-term problems is that the temporary has a nasty habit of being permanent. One recent report sited the sad "fact," and I put fact in quotation marks because it is extremely difficult to get reliable individual investor data, that your average holding time has shortened from 8 years, fifty years ago, to just 11 months now. Can you come up with any reasons why your investment horizon might have shortened over the years?

LR: Uh, we're a "sound-bite" society? I'm a marshmallow girl - I want it all right now? Change happens more rapidly?

TM: Right, right, and right. And more importantly, the pace of business formation, innovation, and obsolesence has speeded up. Remember Schumpeter's "creative destruction?" Well, we're creating and destroying at a much faster clip than ever before. Companies are born, grow, and die in a matter of a few years. They quickly outlive their purposefulness.

TM: Not only is it good, it's necessary...and it's reality. The purpose of all businesses is to provide us with the goods and services we need to live - to make life more enjoyable, easier, better, and most of all - to make life longer. The faster we overcome the destructive forces of Nature that kill us, the better off we are. So, yes, I'm all in favor of speeding up progress as fast as we can. And the way we do that is to speed up the formation and destruction of businesses, with each new one replacing something that has become obsolete. Maybe because I have degrees in history and economics I see our timeline on Earth as one of improvements improving upon improvements. I can still remember outhouses. Three cheers for modern plumbing!

LR: But you say there are those who don't want to adjust their thinking to this newer, faster lifestyle that includes a faster investment framework?

TM: Of course not. Change hits the establishment the hardest, but it usually benefits the masses the most. There is a big battle brewing between individuals and professional money management. For at least half a century, the professionals have kept a tight grip on investment monies. But the Internet and increased investor education are beginning to beat down the walls of Wall Street's castles. You can be sure many pressure groups will have their lobbyists up on Capital Hill trying to thwart the individual's getting hold of his money.

TM: The individual, of course. Look back over the past 50 years. How many "closed shops" have been opened up? Practically every one of them. The gatekeepers are on the run. We don't need them anymore. I don't remember who said it, but it was right when it was originally spoken, and it's right for now: Nothing is more powerful than an idea whose time has come.

LR: Well, I hope you're right. We've certainly seen a big improvement in getting investment information and advice delivered to us. It all seems to be getting easier and cheaper.

TM: Yes, that's what technology does. It makes life better. The time of the individual investor has come regardless of how much the power brokers try to get in the way.

LR: The United States is the world's technological leader and I expect that will continue, don't you?

TM: That could be a problem if we don't encourage rapid progress. We've fallen behind in cell phone and broadband coverage recently. We can certainly fall behind elsewhere. South Koreans are making news with advancements in biological progress. Some of it is questionable, but it means they're working on it. Where are we? The problem is that too many of our people can easily get too comfortable and stymie the new, new thing, as Michael Lewis would call it. The rest of Asia is running at breakneck speed into the future. And it doesn't help that such luminaries as Professor Jeremy Siegel of Wharton calmly, and evidently approvingly, predicts that we will transfer much of our wealth to the Asian peoples over the few next decades. But we need to shorten our viewpoint and crowd as much creative activity into the immediate as we can in order to maintain our living standards. We need to encourage success here at home and get rid of failure, the faster the better. The way I see it is that we don't have much time to waste.

LR: Well, I see that our time has come to an end for this week. Any closing comments?

TM: Embrace change. It's coming so you'd better get used to it. As Lee Iacocca said, "Lean, follow, or get out of the way." Which will it be for us?

TM: Who knows? The bulls are giddy and the bears are throwing in the towels, one by one.

TM: There's a school of thought that believes that way. It's been a rather narrow rally from the June-July bottom. The Generals are definitely out in front of the Soldiers. And that's not usually healthy. However, I will say that the past two weeks have seen the Transports, our secondary shares, and some smaller overseas markets trying to catch up. I guess the best I could venture is to say that if the secondary strength of past two weeks continues very much longer, the market could easily work its way higher.

TM: Yes. REITs are the "in" thing. Plenty of income from those securities. Just don't bring Mortgage Investment up. It's a disaster.

LR: And Utilities are also holding firm in the #2 position - up over 2% for the week. Both of those are typically defensive groups of stocks, aren't they?

TM: True. The same could be said of Tobacco at #3. Investors are still putting their money into the safer types of securities.

LR: Media, at #4, is spending its 10th week in the Top Ten. You like the chart, don't you?

TM: It's probably the best looking chart of the lot. After a three-year consolidation of going nowhere, it finally broke upward into new recovery high ground. It has tremendous support underneath it.

TM: Yes. And I should mention that it too is sometimes considered a defensive area to stash one's funds. So four of the top five sectors today are considered defensive. That's another reason not to get carried away with the current "all-time new highs."

LR: Insurance remained in the #6 position. I guess not having any hurricanes this summer helped the companies recoup last year's losses.

TM: True, but it's the Life Insurance companies that have lit the fire under the group. We're living longer, you know.

LR: How about Computer Hardware climbing all the way up to the #7 spot? Doesn't that indicate more aggressive stock buying by investors?

TM: Yes, it does. But how much is short covering and how much is true new money? IBM, up 5%, and Apple, up 6 1/2%, had super weeks, and helped a lot. However, the sector is still basically trending sideways, still recovering from the pasting it took back at the beginning of the century.

LR: You don't like the Dow Jones Industrial Average holding down the #8 spot, do you?

TM: I just think it's a healthier situation to have the thousands of other stocks doing better than a couple of the world's biggest and safest companies. The current situation indicates that investors are hunkering down right now. For what, I don't know. But it's hard to argue that the investment world is alive with exuberance. Perhaps the market is climbing this wall of worry that's supposed to be constructive. But history shows us that when the Dow stocks come to dominate, it's just not that healthy, especially at all-time highs. We've had strong buying this summer in GM on a snap-back rally from a several-decade low. And Johnson & Johnson, Merck, Coca-Cola...these stocks are not the future of America. They're havens from the storm, if there is one, as is the next sector on the list.

TM: Yes indeed. They don't go up much, but they don't go down that much, either.

LR: Telecommunications, at #10, certainly moves around, and it's a part of the future, isn't it?

TM: Yes, I'll agree on that. Telecommunications has done a good job - up 15 1/2% for the year. A couple of decades ago, these stocks were also considered defensive - slow moving telephone (almost utility) stocks. Not any more. At least, not recently. The leopard can always change its spots. That why we watch the interplay between the sectors on a daily basis.

LR: Okay, even leaving that one out, wouldn't you agree that a large part of leadership this week remains in the defensive category?

TM: Well, it's a market that I surely wouldn't commit a large amount of my funds to. As a matter of fact, there were only a couple of stocks that even came near to surviving our filtering process this week for new investment. As I've been saying for a month or two, we should be taking off positions now, not putting them on.

TM: I'm still looking for new leadership. The market has to have a theme. Last fall, all winter, and into the spring, it was Olivia Newton John's "Let's get physical." Everything had to do with the physical. Stuff you could dig and drill for, stuff to manufacture, stuff to build - stuff that needed to be moved. But ever since Manufacturing, Transportation, Energy, and Metals & Mining (and even the tail end of the Materials and Construction - homebuilders and otherwise) succumbed to the summer swoon, we haven't had a theme, unless you call "defensive" a theme. Today, we've got - what?

Sector	20Apr06 to 20Oct06	Week of 20Oct06	Visual Chartist Commentary
Real Estate	+12.88%	+0.12%	Getting stronger as it goes. Everything except Mortgage Investment headed higher.
Utilities	+12.01%	+2.17%	It was a good week with stocks extending recent gains. Water Utilities is the only weak spot here.
Tobacco	+11.05%	+0.39%	Holding strong.
Media	+9.77%	+0.35%	CATV and TV Broadcasting leading this sector higher. Even Periodicals is turning up. Radio still remains dragging on the bottom.
Drugs	+8.46%	+1.75%	The Major Manufacturers continue their strong recovery. Biotech is strengthening, but has a ways to go to make up for lost time. It is now approaching its old January high.
Insurance	+6.65%	-0.48%	Life Insurance and Property & Casualty moving into new high ground. Surety & Title and Accident & Health still having troubles with old highs. Little volatility makes interest negligible.
Computer Hardware	+6.04%	+1.36%	Winner of "The Move of the Week." IBM and Apple put some fire under this sector in recent days. However, much of the rest of the areas are not reacting as favorably. An interesting situation what attracts our attention. How long will the strength last?
Dow Jones Industrial Avg.	+5.88%	+0.35%	A dull, grinding continuation of the march to 12,000. So, now what? The same arguments control the discussion. We still have the issue of the Generals leading and the Soldiers lagging behind...although they did make a little improvement this week.
Food & Beverage	+5.68%	+0.72%	Losing some of its strength, although selected alcoholic beverages and processed foods climb higher. Low volatility disinterests us.
Telecommunications	+5.31%	-0.09%	Although it had a losing week, the sector remains strong and is in a healthy uptrend.
AND THE REST...
Retail	+5.29%	-0.40%	Led by Department Stores and Grocery Stores, this sector has risen in the ranks to its highest position since last October. Why?
Leisure	+4.74%	-0.19%	Thanks to Restaurants, this sector is still relatively strong. Many other areas are weakening.
Consumer Non-Durables	+4.68%	+0.06%	The old faithful, defensive stalwart is doing its job, although the market is not falling apart. Several areas show good strength. However, this is another sector with relatively low volatility.
Specialty Retail	+4.63%	-1.39%	Sporting Goods Stores and Auto Dealerships have kept this sector in the running. Apparel Stores are beginning to strengthen.
Computer Software & Svcs	+3.77%	-0.49%	Information Software, as well as Multimedia and Graphics have led this sector out of the basement. But it will need help from other areas to keep going.
Automotive	+3.55%	-0.08%	There's not much of interest here except whether Ford and GM go bankrupt...and what types of deals arise to keep it from happening.
Health Services	+2.60%	+1.34%	Hard to believe that this stuck-in-the-mud sector actually had a very good week and climbed in the rankings. More and more stocks are looking interesting. We still have hopes that this sector can come alive and become a market leader. There are plenty of good option selling stocks here when the time is right..
Chemicals	+2.38%	+0.47%	The long-term chart of this sector is one of do-nothingism for most of a decade. Agricultural Chemicals is showing some life, as are the major chemical companies. Not much here to interest us.
Banking	+2.19%	-0.78%	Foreign Banks are putting in some good uptrends, but the rest of the sector is dogging it.
Aerospace/Defense	+1.97%	-1.92%	This week saw a big drop for one of our main leaders of the year. The minor companies are finally beginning to pull down the major defense contractors after quite a run.
Transportation	+0.40%	+2.23%	A strong showing, but still non-confirming the Dow Industrials. The airlines are flying high while the rest of the sector is showing signs of stress.
Financial Services	-0.56%	-0.41%	The sector just isn't able to get its act together.
Wholesale	-1.15%	+0.36%	There is absolutely nothing cooking here.
Diversified Services	-1.74%	+0.14%	This is another dead sector.
Electronics	-1.95%	+2.11%	A good week, but the whole sector is really laboring. It has a lot of resistance here as it tries to break through highs established as far back as 2003.
Conglomerates	-2.15%	+1.04%	Nothing going on here.
Consumer Durables	-3.64%	-0.41%	Weakness pervades this sector with the exception of Toys & Games and Recreational Goods.
Internet	-5.32%	-0.33%	Even Google's dramatic week couldn't get the rest of stocks moving.
Manufacturing	-7.71%	-2.03%	Things still looking bleak here, especially with Caterpillar's bombshell this morning.
Energy	-7.80%	+-2.42%	All of the Energy complex has spent the entire year either trending sideways or downward. Everything is relatively weak, plus more and more overhead resistance builds up with each passing week.
Metals & Mining	-9.20%	+1.67%	Whether this is a sideways consolidation or not depends on what happens during the next few months. Many crosscurrents buffeting this sector.
Materials & Construction	-13.39%	-0.37%	Waste Management is doing a good job of holding. The rest of the sector has weakened so much it's debatable whether it can stage a recovery. Residential Construction has a tremendous amount of overhead resistance a few percentage points higher. It bounced off support just as expected, but has not been able to mount any sort of a rally. Other areas of the sector could regroup for another rally...maybe. Caterpillar's disappointment today didn't help the cause of a continuation of a worldwide building boom. We'll just have to let the charts speak for themselves. Right now, they're mute.
Statistical Data: TeleChart 2007