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...

September 1, 2006

This is the Dawning of the...

What do The Wisdom of Crowds, An Army of Davids, The Tipping Point, Out of Control, The Long Tail, How Hits Happen, Next,  Ubiquity, Linked, The Wealth of Networks, and a host of other similar titles that have come out recently all have in common?

Need a hint? 

When the moon is in the Seventh House
And Jupiter aligns with Mars
Then peace will guide the planets
And love will steer the stars
This is the dawning of the age of Aquarius (hint)
Age of Aquarius
Aquarius!
Aquarius!

Harmony and understanding
Sympathy and trust abounding
No more falsehoods or derisions
Golden living dreams of visions
Mystic crystal revelation
And the mind's true liberation
Aquarius!
Aquarius

(1969 - The Fifth Dimension)

Well, we here at the Simplespread Institute don't know much about astrology, or mystic crystal revelation, either. We check our horoscopes in the newspaper each morning only to see whether we should go back to bed or not. But what we have heard is that we, supposedly, are at the end of the Age of Pisces - the past couple of millenniums when mankind depended upon the great teachers, the great healers, and the great leaders because us underlings didn't know how to take care of ourselves. Thus, arose elites - keepers of all the inside information on how things worked (Kings, Magicians, Princes, Holy Men, Mystics, Oracles, Saints, etc.). And usually, the reality was that it was how things worked for the betterment of the elites at the expense of the rest of the people. But that's another story.

Today, if we squint real hard, we can see the world changing before our very eyes. Remember that anti-drug TV commercial a few years back? First they showed you your brain; then they showed you a couple of eggs frying in a pan. The tagline was, "This is your brain on drugs." 

Now, grab hold another image - an image of our globe from outer space. Google Earth is a good example. See it slowly rotate and move toward you? Okay, the new image for our new Age of Internet should be a zillion wires coming up from all over the globe connecting to a zillion other points on the globe as it revolves on its axis. The new tagline would be, "This is your world; and this is your world on Internet." We're all connected. (Okay, we'll all going wireless, but you get the picture.) 

And, you get the idea anyway. If the Internet does not signal the dawning of the Age of Aquarius where self-organization rules, what does?

From what we understand, the Age of Aquarius is when we don't need the elites to show us the way (regrets to Peter Frampton) because we will have access to the wisdom of the ages ourselves, without gatekeepers. Today's constant inputs into the Internet by millions of people around the globe must be what Marilyn McCoo, Billy Davis, Jr., and the rest of the group were singing about.

In just the past decade or so, look at how many elites have been dethroned: In politics, we have the fall of Communism - the ultimate example of elitism. In the mainstream media, the gatekeepers of news and information (the networks, the wire services, and the big publishers) have given way to Drudge, blogs, instant cell phone reportage by "citizens" out in the field, and print-it-yourself publications. Wikipedia is supplanting Encyclopedia Britannica as we talk. Scholarly journals, once the domain of a tight group of academic insiders, now see their papers published on Internet within hours of their completion. Focus groups provide immediate feedback. The medical field has been taken over by web surfers so much so that doctors frequently consult with their patients on how the patients can enlighten the doctors on the latest advancements. Polling and primaries get sidetracked by Internet-inspired political movements. Amazon opened up critical reviews to anyone with a keyboard, including combative debates between authors skewering each other's works. American Idol bypassed the music industry's years of required 'dues paying' in favor of instant fame. Scientific research is traded back and forth around the world at the warp speed. Constant electronic monitoring of inventory points manufacturers and retailers in the direction consumers want to go. The list can and does go on and on. It's here, folks, whether you're ready or not. 

Thomas Friedman preaches that the world is flat, meaning that competition is being equalized around the world. But the real flatness occurring throughout the world's societies is that of the beating down of elites who keep trying to rise up to re-take power they've built up through their positions as gatekeepers over the past several thousand years. They just don't understand that more than the Berlin Wall came tumbling down almost two decades ago.

All of the above brings us to the world of finance. Just a few, short decades ago, individual investors had absolutely no access to the news that drove securities markets. If they ever did get it, it was weeks old and totally useless. But today, millions of investors scour the Internet daily for pertinent information relating to investments of interest to them. Yet, most of the world's money is managed by a very small number of professionals congregated in the world's capitals. Institutions (itself a word in danger of becoming obsolete) - pension funds, mutual funds, index funds) continue to dominate money management.

Trillions of dollars of "the people's" money are managed by a select group of professionals reading the same info, thinking the same thoughts, and acting the same way. Thus, as John Bogle has so thoroughly argued, most money is really indexed, either by definition or on the sly. And thus, most money doesn't earn a very good return. Mediocre would be a better word for it. When you think about it, this must be the first time in American history when mediocrity not only became acceptable but also became our goal. No longer do we want to "beat the market;" we just want to be average. At least that's what the pros tell us. Maybe Friedman is right - it's the investment world that's flat; flat, as in no return. The Standard & Poor's 500 Index's price return since Y2K is down 10%.

Well, expect to see some changes. Just as other power centers have fallen, expect to see the world of institutional money also crumble as individuals come to realize that they now not only have the tools to "do it myself," but also the ability to "outperform," and the responsibility for making our world of tomorrow through their investments of today.

Most research on investment returns centers on mutual fund performance because it is the most public. Bogle has brilliantly used past performance records to show that very few mutual funds outperform the index. That, he says, is proof positive that everybody is better off in index funds. This brings up the question of whether or not investors who want superior returns would be better off in no funds at all. 

Recently published research was done to show that individuals managing their own accounts have done poorly by comparing a few returns ascertained from some brokerage accounts. One gets a feeling that the research was created to prove that investors should keep their money in long-term mutual funds. The message of the research was to convince individual investors to let the pros do it and be happy with whatever returns they are given. 

But the tide is turning against the pros as it has everywhere else. I believe that individuals have done all right over the years, and have certainly done better than the pros. 

On May 1, 1975, the New York Stock Exchange experienced what was called the "Big Bang." Fixed commissions were eliminated, pointing the brokerage business in various other directions to recoup lost revenue.

In the not-too-distant future, look for the foundations of Wall Street to shake again. Individual investors will rise up to take control of their billions...and most probably do a much better job of earning a decent return on it.

Let's call it The Dawning of the Age of the Individual Investor.

Tidbits

If you believe that "it" is over by the time "it" hits the front page of our media, then take a look at just a sampling of "oil" books that have been published in the past few years:

 It's enough to make you want to go looking for stock market profits anywhere else than the oil patch.

Flash from the Past: Looking back at our records, we see that we first got interested in the Homebuilders during the fall of 2000. On 13 October 2000, while the market averages were falling apart, KB Homes gave us a foreshadow of what was to come. On that Friday the 13th, you could have bought KBH for $25.50 (pre-split) and sold the January 25 calls for $2.50. It barely fit into our parameters, but the stock looked good and the calls were acceptable. Two and a half months later, on 5 January 2001, you could have sold your KBH stock for $34.50 and bought back the January 25 calls for $9.50, closing out the position for a 10% profit. And what is really interesting is that when you were buying the KBH stock, the S&P 500 Index stood at 1374. When you would have closed out your Simplespread that following January, the S&P 500 Index had dropped down to 1298, not far from where it is right now. Two things to note here: 1) strong stocks in strong industries can be a good investment during both good and bad times, and 2) indexers haven't done very well, comparatively speaking...ever.

    ____

FOR THE WEEK...Dullsville struggles on

Blame it on the lackluster summer. Prices have drifted upwards since the July bottom. Only about 1/3 of the optionable stocks have been able to rally above their May 10th (the indexes' highs for the year) highs. Now, vacationers will slowly return to work and decide whether we continue on upwards or get hit again. Was this a brief respite, or the makings of a formidable bottom? Time will tell.

Tobacco hasn't needed any time to tell whether it maintained its #1 position. Since the market's top in May, the smokers have climbed over 12%. Too bad their options are so cheap. The #2 spot goes to Utilities, which has also had a good summer since becoming a leading sector in June. Food & Beverage continued its strong showing at the #3 position. Metals & Mining dropped one spot to #4, making it 51 weeks in a row in the Top Ten. The #5 spot went to Energy, still holding strong, although some of the charts are getting a little top heavy.

Automotive climbed 3 places to the #6 slot. We continue to be amazed at how well the automakers have held up. Media continued its recovery at the #7 position. Higher highs and higher lows make this sector a strong contender to continue its chart-climbing ways. The #8 position rested with Real Estate. Since breaking into the Top Ten on June 9th, it has rallied more than 7%. Drugs rose one position to #9. The medical field is looking stronger and stronger as we head into the fall. Aerospace/Defense rounded out the Top Ten in the #10 position. Up 13% for the year, and over 131% since bottoming in 2003, these stocks have had a very good run so far this century.

The "Sell in May and go away" idea has worked out pretty well this year. Dull and boring, the May collapse and the July-August rebound has left many stocks just marking time. The bulls says the light volume of this recent advance was due to seasonal slowness while the bears say the light-volume rally is a fraud.

We'll see come Tuesday. One thing is for sure. The big capitalization stocks have definitely put in a much better showing for themselves compared to the small caps - the Generals vs the Soldiers thing. Looking back at the opportunities we've had, we see that it wasn't a bad summer. Simplespread positions initiated during the May and June selloffs should have netted good profits for the August, September, and October expiration cycles. Gold, Energy, Telecommunications, Drugs, and Food & Beverage buy-writes have presented us with a good diversification. 

With the market approaching overbought status, we can only continue to cash in Simplespreads that have squeezed all the juice out of September calls and wait for new opportunities as the market will present them to us again...sometime in the future.

THE TOP TEN...