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 22, 2006

A Little Blogging 

Yeah, let's do a little blogging this week.

Too big.

Eight years ago this month, practically to the day, Long Term Capital Management of Greenwich, Connecticut, came up short about $4.5 billion when their "hedged" investments didn't hedge the right way. This week, Amaranth Advisors, of Greenwich, Connecticut also, appears to be headed in the same direction. Rumors say its losses better the $6 billion mark. Could it be something in the water?
LTCM's potential damage was mitigated by a shotgun wedding of major Wall Street players presided over by Gov. Greenspan. We'll see who officiates this ceremony.

Which brings us to the subject of SIZE. Hedge funds (there's around 8000 of them now, running well over $1 trillion in 
assets), came into being because investors wanted something better than the  "average market returns" regular funds could deliver. So, the money poured in, and in, and in. As with anything, we humans have a tendency to overdo it, and we've overdone professional money management, big time. This is probably the normal outcome when the American populace gets sold such a goofy idea as indexing, which not only celebrates mediocrity, but holds it as the ultimate goal. Anyone with a brain would realize that indexing would eat through American rationality like termites in a woodpile, eventually buckling the whole edifice. 

Thus, the birth of hedge funds. Now the problem with this and all other "hedged" instruments is that you've got a couple thousand brainy money managers all trying to outperform each other doing the same thing again, just like indexers. Except this time, the name of the game is changed and additional problems mount when the only way to outperform is to put more and more money into riskier and riskier investments, trying to capture that tenth of a percent more than the other firm. Eventually we get a zillion dollars all doing the same thing with no diversification or liquidity, waiting for Nassim Nicholas Teleb's inevitable train wreck somewhere down the tracks.

The real problem here is professional money management. Have you ever thought about how many middlemen and middlewomen stand between you and your money today? Advisors, consultants, benchmarkers, custodians, brokers, researchers, analysts, lawyers, traders, and the list could go on and on. Everybody has to get paid. So, the job to "perform" gets harder and harder. Eventually, illegality shows up to help find a way, and the whole shebang crumbles into dust.

The answer: Individual investors taking control and responsibility for their own money.

Politicians fessin' up?

From Hungary, formerly of the Communist Bloc, where failed politicians disappeared in the middle of the night, we have Prime Minister Ferenc Gyurcsany being caught on tape admitting that he and his bureaucrats lied (Did you get that? - They admitted they lied!) to their people about the state of the economy in order to get elected. A couple of decades ago, wasn't it East Germany that convicted their leader, Erich Honneker, of economic crimes? And this, from former Communist countries! Wonders will never cease. Maybe their honesty will carry over to other politicians around the world to also come clean.

And from Thailand's bloodless coup of last week, comes the word that the ousted prime minister will be investigated for...what else? Economic crimes.

It seems that the word is getting out that the pols who so happily want to take control of the millions, billions, and trillions of dollars of public monies are going to increasingly be held accountable. Now that would be a true, earth-shaking revolution.

Real-time Real Estate Market.

Robert Shiller got the ball rolling of "trading" real estate with his company to hedge home prices. Recently he's been instrumental in the Chicago Mercantile Exchange's introduction of real estate futures this past April.

To this we must add things such as www.zillow.com that can give you an immediate "value" of any of 67,000,000 homes in the United States - updated weekly. Additionally, there is a new gizmo hooked into your cell phone that can use GPS to give you real estate values by the location that you input into their system.

What we're seeing is the evolution of real estate trading approximating stock trading - meaning a continuous, updated, readily accessible market by all who desire to use it. This might evoke feelings anywhere from "Who cares?" to "Oh, Boy!" But what it really does, is for the first time ever, give homeowners a continuous update on the value of their homes. 

Expect more volatility on home prices as owners and buyers now have access to market trends. One of the old standards was that the stock market could clear a market rapidly through its liquid trading mechanism - matching buyers and sellers until everybody was cleared out. Homes, on the other hand, took ages to go through a complete up and down cycle because of lack of information of what was going on. "Out of sight, out of mind," so to speak.

Now, people are going to be able to see their home values' rise and fall, and we'll be treated to all the emotional gnashing of teeth that entails. In other words, nothing influences lower prices more than seeing lower prices, and vice versa.

It will be interesting to see how this evolves.

 Commodities are Commodities are Commodities are Commodities are Commodities.

Oil has collapsed some 25% in the past few months. Lumber, down almost 50%. Similar disasters can be said for gold, sliver, platinum, palladium, aluminum, copper, zinc, etc. Seems as if the stuff that gets mined has gotten "overpriced" lately. 

Commodities have a definite cost of being extracted, processed, transported, and delivered. When oil bounced around $10 a barrel at the end of 1998, a lot of wells that cost more than $10 a barrel to produce got shut down. Who would want to pay $15, $20, $30, $40 to pump out sticky goo that could be sold for only $10? But when you can sell the stuff for $70, why not open up all the wells that cost even $50 or more to produce a barrel of oil? Yeah, why not? 

Same mentality applies to gold, silver, etc. The more expensive the raw product gets, the higher the cost can be borne to produce it. Thus, higher prices always bring on new supply (and low prices always lead to shortages). Evidently, the summer saw the frantic peak in mining the minerals...for the time being. That's not to say that more rallies can ensue as the supply/demand pictures adjusts to the current realty.

Now, the commodities that we grow...that's another story. Corn, wheat, orange juice, sugar. If it grows, most likely it's going up in price. But it will eventually run into the same situation as the mined stuff did somewhere down the road. 

Commodities will always be commodities.

Growing Storm Clouds.

From our friends over at Bob Prechter's Elliott Wave International, Pete Kendall and Steve Hochberg write about the increasing pessimism enveloping our land. They point out that three recently published books, Doing Nothing, In Praise of  Slowness, and Pessimism: Philosophy, Ethics, Spirit express the growing mood of distrust, dismay, and disenchantment.

One would not argue that the popular mood is getting more and more like Jimmy Carter's late 1970s' funk.

One fear - a big fear.

When the dot-com mania (Internet, Media, Electronics, Computers, Diversified Services, and Telecommunications) fell apart in late 2000, many sectors and industries that had been declining since early 1998 were ready to bottom out and remain steady through the next couple of years. Thus, even though the headlines highlighted the decline and fall of the highest profile stocks and sectors, at least 50% of "the market" was ready to take up the slack. All through 2001 and 2002, Homebuilders, Retail, Transportation, Metals, Energy, Materials & Construction, and Manufacturing were marking time, ready to become market leaders when things got sorted out in late 2002-early 2003.

However, today things are not the same. Practically all sectors have put in a pretty good rally since 2003, even the washed-out late 1990s leaders. So, if things fall apart now, what sectors can we count on to hold the fort? None.

And that's worrisome.

All we can do, all we can ever do, is keep our eyes on the strongest sectors and stocks. And if there are none that meet our requirements, then we sit and wait. The market tells us what to do. It's what we do. 

FOR THE WEEK...Failing at the top, or taking a breather?

Recession talk took the wind out of the market's sails this week. The biggest news was falling interest rates. Falling interest rates can be bullish because bonds become less competition for stocks. But when falling interest rates are because of a weakening economy, they are not bullish. With the Dow within a few hundred points (about $1 for each of the 30 Dow stocks) of its all-time high, it's certainly within reach. However, a failure here would be disastrous. Period. So, the bulls have got to get up a head of steam to push on through or else risk getting mauled by the bears.

Tobacco continued its reign at the top of the list. The worse the economy, the more we smoke and drink. Evidently, that's the idea, anyway. Utilities remained strong at #2. Real Estate advanced to the #3 slot. Just like with Automotive, it's hard to rationalize today's news with the market's decisions. But then again, it's the market that makes us money, not the news. Food & Beverage stayed stuck in the #4 position. Media dropped back two spaces to the #5 position.

Insurance, doing a good job this fall, retained the #6 slot. Chemicals, the biggest mover recently climbed into the #7 position. Aerospace/Defense made it 23 straight weeks in the Top Ten with a strong hold on the #8 slot. Telecommunications made its first appearance in the leadership category since last October, coming in at the #9 position. Rounding out the Top Ten was our old bear-market favorite, Consumer Non-Durables.

Very little moved this week, one way or the other. A little weakness toward the end of the week sent the numbers into the negative. We are again at a crucial area of prices and seasonality. As we come to the end of the September quarter, there will be strong influences by the institutions to put stock prices up as high as possible so as to make their performance look good. Whether others will use this strength to unload or merely help push up prices remains to be seen. Just remember that we're in a seasonally strong week.

It will pay us to keep very careful watch on the market and our money. As Mark Twain said about October - "This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."

And he was right. 

THE TOP TEN...