7/27/02 Posting #2
Margin Calls

This is a very short note. Unless you are extremely comfortable owning stocks on margin, please think twice about it. As stocks drop, others on margin are forced to put up more equity to meet their calls. As such, the stock you own on margin maybe at the mercy of another holder who does not have more equity to put up, and that individual's stock will be sold to meet the call. That's one way stocks can gap down- due to margin selling and liquidation.

7/27/02
Reese's Peanut Butter Cups

On Thursday the lead article in the WSJ concerned the possible sale of Hershey Foods. That got my attention in a quick hurry. I specialize in risk arbitrage. My mind though focused on Reese's and not on what Kraft, Nestle, Wrigley, Mars, or Cadbury Schweppes might pay for the business. In trading that day Hershey stock rose 14 points, and it was obvious to me the market thought Hershey could be sold for as much as $11 billion. I don't care about Hershey chocolate bars or the kisses or the cocoa or the syrup or the Almond Joy. York's peppermint patties or Twizzler's don't send me. But the Reese's that's another story. Then I thought why would I spend $11 billion on this company(that's presuming my piggy bank had the jack). Hershey's, at that price, would be valued at over 2 times annual sales and over 50 times earnings. That's a lot of Reese's. Milton Hershey would be laughing all the way to the bank- if he could. He died a very long time ago. Then I got to thinking. Milton and I have two things in common. We both love chocolate and we both come from a German immigrant heritage. Maybe I should try to keep the company in the family, so to speak. Then I thought. Am I for real? This is not a value. So I went to the Grocery Outlet and bought 4 Reese's Peanut Butter Cups for a $1. I savored every bite and realized this was the way to go. Putting $11 billion on my American Express Card makes absolutely no sense. I had come to my senses! My Mother would be proud of me.

7/26/02 Posting #2
Mutual Fund Outflow

For the most recent weekly July reporting period investors pulled out over $30 billion from mutual funds. That amount exceeds the outflow figure just after 9/11. Contrarians would consider this event significant in that it shows overwhelming bearish sentiment. That is an accurate appraisal of the sentiment. On the other hand, the individual investor, believe it or not, has quite frequently outperformed mutual fund money managers over the past several years. I don't believe one should shortchange the individual investor. The so-called experts clearly have been underperforming the S&P for many reporting periods.

7/26/02
"Confidence Comes Not From The Talking Heads On TV But From The Fundamentals"

This was a statement made yesterday by Treasury secretary Paul O'Neill before the National Association of Manufacturers in Washington. Yesterday the Commerce Department released information that factory orders dropped for the first time since March and was the sharpest drop since December.
Mr. O'Neil opined that he was optimistic about the rebound in investment. I suggest he look at the fundamentals rather than be a "talking head". The fact is business investment fell at the sharpest pace since 9/11. That comprises all non-military investment. If business is shying away from investing in business, then what does that tell you about the confidence going forward? Based on this lack of confidence, why should someone invest in business? This is telling, and will have an impact on future stock prices. Decreasing investment will directly impact the profits of corporations. Just look at IT spending and the telecom industry or what's left of it. Additionally, this lack of confidence will continue to weigh on the dollar.

7/25/2002 Posting#2
Advance/Decline

As we move into the last 40 minutes of trading today, the Dow is off about 100 points and the Nasdaq is off about 50 points. Irrespective of the final numbers the last couple of days should have illustrated a point. A market's direction is ultimately determined by its internal strength and or weaknesses, and one of those internals is the advance/decline line. This line has been negative for some time, and even a large Dow upsurge yesterday was not confirmed by a change in the advance/decline strengthening very much. That's why the rally was suspect. Additionally, the new low list has kept expanding and expanding while the new high list was reduced to single digits.
The one bright spot is Hershey Foods as it skyrockets in price. The company is putting itself up for sale.

[7/25/2002 7:14:45 AM | michael buchsbaum]
7/25/02
Arresting Reporting

God help us all. Yesterday many in the media suggested, while the markets were rallying, that the strength could be the result of the arrests made at Adelphia Communications. When handcuffs and not profits make stocks move, then we are in deep deep trouble. I for one would like to see some real growth in homeland free cash flow. I am an optimist. I see something really positive coming out of Adelphia Communications. It's possible that handcuffs might become the restraining unit of choice and replace handguns. If that did occur, we might research the number one manufacturer of handcuffs, and possibly buy their stock at value levels. Until that happens, show me the real net income per share. Green is my color of choice, and I hope yours as well.

Yesterday my early morning blog did not get posted for over 8 hours. I am at a loss of words to explain this happening. Someone suggested that a great many people in Northern California were fixed to their tv screens watching the Adelphia execs being carted off. I believe it was just a technology glitch but not the same one that has hit the Nasdaq for the past two years.

7/25/02
Arresting Reporting

God help us all. Yesterday many in the media suggested, while the markets were rallying, that the strength could be the result of the arrests made at Adelphia Communications. When handcuffs and not profits make stocks move, then we are in deep deep trouble. I for one would like to see some real growth in homeland free cash flow. I am an optimist. I see something really positive coming out of Adelphia Communications. It's possible that handcuffs might become the restraining unit of choice and replace handguns. If that did occur, we might research the number one manufacturer of handcuffs, and possibly buy their stock at value levels. Until that happens, show me the real net income per share. Green is my color of choice, and I hope yours as well.

Yesterday my early morning blog did not get posted for over 8 hours. I am at a loss of words to explain this happening. Someone suggested that a great many people in Northern California were fixed to their tv screens watching the Adelphia execs being carted off. I believe it was just a technology glitch but not the same one that has hit the Nasdaq for the past two years.

7/24/02 Posting #2
Fools Rush in Where Others Fear to Tread!

The Dow up 488. The Nasdaq up 61. Merck, JP Morgan Chase, Citicorp, Microsoft, and GE lead the way. They look similar to the stocks mentioned in my pre-opening blog of today. The rally has bad breath! On the New York Stock Exchange the advance/decline was 20 stocks up for every 13 down and on the Nasdaq 20 up for every 15 down. Those ratios don't make for lasting reversals.

7/24/02
Bad Breath and New Lows

You probably think I am referring to this weekend's Gilroy garlic festival. Actually, I am talking about yesterday's trading when, on the New York Stock Exchange, there were 28 stocks down for every 5 that were up. Certainly that would indicate a market much worse than the Dow 30 stocks.
Yesterday the two companies with the highest market caps, GE and Microsoft, made new lows. Both market caps approximate $280 billion. At one time both had market caps of well over $500 billion or much larger than the GDP for most countries!
In the financial sector Citicorp and JP Morgan Chase traded down to levels not seen in some time. Their charts look like both stocks dropped off a cliff.
Talking about drops, Merck fell to a new low of 39 1/2. The board of directors announced a $10 billion buyback of shares. Since 2000, under a previously announced buyback, Merck had already spent $7.7 billion on buying their own shares. Maybe they should have increased the R&D budget for discovering new drugs. I would prefer to see corporate officers and directors reach into their own pockets and purchase shares- not by exercising options- but by making market purchases. That would be more meaningful, and something that you don't see too frequently these days. Maybe insiders are nervous about the market. If they aren't buying, why should the investing public buy? They should know more about their own company.

7/23/2002
Bear Market Rallies

Overnight the dollar staged its largest rally against the euro since last September. With the dollar strength U.S. stocks in foreign markets rallied sharply as well. That's the natural course of events. Stocks don't go up or down in a straight line. Just look at historical charts and that will be plain to see.

Focus on the current trends and don't be misled by day to day fluctuations. Again, looking at a chart will give you a picture of the trend. There should not be any doubt that the stock markets and the dollar are in bear markets and that the bond market has been in a bull market. Trends can last a very long time. When a long trend is broken, it stays broken for some period. That period can last 10-20 years and not 10-20 days. Rallies in bear markets give a respite to those investors needing to calm their nerves, and to raise the question as to whether a bottom has been reached. No one rings a bell at market bottoms. Only in hindsight do we know a market has reversed itself.

Yesterday I asked what is the rush. Today I am suggesting to keep your eye on the ball, and particularly the trend provided in charts. As the old saying goes, make the trend your friend. Daily fluctuations are the norm. That's what makes markets.

7/22/2002
What's the Rush?

The media spends too much time talking and writing about searching for a market bottom. It makes for bad press and fruitless airtime.
Let's be productive and rational. Most bottoms are comprised of consolidation after consolidation. True bottoms can take place over long periods. On rare occasions there will be a V bottom marked by a long downturn and a sharp reversal. This happened in December 1974. Values were so extraordinary at that time. That is not true today.

I dislike shopping. I look at a sale and see an item marked 50% off. I'm rarely impressed by the markdown. Even going out of business sales aren't great as far as I'm concerned. So many company stocks were marked up to ridiculous prices that 50-60% price reductions aren't that exciting. I can do without almost all of the items on sale. But that's just me.

Please don't think you are going to outsmart a treacherous bear market. It's not going to happen. As they say, when they raid the whorehouse they take all the girls. (That is not meant as a male chauvenist remark. It's an old saying on Wall St.) Your "sister" or "cousin" maybe the prettiest of the bunch, but she's going too. That's the reality of bear markets.

Please take your time prior to investing more money. Do your homework. Invest a little at a time. Do not commit all the funds at one time. You are not about to pick the bottom. Hope may spring eternal but we're not in the hope business. What's the rush?

7/21/2002
Worth Remembering

The stock market is not like baking a cake from a mix. The ingredients are never the same. It is wise to remember that the market accomodates the fewest number of investors at any one time. As such, there will be times when the risks overwhelm any chance for rewards. Pundits put too much stock in assigning the "proper" P/E for the S&P and the Nasdaq. Obviously, the lower the P/E the lower the risk factor.

When do you commit funds? When it feels right for you; when values jump out at you like in 1974 when I could buy really good companies at a 5 P/E and yielding 10%. We are a long way from that now; however, those times may not return. Microsoft was not in existence in 1974. Very few people had heard of the internet. I hadn't. Times in 1974 were different from today. To be a successful investor you need to remember the past but truly concentrate on the present and anticipate the future. Suppose in 1974 you weighed 160 pounds and 38 years later you tipped the scales at 210. You are the same individual getting on the scale but your well-being is different.

Today the country's balance sheet is laden with debt and that is true of most households. That makes us different from 20-30 years ago. We are not as agile financially. That alone limits our abilities. We can become a two job family but we still work 4 1/2 months for the IRS and the second job pays for credit card and mortgage debt. The gov't can only tax you so much. Their revenue capabilities are limited, and tax receipts from stock market bubbles may only occur once in 50-70 years. The debts keep piling up for the gov't and more bonds need to be issued- almost like a ponzi scheme. Conditions today are different and therefore reading the stock market becomes more challenging. Don't rush your learning curve. Invest at your pace and acknowldege the risks before looking for rewards.

7/20/2002
The Third Bubble and Smoke and Mirrors

Before reading this posting I can state that it will upset most readers. As such, in advance of this upset, I proclaim a strong belief in capitalism, the U.S.A., God, and motherhood as well as a strong liking for apple pie. In June 2000 I warned of the coming bursting of the bubble in the stock market. Just last month I warned of the bubble soon to burst in the housing market. Is it true bubbles run in threes? If so, I can describe the third bubble- the gov't bond market. When the stock market is declining, funds pour into the gov't bond market, the so called safe haven. There is only one reason to find this market comforting and that's what appears on the dollar bill: "In God We Trust." Interest on the debt and repayment of the debt are made in dollars. It stands to reason that the "best borrowers" pay the lowest interest rate. Two year gov't bonds are now trading near their all-time lowest rate of 2.31%. This is as ridiculous as the Nasdaq index trading at 5000. The Administration has just announced we can expect federal budget deficits for years to come. Those deficits accompany huge monthly account deficits. The latest, $37 billion, was just announced. To nullify these deficits we need to attract foreign capital and inflows amounting to $1.7 billion per day- even on Sundays, a normal day of rest. Monthly statistics show that it is increasingly difficult to attract this capital. Our rates are too low and confidence in our accounting systems etc. has waned. The first sign of trouble has been the dollar falling in value. With that fall money managers are moving more funds into the eurozone market. The Administration has tried to calm the nerves of the investing public as well as foreign investors. From this week's stock market I would say nerves appear at their wit's end. Foreign investors will be the next to jump ship. When that happens, rates will begin to rise on gov't and corporate bonds and with that increase mortgage rates will move higher. The bottomline is the gov't must raise increasing amounts of money to fund our growing deficits. Supply and demand rule the markets. The gov't bond market will suffer the consequences. Hopefully corporations will not be crowded out of the bond arena. I strongly suggest the Administration cut spending by at least 20% and immediately. In addition, it's time to clean house. We need smart businessmen manning the gov't checkbook. It's nothing personal- just a business decision. I'd like to see a Ross Perot become Secretary of Treasury and a non-consultant or economist become Fed chairman. Preferably a person with a long successful business career of creating yearly positive cash flow. We need doers and not talkers. We will not talk our way out of deficits. The government's only source of revenue is our tax dollars. It's not like the gov't makes the money. If they did, do you think they'd spend it irrationally? The irony is that Mr. Greenspan has been overseeing the gov't bond market's irrational exuberance with smoke and mirrors. The American people will be the ones to pay the consequences. Isn't that always the way?

7/19/2002
Flow of Funds

In recent blogs I have discussed gov't budget deficits. I would like to touch on an additional deficit, and that is the difference between this country's exports and its imports. Until about six months ago the dollar was very strong against the yen and the euro. That fact made it cheaper to pay for imports. As such, the U.S. has been running a recent annual deficit(importing more than exporting) of close to $450 billion. This figure takes into account our annual trade with all countries, such as, China and Japan. In sum, this $450 billion is considered a negative flow of funds. The funds leave this country to pay for the imports. In order to make up this deficit we must attract capital into the U.S. It requires an enormous inflow on a daily basis. Up to this point we have been pretty successful attracting foreign funds. The U.S. has been viewed as a safe haven. After 9/11 that viewpoint has changed somewhat. In order to make the U.S. a more attractive location for investment it has been necessary to reduce the value of the dollar and make our exports more affordable. In addition, inflows into our bond market have lessened for two reasons. One is the loss of confidence with the continuing corporate scandals. The other is that our bonds provide less income than they do elsewhere. Fixed income investors can achieve 1 1/4% higher interest in short term German gov't bonds than they can with short term U.S. gov't bonds. That's a wide differential, and one more reason I believe our interest rates will begin to move higher.

Posting #2 7/18/2002

I would be terribly remiss without mentioning what Andrew Grove, Intel's Chairman, had to say yesterday. Mr. Grove, in his youth, fled Communist Hungary to this country. Yesterday he compared today's anti-business atmosphere to the Communist Hungary he remembers so vividly. With all humility I believe the problem goes even further. Investors are being criticized for their greed in the late 1990's. The gov't didn't have a problem taking the capital gains taxes from the investors. In fact, those tax revenues produced large gov't surpluses. Now, with stock prices declining, tax revenues have dropped significantly, and we are faced with a $160 billion budget deficit. So we are led to believe the stock market and the investor are the culprits. Were they also the saviors? How about the anti-individual sentiment. An ordinary person works 4 1/2 months each year for nothing- all the money goes to the IRS. On top of that Mr. Greenspan denounces capitalist greed. Is it anti-American to make money in the stock market? Is it anti-American to take the side of the multi-national corporation over the consumer? That's what happens when one accepts a weak dollar. The consumer pays more for imported goods and our exports become more attractive. The consumer represents 2/3 of this economy and overwhelms the significance of Coke or MMM. I agree with Mr. Grove about the anti-business sentiment; however, that anti sentiment is much more far-reaching. I suggest it's unwise to bite the hand that feeds you.

7/18/2002
Covert Operations

The Administration has given the go-ahead for the CIA to conduct covert operations in Iran. Maybe a coup will work. It hasn't in the past, and there isn't any reason to expect it will now. If a coup fails, then the alternative would be a large military effort.
There is tried and true, and then tried and failed. No individual or group can talk the stock market up. Profits and confidence are the movers and shakers. Both Mr. Greenspan and Glenn Hubbard, chairman of the White House economic council of advisors, seem to believe the main risk to the economic turnaround is the stock market. Isn't it possible that an influential covert group is attempting to talk up the stock market when it appears to be reeling? It's a little like CNBC. They took a poll of analysts asking where the Dow would be by the end of 2002. Five respondents said between 1120 and 1150. No publicity was given to those not sharing that viewpoint. A few days before Mr. Greenspan spoke a new consumer poll showed a sharp drop in consumer confidence. Mr. Greenspan acknowledged the poll but said there wasn't any evidence of the lack of confidence being translated into lower spending. Are we all considered morons? How could a poll taken five days ago instanteously be translated into lower spending? I suggest a little less covert and a bit more get real.

Posting for 7/17/2002
Interest Rates: It was fun while it lasted!

IThe Bond Market Association's Economic Advisory Committee recently predicted large federal budget deficits well into the decade with some believing annual deficits could approach $200 billion. In fact, they mentioned that deficits can raise interest rates and discourage investment. Over the next five quarters the committee is forecasting an increase in both short and long term interest rates. I agree with this scenario. I also believe that Wall Street is convinced the Fed will hold the line on interest rates and assist in an economic turnaround. Thus, the market may not be factoring higher interest rates into future business conditions. The market anticipates future events, and therefore, a smart investor must also anticipate- at least 9 months in advance. Looking at WalMart's recent stock performance one can witness a future anticipated decline in consumer spending. The same is true with Home Depot and Lowe's in home renovation and do-it-yourselfers. These are the market leaders in their respective fields. Higher interest rates mean higher mortgage rates, and the latter will lead to less home building, less home buying, and reduced demand will bring forth lower home prices. So, in sum, we should be looking for weaker economic conditions, weak consumer spending, higher unemployment, higher interest rates, reduced real estate prices, a weaker dollar, and a global deflationary trend. That's my mid-year economic viewpoint.

7/16/2002
Pfizer to buy Pharmacia
They will issue 1.4 shares for each Pharmacia. At last night's Pfizer 28 3/4 close the worth would be a bit over 40 per share and Pharmacia closed at a point discount to that level. The rationale for the merger is: close to a dozen drugs with annual revenue exceeding $1 billion are protected by patents between 2010 and 2015; Pfizer's core and global pharmaceuticals business will be expanded; and there will be inroads into endocrinology, oncology, and opthalmology. The anticipated net income yearly growth rate will be 14% and achieve earnings of $1.84 in 2002 and $2.12 in 2004. With that growth rate my view it is unlikely the P/E for Pfizer would drop below 14 or a bit over $25 per share, a drop of some 10%. Pharmacia shares would drop in line with those of Pfizer's. This merger will place pressure on other companies, such as, Novartis, Glaxo, and Merck to make acquisitions. Two possible candidates could be Schering Plough, selling at 21 1/2 with a 16P/E and yielding 3% or Bristol Myers Squibb at 23 with a P/E of about 10 and yielding 4.9%. Should the dividends in each be safe the yield would cushion any price decline from these levels. Each company has problems but some bright spots like Schering's new drug Zedia which fights cholestrol.

7/15/2002
Mr. Greenspan

Tomorrow the Fed chairman provides his semi-annual testimony to Congress. The world will be watching; however, it is doubtful that the financial markets will be hanging on his every word. How much more can the Fed lower interest rates? In recent weeks the dollar has fallen rapidly against the yen and the euro. That fact prevents the Fed from printing too many dollars in an attempt to increase liquidity in the market place. Mr. Greenspan will touch on the corporate and accounting scandals and explain their negative impact on business investment and consumer spending. (When a corporation buys a PC it's an investment. When Mr. and Mrs. Smith purchase the same item, it is spending. Maybe the difference has to do with depreciation, an interesting accounting item.) Sentiment indicates the growing reluctance on the part of business to spend and hire. This alone will impact the economy in the future. Mr. Greenspan will attempt to soothe the nerves of consumers, investors, corporate leaders, and the nations responsible for buying our debt. So, the bottom line is for him to reject irrational gloom and project an economy which has recovered slowly in this year's second quarter, and to provide an emotional pathway for calm leading to economic resiliency. That is a difficult chore. I wish him well in his Greenspan speak.

7/14/2002
The D Word

Sunday is suppose to be a day of rest. As such, I apologize in advance for this posting which may prove unsettling for many. Over the past year I have had a growing sense that there was a chance our economy could take a turn into a depression. A year ago I thought there was a 10% chance and that feeling has recently grown to 30%. Normally I would only discuss this subject with family; however, yesterday I read the most recent Barron's and in it was an interview with Seth Glickenhaus, a successful investor for well over 50 years. Like me, he thinks for himself and is a contrarian. Barron's asked him whether he thinks a depression could be coming. Seth's reply was: "not only could be, it will be." His opinion was based on many facts. Interestingly, based on history, he stated that the stock market would need to consolidate for 16 years. I remember the period from 1966 to 1982, and that's just what the market did as it moved back and forth and back and forth. In every market there will be opportunities to make money. One has to be patient and assess the risk/reward ratio until it is clearly in your favor. This market is unforgiving. There is very little room for error. Invest when the time is right for you and not when a pundit proclaims the time is now. It's your money. The pundit has an axe to grind. Don't let your hard earned savings get pulverized.