Some Thoughts

While I have been wrong a lot over the past few months, I would point out a few important factors that we should keep in mind. 1) The time to buy is when recession is confirmed [I've been beating the Sep/Oct/Nov drum for this to occur for a long time] 2) The recession is not just starting as most believe - it's in the 6th or 7th inning [I finally found an article that shares my viewpoint that the recession started in Q4 2007: http://news.morningstar.com/articlenet/article.aspx?id=262592&pgid=hparticle] 3) Once the economy turns around [which requires two things to happen a) credit crunch to end which it mostly has and b) a restoration in trust in the economy which could happen at any time] it will likely be "too late" to buy (it won't be, but it will feel too late as we'll be far from our lows).

We may or may not revisit the 10/10/2008 lows, but I believe the 2002 lows will hold in any case -- because I believe the economic outlook is a lot better than most expect.

Also, Jeremy Siegel posted a good article on Yahoo that you may wish to review [http://finance.yahoo.com/expert/article/futureinvest/118916] in which he argues for a 20% return over the next year. One of his big points is also one of mine - that it's unreasonable to use trough earnings as the denominator in a P/E and compare to "normal". He claims that Ford, GM, and Sprint are less than 0.2% of the S&P 500 yet reduced the S&P's earnings by over 20% due to massive losses.

Look for high volatility to continue, but subside over the next 3 to 9 months. Conservative investors should strongly consider intermediate term investment grade corporate bonds.

Market Bottom?

I see reason to believe that the market bottom was this morning. We won't know for sure until this is confirmed by declining volatility levels (^VIX and ^VXO). The market has fallen over 40% in the past year and over 30% in the past 30 days making this the worst crash since the depression.

Some pundits are saying "you still have time to sell now" - I don't believe this. Market crashes happen near the top - that's why this big decline has come as a day after day grinding rather than a single (or double) day event.

I'm a big believer that "the pendulum swings both ways, and it swings too far". There is good reason to believe it has now swung too far:

1) Historic speed of decline
2) Extreme fear levels (^VIX)
3) Favorable valuation levels (trailing 10 year P/E is now down to 13.6, price to book, dividend yield etc are all at long term lows)
4) Forced selling brings price too low
5) No one wants to own stocks
6) Front page of newspapers and magazines (not financial magazines) is the stock market

I read somewhere today an interesting statement - when markets are going up we all forget what can surprisingly go wrong - now we're all forgetting what can surprisingly go right. I believe there's a lot that may go right that will shock investors (or former investors who have bailed) -- most notably the shocking amounts of liquidity being pumped into markets which could create a major boom.

Will I be right? Not based on my recent predictions.

While I'm not going to update the recommendations (lack of time) I will add MER - Merrill Lynch to the list as of today's close.

The Market is Cheap

Well, in case it wasn’t terribly obvious, I was very wrong in my last posting. I called it “time to buy” – it wasn’t (at least in the short term). I said I thought WaMu would be fine – they weren’t [I will say that looking back on 2008, we will know that Jamie Dimon got the best deal of the year in purchasing WaMu for only $1.9 billion, without assuming any debt].

So I was wrong. However, I believe that the market is a “screaming buy”. We have fallen too fast (fallen faster than in 1987, looking at it month by month, based on percentage below 100 and 200 day moving average). We have cheap valuations. There is an insane amount of stimulus being applied – which lags by 6 to 12 months, but will eventually cause an improvement in the markets. If housing bottoms in the first half of 2009 [as I’ve long predicted], then this will look like a tremendous buying opportunity – and I think it is.

So how did my last recommendations fare? [MMM (-9.92%), UNH (-25.70%), PETS (-9.33%), APA (-20.69%), DPS (-3.00%), ADSK (-17.07%), AIB (-22.70%), PBR (-18.92%), TEX (-37.04%), WM-PK (-100% )] averaging a loss of 26.44%, underperforming the S&P 500 [-15.78%] by a whopping 10.66%. Since inception on 7/31/2007 the recommendations have lost 11.82%, outperforming the S&P 500 [-25.97%] by 14.15%.

I recommend buying stocks at this juncture. Ones I prefer: SSO, QLD, DDM, DIG, UNH, COP, ADSK, AIB, PBR, TEX, ASF, MT, BBY, L, MDR, PCZ, BID, SVU, TXT.

Here are some stocks that hit 52 week lows today that I think are cheap:

TKR – Name P/E P/Book Enterprise Value/Revenue
ASF – Administaff 11.6 3.1 0.3
AET – Aetna 9.3 1.8 0.7
AA – Alcoa 7.5 0.9 0.8
MO – Altria 10.3 10.1 1.2
AXP – American Express 10.4 2.9 2.7
APA – Apache 7.0 1.8 2.7
MT – Arcelor Mittal 4.3 1.0 0.8
ADM – Archer-Daniels-Midland 6.9 0.9 0.3
BJS – BJ Services 7.3 1.5 1.0
BP – BP 5.7 1.4 0.5
BHI – Baker Hughes 9.1 2.3 1.4
BBY – Best Buy 10.3 2.9 0.4
BA – Boeing 9.2 4.7 0.6
BYD – Boyd Gaming 12.2 0.5 1.6
CBS – CBS Corp 7.0 0.4 1.1
CI – Cigna 8.9 1.9 0.6
CVS – CVS 15.0 1.4 0.7
DVR – Cal Dive 10.6 1.7 2.1
CAJ – Canon 10.3 1.6 0.9
KMX – CarMax 25.4 1.7 0.4
CAT – Caterpillar 8.1 3.3 1.3
CX – Cemex 5.1 0.7 1.2
CRL – Charles River Labs 21.1 1.9 3.0
CVX – Chevron 8.2 2.0 0.7
CHS – Chico’s 34.5 0.9 0.4
CBK – Christopher & Banks 18.0 1.1 0.3
XEC – Cimarex Energy 6.0 1.0 2.0
COH – Coach 9.4 4.8 2.1
COP – ConocoPhillips 5.9 1.1 0.6
GLW – Corning 7.8 1.7 3.3
DE – Deere & Co 7.7 2.2 1.4
DVN – Devon Energy 8.5 1.6 2.8
DFS – Discover Financial Services 11.8 0.9 NM
EMC – EMC Corp 13.9 1.9 1.5
FIS – Fidelity Info Services 9.3 0.9 1.4
FRX – Forest Labs 8.0 2.1 1.6
FDP – Fresh Del Monte Produce 7.0 0.9 0.5
FTO – Frontier Oil 4.9 1.4 0.3
GD – General Dynamics 11.4 2.2 0.9
GE – General Electric 10.9 1.8 4.2
GNA – Gerdau AmeriSteel 4.4 0.9 0.8
GSK – Glaxosmithkline 12.7 8.3 3.1
HAL – Halliburton 9.0 3.1 1.5
HES – Hess Corp 9.1 2.1 0.7
HPQ – Hewlett-Packard 12.7 2.7 0.9
IR – Ingersoll-Rand 6.3 0.8 1.4
IBM – IBM 12.4 5.0 1.6
IFF – International Flavor & Frag 14.1 4.6 1.7
KG – King Pharmaceuticals 15.4 0.8 0.7
L – Loews Corp 6.6 0.9 0.6
MAN – Manpower 7.5 1.0 0.2
MRO – Marathon Oil 7.4 1.3 0.5
MDR – McDermott International 7.3 3.1 0.6
MCK – McKesson 13.1 2.2 0.1
MRK – Merck 13.2 3.4 2.6
MCO – Moody’s 14.0 NM 4.2
MOT – Motorola 16.2 1.0 0.4
MUR – Murphy Oil 7.2 1.7 0.4
NYX – NYSE Euronext 10.0 0.9 2.1
NBR – Nabors Industries 6.5 1.2 1.8
NOV – National Oilwell Varco 8.7 1.5 1.5
NWS.A – News Corp 7.4 1.0 1.1
NE – Noble Corp 6.3 2.1 3.2
NUE – Nucor 5.7 1.4 0.6
OXY – Occidental Petroleum 7.1 2.0 2.2
PBY – Pep Boys 19.8 0.7 0.3
PCZ – Petro-Canada 3.8 1.0 0.7
PBR – Petrobras 14.7 2.6 1.9
PLA – Playboy NM 0.6 0.6
PKX – POSCO NM NM 1.0
PCP – Precision Castparts 9.0 2.3 1.4
PRU – Prudential Financial 10.0 1.1 0.9
RTN – Raytheon 13.0 1.8 1.0
RSC – REX Stores 5.1 0.4 0.4
COL – Rockwell Collins 10.6 4.4 1.6
RDC – Rowan Companies 5.2 1.1 1.4
SWY – Safeway 10.5 1.4 0.4
BID – Sothebys 5.9 1.6 1.6
SUN – Sunoco 14.2 1.5 0.1
SVU – SUPERVALU 7.3 0.7 0.3
TGT – Target 12.6 2.5 0.8
TTM – Tata Motors 6.0 1.5 0.6
TEX – Terex Corp 3.7 0.9 0.3
TXT – Textron 6.1 1.7 1.1
MMM – 3M 12.1 3.6 1.9
TWX – Time Warner 11.1 0.7 1.7
TSN – Tyson Foods 60.0 0.9 0.3
USG – USG Corp NM 1.0 0.7
UL – Unilever 14.5 1.2 0.6
VIA.B – Viacom 8.1 2.1 1.6
WAG – Walgreen 12.7 2.2 0.5
WLP – WellPoint 7.7 1.1 0.4
WSM – Williams-Sonoma 13.5 1.3 0.4
WYE – Wyeth 11.1 2.6 2.1
YUM – Yum! Brands 15.0 25.1 1.6
ZMH – Zimmer Holdings 17.1 2.4 3.3
ACMR – AC Moore 14.8 0.6 0.2
AAPL – Apple 19.2 4.4 2.1
BAMM – Books-A-Million 5.4 0.8 0.2
CAKE – Cheesecake Factory 12.9 1.6 0.7
CTXS – Citrix Systems 20.1 2.1 2.3
DELL – Dell 11.1 10.6 0.4
EBAY – eBay 47.0 2.2 2.4
ERTS – Electronic Arts 13.6 2.4 1.9
EXPE – Expedia 13.2 0.8 1.3
FWLT – Foster Wheeler 8.3 5.1 0.6
LOJN – LoJack 8.4 0.8 0.3
MNST – Monster Worldwide 14.1 1.5 0.9
FLWS – 1-800-Flowers.com 15.2 1.4 0.4
OXPS – optionsXpress 10.2 4.3 1.5
RICK – Rick’s Cabaret 7.5 1.2 1.9
RMCF – Rocky Mountain Chocolate 10.3 4.3 1.6
SIGM – Sigma Designs 6.4 1.1 0.8
SPLS – Staples 14.3 2.4 0.9
SBUX – Starbucks 20.7 4.0 1.0
WFMI – Whole Foods 17.1 1.7 0.4

Obviously this is not an exhaustive list of all cheap stocks – these are just the ones that hit new 52 week lows today that I noticed.

It Was Time for a Miss

In case you miss the rest of what I say below, I want to point out that I am calling this "time to buy".

No one is always right. I was very wrong on the Fannie preferred. I thought it was “money good” and it looks like it may well not be. As you are certainly aware the government socialized Fannie and Freddie over the past weekend and eliminated future dividends on the preferred stock. There may be some value in the securities at these prices [assuming 1) housing recovers 2) the government doesn’t run these into the ground and 3) congress doesn’t eliminate the outstanding equity in the future], however the risk is great enough that I would not recommend the preferred stock (and if you own Fannie or Freddie common and want to hold on for the potential gain if the above 3 points are true you should sell, take the tax loss and buy the preferred in the same sized investment rather than holding the common – there’s a far higher chance of the preferred being worth something than the common). At least the government gave us the Q3 dividend on the preferred.

Also I recommended two oil companies which did poorly as oil fell and hedge funds that owned the oil producers have been forced to sell.

My outlook is this: I think this is time to buy. I expect that the July lows will in fact hold for the market and with Fannie/Freddie resolved (and I expect Lehman will be resolved similarly by Monday) there should be a lot less uncertainty. Furthermore I believe that the government took over Fannie and Freddie for the purpose of lowering mortgage rates, which has in fact happened significantly this week. If financing rates are cheaper home prices don’t seem as high and I think this will aid the housing recovery which I see occurring sometime in late Q1 or Q2 of next year (as mentioned here previously). If housing can stabilize this is very good for the stock market. Generally I do not see a global recession in the offing, which most market participants are betting on. If I’m right performance should be good relative to the market for a while, while if I’m wrong it will be poor. Generally I like financials, industrials, and energy companies currently.

Since I now have so much credibility in recommending beaten down financial preferred shares, I am going to recommend WM-PK. This is a preferred stock issued by Washington Mutual. I believe that the rumors of WaMu’s demise have been greatly exaggerated. The stock is somewhat cheap, but I don’t think after the massively diluted capital raise earlier this year that there will be a terrific return for common shareholders anytime soon. However with capital levels that are some of the highest in the industry and fairly solid reserves against losses their current condition is not bad. The concern is that their holdings of option adjustable rate mortgages will sour in the future when those negative amortization minimum payments turn into fully amortizing regular payments (i.e. when people stop being allowed to make a token payment and have to pay their full mortgage principal and interest installments). However, as mentioned above the government is lowering interest rates for mortgages – this has the distinct possibility of causing a turning point in the housing market. And those option ARMs don’t convert to amortizing payments soon for the most part – so there’s plenty of time for recovery in housing. Finally WaMu could always renegotiate the loans and allow for smaller payments from the borrowers which could reduce defaults if markets remain bad.

Energy: OPEC seems to be saying that they will defend $100/barrel oil prices which should be good for oil companies as their shares seem to have priced in much lower levels. Also global demand for commodities has dried up in the recent past as China had loaded up prior to the Olympics and then stopped buying, but I see this reversing as the Chinese pollution controls are returned to normal and the Olympics inventory is burned through. Probably positive for coal, copper, and oil, but I’m not very good at predicting commodity price moves.

Since the last update the recommended stocks [MMM (-1.37%), UNH (-1.12%), PETS (13.62%), APA (-5.94%), OXY (-16.28%), SNY (0.60%), DPS (5.87%), AEO (19.64%), ADSK (-6.28%), AIB (-5.55%), and FNM-PS (-71.02%)] averaged a loss of 6.17%, underperforming the S&P 500 [-2.09%] by 4.07%. Since inception on 7/31/2007 the recommendations have gained 19.87%, outperforming the S&P 500 [-12.10%] by 31.97%.

I recommend at this time: MMM, UNH, PETS, APA, DPS, ADSK, AIB, PBR, TEX, and WM-PK.

Many happy returns.

The Bear Takes Hold

Sometimes it's not fun to be right. The market has been terrible. Unfortunately two of my picks in my last update has also done terrible [PG should do well in the long run, but WNR was a mistake - only buy it if you think oil has peaked which is difficult to predict]. The good news is that financials are near the bottom [SKF, the double short Financial ETF did terrific since my last post, and should do terrible as Financials recover some of the ground they lost]. My view is that house prices probably will bottom around the end of Q1 2009. Traditionally this would mean that the bottom for banks and builders would be around the end of Q3 2008, or September/October/November. However banks have fallen so far (as have homebuilders, just not as recently) that it's likely that the bad news is priced in at this point.

Overall the market [S&P 500] has fallen 6.64% since my prior post, but had rallied in the period in between. I still believe that the S&P will probably fall about 15% from the level of my prior post which would be 1,164 [8.9% from here]. Overall the odds are that the S&P 500 should fall somewhere in the 5% to 15% range from here.

What has happened since Q3 of 2007 is that corporate earnings have been dropping, and financials have been pulling down the market. If history rhymes then what should happen next is that financials will bottom out, yet the S&P will continue to fall, accelerating and eventually dragging financials back towards their lows again.

There are a good number of regional banks today that are very cheap on a price to book basis. If their problems don't multiply and accelerate, long term investors will do very well to buy them here.

Overall the economy is either in a recession or on the brink of one. I'm a believer that looking back we'll say that Q2 2008 was the start of the recession and that it ended in Q1 2009 [plus or minus a quarter]. Typically the market bottoms 6 months before the recession ends which should put the bottom sometime in August to November, probably around September.

When we do have a bottom in the S&P it should be a terrific buying opportunity as the problems that are here are not going to be here forever.


My prior recommendations [SKF (+49.27%), JNJ (-1.91%), PG (-13.67%), BUD (+29.41%), FMX (+3.94%), WNR (-14.44%), DNA (-8.44%)] averaged a gain of 6.31%, which outperformed the S&P 500 by a whopping 12.95%. I recommend at this time EWBC, MMM, UNH, JNJ, UYG, XHB, DNA.

Overall record since I began posting recommendations on this blog on 7/31/07 has been -0.93%, compared to the S&P 500's -12.18%.

Recession Called Off?

Since my last update the S&P 500 is down 8.92%. As of yesterday (1/22/2008), the S&P 500 was at its lowest P/E ratio in 10 years, lowest P/Book ratio in 10 years, and highest dividend yield in 10 years. Clearly if we aren’t headed for economic disaster this is a time to increase your equity allocations. Also, as a side note, with the 2 year treasury yielding 2.09%, 5 year at 2.64% and 10 year at 3.51% you probably want to be getting out of bonds (put the “non-stock” portion of your portfolio into a money market, the yield of which will go down along with these Fed rate cuts, but you won’t risk losing money if inflation takes off and interest rates rise). In general I expect companies with (long-term) growing earnings that are trading at a discount to the market should be the best companies to invest in, although this is the style I prefer in all markets.

Unfortunately for my returns several of the last recommendations made here turned out very badly (Alcoa and Boeing particularly), and my methodology for tracking returns in this blog do not take into account any sort of equity weighting (in other words I’m assuming that stocks are always 100% of this portfolio).

At this juncture, I expect the dollar to remain volatile but not continue the drop it experienced over the past several years, meaning that international should be trimmed back to 10% of your portfolio or so. Also, I believe that the selloff in financials and consumer discretionary companies have been overdone, and they seem to be regaining their footing since the Fed’s surprise ¾% Tuesday morning. The true value today lies in these unloved companies that cater to the American consumer (plus if everyone gets an $800 tax rebate check, and low interest rates combined with the thawing of credit markets allows prime credit borrowers to refinance their home, some of that money should flow to these sectors).

My prior recommendations [WMT (+6.0%), JNJ (-6.1%), BCS (-15.4%), BA (-17.9%), DIS (-12.1%), AA (-20.1%), AIB (+1.5%)] averaged a loss of 9.16%, which underperformed the S&P 500 by 0.24%. I recommend at this time BAC, C, WB, BBY, JOSB, BWLD. Note that this portfolio is only financials and consumer discretionary companies which may be too concentrated or risky for many investors.

Many Happy Returns, Mark Hanna.

Economic Indicators

The Wall Street Journal today reported that the number of existing homes sold in October increased 0.5% month over month (+6.4% in West, UNCH in Midwest, -1.2% South, and -2.9% Northeast). These results were higher than the market expected. The median price of an existing home showed no change month over month, at $221,000 but was down $8,000 (-3.5%) year over year, the largest ever annual drop and record third monthly consecutive decrease.

Consumer confidence was expected to slightly rise to 105.8 from October's 105.1 but instead it has dropped to 102.9. A number over 100 is considered good.

I expect that my prediction on 11/11 ("Money has been flowing in the market in anticipation of a Q4 rally, which has driven the market up double digits. I think that if this rally does not materialize we could easily see a disappointing reaction") is beginning to pan out. I'd predict at this point Q4 will be fairly close to unchanged overall (if that is correct, we have about 4% to give back from large caps and 7% from small caps), and Q1 07 will be a downer. As pretty much always, I am bullish on the long-term outlook for the market, but today I am fairly bearish on the near-term.

To those who don't know my feelings on it - stay invested. It never really works to try to jump in and out of the market. Just consider these things and think about positioning your portfolio in a more conservative manner -- Focus more on mega cap companies with strong fundamentals. Make sure you have some (but not too much) foreign exposure for diversification.

The Stock Market

The US stock market has been on a roll lately, with the S&P 500 index up 2.2% over the past month, and 12.5% since the low on July 17th. The only problem is there doesn't seem to me to be a legitimate reason for a 12% gain in 4 months. Consumer confidence has risen, and oil prices have dropped - so the US consumer is looking strong, but corporate earnings growth is slowing and there is a great deal of talk about the Fed cutting interest rates in 2007. Here are some excerpts from the Wall Street Journal about the market this past week:

WSJ.com: Wall Street Focus Shifts From Elections to Fed November 10, 2006.

Wall Street shifted its gaze from the fleeting turbulence of the midterm elections to more-familiar fare Friday: earnings, oil prices and the Federal Reserve.
...
"The topic de jour for the next few weeks will be the Fed" and its policy meeting in early December, said Ned Riley of Riley Asset Management.
Investors will also focus on consumer spending as the holiday season ramps up. A new survey by the International Council of Shopping Centers shows consumers may cooperate. On average, consumers plan to spend $676 on holiday purchases this year, up 9% from last year, according to the survey, helped by declining gasoline prices.
Wall Street will get an important batch of economic data next week, when the government releases its monthly inflation statistics. Any hint that inflation is creeping higher will likely trigger a selloff on Wall Street, said Mr. Malone, since many investors are banking on a Fed rate cut in early 2007 to cushion the softening economy's downward slide.
Until then, stocks are likely to languish, as they did throughout Friday, though they finished the day with a push into the black. The Dow Jones Industrial Average gained 5.13 points to 12108.43, gaining 122.39 for the week.
...
The Standard & Poor's 500-stock index gained 2.57 to 1380.90, and the Nasdaq Composite Index rose by 13.71 to 2389.72, its highest close since February 2001.
Oil prices fell $1.58 to $59.58 a barrel after the International Energy Agency lowered its global oil demand forecast for 2006 and 2007, citing weakening demand from China. Gold prices fell $7.50 to $629.30 an ounce after surging more than $18 Thursday after an official with the People's Bank of China said the country may diversify away from U.S. assets such as the dollar and bonds.
Treasury securities rallied after a Thursday auction of $13 billion worth of 10-year bonds showed strong demand from overseas buyers, including foreign central banks.
Though stocks have meandered in the past few days, some investors expect the uptrend that recently lifted the Dow industrials to a record high to resume. The period from November through January is traditionally the strongest of the year for stocks, and many analysts think this year will be no different.
...
The reason for Mr. Pavlik's bullish stance: expectations that the economy is on solid footing and that a rate cut by the Federal Reserve in the first half of 2007 will help growth continue.
While market analysts aren't in complete agreement about why stocks tend to rally at the end of the year, one factor is the wave of spending generated by the holidays, which tends to lend a bullish tone to Wall Street. This year, investors also hope a sharp drop in energy prices will lead to a happy holidays, the most critical time of the year for the nation's retailers.

Link to the full article.

You'll notice that there was quite a bit of mention of the expected rate cuts by the Federal Reserve in 2007 in that article. That theory is part of what is driving the market higher. The problem is, if the Federal Reserve cuts interest rates there will be a reason why. The Fed does not cut rates to drive the market higher; they cut rates to spur on a slow economy or to raise prices in the face of deflation. I think at this point we can rule out the idea that we may be facing deflation as an impetus for the Fed to cut, so it would have to be because the economy is slow. If the Fed sees that the economy is slow, and reacts, generally that means it is too late and a recession is in the offing.

So to bring all these predictions back together and spell them out in simple language, the Market assumes that the economy will be slowing in 2007, probably leading to a recession, and so stocks have been rallying higher. That is not a good reason for a rally.

Now, I do also feel that there is a likely chance of a relatively strong market through mid-December based on current bullishness and the general lack of bears recently. Also, the fact that for the past several years there has been a strong rally in Q4 is good reason (in investor's minds) for there to likely be one this year.

And I think that, ladies and gentlemen, is the reason for the recent rally. Money has been flowing into the market in anticipation of a Q4 rally, which has driven the market up double digits. I think that if this rally does not materialize we could easily see a disappointing reaction. Also, I wonder how much of the money is planning on leaving the market early in Q1 2007, as they expect a slowing economy and Q2 of each of the past several years has not been a tremendous time to be invested. I think we stand to see a peak in late November or early December followed by several months of market drops, which should be a good time to be buying, particularly mega cap companies with strong fundamentals.

Dell Stock?

There is an article in the WSJ today that's fairly bullish on Dell stock. Here are excerpts:

Wall Street Journal: HEARD ON THE STREET: Dell Loses Lead, And Investors Can Take Heart
By CHRISTOPHER LAWTONNovember 10, 2006; Page C1
Dell Inc. lost its No. 1 position recently in the world-wide personal-computer market -- and investors have reason to cheer.
For years, the Round Rock, Texas, computer maker was a highflying tech company that churned out healthy profits and consistently grabbed market share with its low-cost business model of selling PCs directly to customers. Over the past year and a half, as that formula has shown its age, Dell has struggled to increase its share and maintain robust profits. It often slashed prices in order to move more PCs.
The price cuts hit Dell's bottom line hard. In August, it reported that fiscal second-quarter profit plunged 51%. Dell's operating margin, once the envy of the industry, also deteriorated. Margin, a measure of profitability that represents the difference between revenue and the cost of production, stood at more than 10% in the late 1990s and above 8% as recently as 2004. It fell to 4.3% in the most recently reported quarter.
Meanwhile, Dell shares have risen more than 9% on Nasdaq since fiscal second quarter results were posted Aug. 17, though the stock is still down nearly 17% for the year. Dell closed at $24.98 yesterday, up 80 cents, giving it a market value of $57 billion.
...
A Dell spokesman declined to comment ahead of next week's earnings report. In remarks to analysts during the company's last earnings call in August, Dell Chief Executive Kevin Rollins acknowledged that the company's pricing has been "overly aggressive." He said Dell would be more careful about its pricing but didn't want to lose market share.
Some are skeptical Dell is on an upward trajectory.
"If Dell just came out and said they are going to focus on profitability and not going to focus on share gains, it would help," says Ken Smith, director of technology research for Munder Capital Management. "They have lost share and become less profitable. I take whatever they say with a grain of salt." He says the PC industry is mature and there aren't huge share gains to be had anymore. Munder Capital Management, which manages $42.2 billion, owned 862,974 shares of Dell as of June 30, according to SEC filings.
...
URL for the full article: http://online.wsj.com/article/SB116311547762619207.html

I wanted to point out a few things about this. I DO NOT LIKE MANUFACTURING COMPANIES!!! I don't understand why people always want to invest in capital intensive companies. The easiest way to explain how this is a bad idea is to look at the airlines (or today, car companies). The only obvious way for one to make a good long-term investment in a capital intensive company is to invest in its early years, while their market is growing, and their market share is also growing. Under those circumstances, companies are typically rewarded with high multiples, and earnings will grow at a rapid pace. The problem comes when the market matures, and the company is no longer able to steal market share. The company will probably irresistibly spend money trying to continue the days of old, which will generate horrible returns for investors.

To be fair, the same can be said about many types of companies, particularly in "growth" industries. For example, this criticism is probably very accurate if applied to Amazon.com, because they continue to invest in non-core businesses, and face tremendous competition and ever-growing capital expense needs. If capital expense as a portion of income or revenue must grow over time, the company is not a good investment.

So, to recap, I don't like DELL, or HPQ, or INTC (particularly Intel - INTC), or any company that must continually spend to stave off stiff competition in the face of a slow-growth market.

Stock Market P/E Ratios Drop, Aiding Bull Market

Bloomberg: Price-Earnings Ratios on U.S. Stocks Drop, Aiding Bull Market


There was an interesting article on Bloomberg.com (article here) yesterday detailing one theory on why the stock market could be set to post significant additional gains. This is one story I have heard from multiple pundits and advisors.

The story goes like this: This bull market (from the bottom in late 2002 through today) has seen earnings increase faster than stock prices. Thus the market multiple (P/E ratio of the market as a whole) has decreased, which is not typical for a bull market. Usually, during a bull market, enthusiasm increases faster than earnings, and thus the market multiple increases, until it gets to a level that is unsustainable, and the market turns into a bear market.

I have no idea if this will play out as advertised. What I do know is that the stock market is no longer cheap, as it has been for most of the past 4 years. Thus the inclination would be to reduce exposure to stocks in your asset allocations. However, bonds are truly pitiful right now (long-term interest rates have nowhere to go but up, so the best a buy-and-hold bond investor can achieve will be the coupon, which is lower than cash or short-term yields), so I would recommend that most people stay fairly heavily weighted in stocks, and start to add to their cash (or short-term) position.