Tuesday, August 08, 2006

FED ACTION AND MARKET REFLECTION
US stock market regulator considers controls
Los Angeles Times-Washington News Service

Eight years ago, the collapse of a hedge fund named Long-Term Capital Management triggered fears of international financial instability. Since then, hedge funds have quadrupled the volume of money they manage and account for perhaps 30 per cent of trading on US stock markets.
Meanwhile, the regulatory response has been confused. Two years ago, the Securities and Exchange Commission decided to require hedge fund managers to register and submit to inspections. This was opposed by Alan Greenspan and got a cool response from regulators. In June a federal court vacated it.
Having inherited this mess, SEC Chairman Christopher Cox is pondering how to fix it. His objectives should be to mend fences and to tread lightly on this industry.
Hedge funds, which exist to come up with futuristic trading strategies that others haven't tried, are the classic example of an innovative industry with which regulators can't keep up.
There are three types of argument in favour of regulating hedge funds, and none is persuasive.
The first invokes systemic risk: If a hedge fund collapses, the banks that lent to it may collapse, too, causing a chain reaction through the financial system. This danger is real, but banks that lend to hedge funds have a strong incentive to manage it by limiting their exposure and by monitoring the risks that the funds take.
The second is that they are havens of insider trading and other sorts of manipulation. The law already empowers regulators to go after hedge fund managers for financial crimes. It's not clear that extra regulations would add much.
The third concerns investor protection. The SEC suggests that by inspecting hedge funds it can reduce the danger that investors will lose money. Some fund managers calculate that submitting to mild regulation now may be smarter than waiting until the political storm that would follow the scandalous blowup of a crooked player in their industry.
Wealth limit needs to be raised
There is one fix that does make sense, and Cox has proposed it. Hedge fund customers are currently required to have personal wealth of at least $1 million a relatively low threshold given that home equity counts toward it. But hedge funds make sense only for families richer than that. The $1 million hurdle should at least be doubled.

FED ACTION AND MARKET REFLECTION

Early stock market signals positive before Fed decision on interest rates
08:06:51 EDT Aug 8, 2006
Canadian Press: JAMES DALZIEL

TORONTO (CP) - Global indicators were positive for North American stock markets early Tuesday as investors awaited the U.S. Federal Reserve's latest move on interest rates.
Wall Street futures suggested a strong start for regular trading while oil prices eased lower after shooting up more than $2 US a barrel Monday after the shutdown of a major oilfield in Alaska.
Tokyo's stock market was lifted by broad buying as most Asian markets advanced.
Japan's benchmark Nikkei 225 stock index added 310.6 points, or 2.05 per cent, to finish at 15,464.66 points on the Tokyo Stock Exchange. Oil issues, electronics, steel makers, telecoms and banking stocks led the gains.
In Hong Kong, shares advanced for the fifth consecutive session amid gains by bank HSBC and China Mobile, but trading was sluggish as investors waited for a U.S. Federal Reserve meeting on interest rates. The blue-chip Hang Seng Index rose 94.65 points, or 0.6 per cent, to 17,048.2.
The Canadian dollar opened at 89.16 cents US, up 0.53 of a cent from Friday's close. The Fed is scheduled to announce its decision on interest rates at 2:15 p.m. ET, with many observers saying a pause is likely after 17 rate hikes over the past two years.
In other news:

-Crude oil prices fell Tuesday, one day after they jumped more than $2 US per barrel following the shutdown of a major oilfield in Alaska. Light sweet crude for September delivery on the New York Mercantile Exchange slipped 33 cents to $76.65 a barrel in electronic trading by midday in Europe.
-Natural gas operator Paramount Resources Ltd. (TSX:POU) reported a whopping increase in second-quarter profit late Monday as the company benefited from a one-time gain on its books from an oilsands transaction. The Calgary energy company said it earned $111.9 million or $1.65 per share for the three months ended June 30, compared with a profit of $12.9 million or 20 cents a share for the same 2005 period.
On Monday, while Canadian markets were closed for a civic holiday, near-record oil prices prompted Wall Street investors to sell stocks on inflation fears.
The Dow Jones industrial index fell 20.97 points to 11,219.38. The Nasdaq shed 12.55 points to 2,072.5.

FED ACTION AND STOCK MARKET REFLECTION
MARKET KEEP A WARY EYES ON FED
Oil news worries investors as they hope for "pause" in interest rates.
Michael J. Martinez The Associated Press New York
Near-record oil prices following an Alaskan oilfield shutdown prompted stock investors to sell on inflation fears Monday, one day before the Federal Reserve's next decision on interest rates.
BP PLC said late Sunday it would shut down the Prudhoe Bay oilfield, which represents 8 percent of daily U.S. crude production, due to possible pipeline corrosion. Crude oil futures surged $2.22 in response to settle at $76.98 a barrel on the New York Mercantile Exchange — near the closing record of $77.03 and all-time intraday high of $77.40, both set July 14.
The stock market showed some resilience despite the higher oil prices, as many investors held out hope that the Fed would not raise rates today. Nonetheless, there are concerns that even if the Fed halts its rate increases, inflation may yet become a concern.
"Whether or not the Fed pauses in August is not as important as their plan going forward," said Russ Koesterich of Barclays Global Investments in San Francisco. "I don't think the market's going to get the kind of finality it's looking for. The concern is, yes, they pause in August, but raise the specter of raising rates in September."
According to preliminary calculations, the Dow Jones industrial average fell 20.97, or 0.19 percent, to 11,219.38. Broader stock indicators also dropped. Bonds lost ground as well in advance of the Fed meeting. The dollar gained against most major currencies.
The nation's benchmark interest rate now stands at 5.25 percent, and the Fed has raised rates by a quarter percentage point in each of its last 17 meetings dating back to June 2004. Ever since the Fed signaled six weeks ago that the economy was growing at a slower rate, and that it was taking this moderation into account, Wall Street has been parsing economic data and looking for signs of further slowing in hopes the Fed would stop raising rates.
Slowing job growth and a weaker-than-expected second-quarter gross domestic product have had many investors optimistic that the long-expected pause will come today. The market's modest move lower on very light trading volume showed investors' willingness to wait and see what the Fed will do.

Friday, August 04, 2006

NEW FLASH: MARKET IS DOWN

By Selena Maranjian (TMF Selena) August 3, 2006

You didn't need my news flash to know that the market is down. After all, you've probably seen some red in your portfolio of late. Yet one of the most important concepts that we investors need to understand is this: The stock market, especially in the short run, goes up and down. And while it can be unsettling and even alarming to see our holdings drop in value, we needn't freak out.
That's particularly true if we're constructing a sensibly diversified portfolio. In fact, if you've been hard at work building a particularly good portfolio, then you might actually be welcoming this downturn. Permit me to explain.
Learn from the masterThis is from master investor Warren Buffett's 1997 letter to shareholders:
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time, but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
Buffett continued:
But, now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Got it? Good. Here's a real-life example. Over the past three months, the S&P 500 has slumped approximately 3%. In that same period, many individual stocks sank further. Home Depot (NYSE: HD), for example, is down more 13% and Netflix (Nasdaq: NFLX) is down nearly 40%. Some of these declines are due to the market's irrationality, while others may be warranted. Netflix, for example, looks like it has some struggles on the horizon.
Buying lowsDespite these drops, as Buffett advocates, many professional investors are swooping in to buy. What's more, we've been telling individual investors to do the same.
But what if you don't know how to separate the irrational drops from the warranted drops? Well, I've got good news for you. You can put professional investors to work for you in this opportunistic market by buying shares of top-notch mutual funds. These are folks who have lots of experience in the market and spend all day every day researching the best ways to make you money. Even better, as stock valuations fall so do mutual fund valuations.
Consider, for example, an international value fund that Fool fund guru Shannon Zimmerman recommended in June 2006. While it's down more than 9% in just a short period of time, that's no reason to worry. In fact, there may be reason to celebrate, if you're thinking of buying some shares. The seasoned value hounds running the fund have more than 20 years experience, and investors can rest easy that they'll be figuring out ways to make money from cheaper stocks. And if you're curious, this fund's recent top holdings included Jones Lang LaSalle (NYSE: JLL), Markel (NYSE: MKL), HCC Insurance Holdings (NYSE: HCC), Investors Financial Services (Nasdaq: IFIN), and Career Education (Nasdaq: CECO).
The Foolish bottom lineOn days or months when the market has taken a beating, remember that can mean there are special opportunities out there. What looks like bad news can actually be good news for you.

Wednesday, August 02, 2006


CONCERN ABOUT INTEREST RATE HIKE LOWERS STOCK MARKET

U.S. stocks fell, with bonds little changed Tuesday after economic reports rekindled concerns the Fed may need to continue curbing inflation with an additional interest rate increase.
Lackluster earnings and sales reports, along with higher energy prices, also weighed on equities.
In commodity markets, spot gold rose $10.90 to $647.65 and spot silver rose 33 cents to $11.76. The price of crude oil rose 51 cents to $74.91 a barrel.
Verizon announced quarterly earnings fell as competition with new providers such as Time Warner and Comcast increases. The company reported second-quarter earnings declined to 55 cents a share from 76 cents a share for the same period a year ago.
The telecommunications company is increasingly dependent upon wireless and Internet services for growth as customers switch to providers who offer package deals including television and high-speed Internet access. Shares of Verizon fell 55 cents to $33.27.
General Motors reported sales declined in July because, in part, of rising gasoline prices that continue to decrease demands for truck and sport-utility vehicles. Sales of its best-selling SUV, the Chevrolet TrailBlazer, dropped by 52 percent and sales of its Silverado pickup truck fell by 31 percent. GM reported it posted a 19.5 percent drop in sales for July, which was in line with company expectations. Shares of General Motors fell 93 cents to $31.30.
Emerson Electric reported quarterly earnings rose as demand from the oil and gas industry increased sales. The company also raised its full-year earnings forecast.
Record oil prices continue to drive demand from customers such as Exxon Mobil and Royal Dutch Shell for Emerson's equipment that helps measure and analyze raw materials. The St. Louis-based company reported third-quarter earnings increased to $1.18 a share from 86 cents a share for the same period a year ago. Emerson Electric shares rose 58 cents to $79.50.
Arkansas Valley Publishing.


Stock Market Action Foreshadows a Coming Crash?
Wednesday, August 2, 2006
U.S. stock markets have been acting very strange of late, and economists worry that it may portend coming trouble.Consider this idiosyncrasy: Last Friday, after the release of governmental statistics stating sharply lower economic growth during the second quarter, U.S. stocks rallied strongly (321gold.com, July 31).
It certainly seems strange that stocks would go up in value upon hearing poor economic news. If this was an isolated incident, it could be written off as a market aberration—but it isn’t. The stock market has lately been rallying upon the release of all kinds of negative economic indicators: weaker-than-expected manufacturing activity and other figures that show a slowdown in the U.S. economy.Economic analyst Paul van Eeden summed up the ominous market action on July 6:

The reasoning goes that a sufficient slowdown in the economy will cause the Federal Reserve to stop raising interest rates, and since higher interest rates are generally bad news for stocks, then a hiatus in rising interest rates should be good for stocks.You don’t have to be a genius to figure out that when the market hopes for bad economic news and interprets them as good news, something is wrong. Since when are falling retail sales good for stocks? Since when is reduced manufacturing activity good for stocks? Are stock traders so obsessed with the Fed’s next move that they forget to look at what is really going on?If the U.S. economy is slowing down, as confirmed by tepid retail sales and slowing manufacturing activity, then it is merely a matter of time before corporate earnings come under pressure and stock prices start falling.When the market becomes this shortsighted, you should know that we are in a dangerous environment. Anything can happen.
On July 19, it was even more amazing that the stock market rallied. That day, Federal Reserve Chairman Ben Bernanke actually warned Congress that the economy was slowing down, yet again investors took that for a positive.
As Van Eeden says, “When bad news is good news, all news is bad news.”It has been years since the U.S. has faced a major market meltdown. Whether or not recent market action indicates a pending collapse remains to be seen.
But considering the plethora of negative economic indicators of late—including the unwinding of the yen carry trade; recent inverted yield curves; rising inflation and interest rates; record negative personal savings rates; massive private debt; record trade deficits and governmental debt; along with a now-deflating housing bubble—the case for a stock market bust looms ever larger.

Tuesday, August 01, 2006

PLAYING THE MARKET STOCK SLOWDOWN
Investors are knee-deep in the toughest time of year for the markets. Here's a look at what sectors should hold up.
By Alexandra Twin, CNNMoney.com senior writer
August 1 2006: 12:34 PM EDT

NEW YORK (CNNMoney.com) -- Feeling sluggish lately? Don't just blame the heat wave.
Summer's never an easy time for a stock investor, and this year is no exception. With the double whammy of the always tough third quarter and the potential economic slowdown, investors have their work cut out for them.
Since peaking in early May, stock markets have been all over the place on a mix of worries - both national and international - and the short-term outlook remains foggy.
"Summer is typically not a great period," said Paul Levine, president at money manager Lifetime Financial Services.
Indeed August and September are traditionally the worst months of the year for stocks, what with low attendance, less money moving in and out of the market, and the tendency for corporations and analysts to see the mid-year as the time to revise full-year profit forecasts.
"Plus you have the confluence of rising rates, rising energy prices, the events in the Middle East, the consumer getting squeezed, the decline in the housing sector and the effects of the four-year presidential cycle," Levine added.
The cycle, tracked by Stock Trader's Almanac, Standard & Poor's and other market researchers, suggests that the stock market often follows the four-year cycle of a presidential term, with year two - such as 2006 - the weakest of the four.
Grace Fey, who manages large-cap portfolios at Frontier Capital Management, says that the stock market's biggest problem now and likely through the summer is "the interest rate issue."
After 17 straight hikes since June 2004, the Fed funds rate, an overnight bank lending rate, currently stands at 5.25 percent, up from a level of 1 percent two years ago. Many traders and market watchers expect the central bank to boost rates again at the Aug. 8 meeting and perhaps beyond.
"After more than two years, we're obviously closer to the end of the cycle than the beginning, but we need to get through the cycle before the market can really get better," Fey said.
At this point in the cycle, more rate increases are "putting pressure on earnings multiples and calling into question the economic growth," Fey said, all of which sets up fears for investors of an environment that would be even tougher for stocks.
But when the going gets tough, investors can often look to gold, bonds, and select alleged 'safe-haven' areas of the market. This summer isn't likely to be much different, the analysts said.
Hedging against inflation, a slowdown
"Over the next three months, gold and bonds will outperform stocks," said Daniel Turov, editor of market newsletter Turov on Timing. "In my largest managed accounts, I am 100 percent invested in the long-bond and gold mining funds, rather than stocks."
Levine likes these areas too, but said that if one does want to be in stocks or stock funds, there are places to go. He's looking at healthcare and other defensive sectors.
"You want to stick with companies that are going to continue to produce double-digit earnings growth and that won't get hurt too hard by a slowdown," Fey said.
Fey said she would continue avoiding economically-sensitive areas of the market like Dow stock 3M, or the broad transportation sector, which has been getting clobbered lately.
It's also common sense to go light on companies that have had huge cyclical runs, she said, such as chemicals and commodities - excluding energy. All of these sectors have run up sharply in the 3-1/2 year bull market, and have been struggling since then.
Since 1990, energy has been the S&P 500's best performing sector in the third quarter, according to research compiled by S&P's chief market strategist Sam Stovall. The overall energy sector has been good for a gain of 1.8 percent, on average.
Utilities is the only other broad sector besides energy to average a positive return during the third quarter over the last 15 years, according to Standard & Poor's. Among the smaller industry groups, biotechnology, gold and select financial areas have done well. (For details on the third quarter's best industry performers, see the graphic.)
"Utilities aren't cheap, but they do have the dividend yield, the earnings stability and the benefit from high oil prices," said Jack Ablin, chief investment officer at Harris Private Bank.
Ablin said that healthcare and consumer staples are also areas that have a good price-to-earnings ratio relative to the broader market, because they haven't been doing that well this year, but are now showing signs of improving.
However, Fey said that investors need to be careful with consumer stocks as some of the ones she owns in her portfolio - including Procter & Gamble and Pepsi - may be classic defensive plays but aren't really that attractively valued in terms of price-to-earnings. She's more interested in select financial services stocks such as Bank of America and Northern Trust.
In addition, playing it safe doesn't mean you have to play it boring.
"I think you have to look at the non-economically sensitive areas of the market, but still look for a good risk versus reward ratio," said Manny Weintraub, money manager at Integre Advisors, a firm specializing in high net-worth investors.
He said that within that universe of stocks, he's looking for the currently out-of-favor stocks that look like they could turn around. Favorites of his include medical device maker Boston Scientific and contact-lens manufacturer The Cooper Companies .
-- Portfolio managers contacted for this story own shares of the companies they discussed

Stock Market Window Dressing: The Art of Looking Smart!

by Steve Selengut

As investors, and we all are investors these days, it is important that we understand the idiosyncrasies of the Stock Market pricing data we use to help us in our decision making efforts. On Wall Street, investing can be a minefield for those who don't take the time to appreciate why securities prices are at the levels that appear on quarterly account statements. At least four times per year, security prices are more a function of institutional marketing practices than they are a reflection of the economic forces that we would like to think are their primary determining factors. Not even close... Around the end of every calendar quarter, we hear the financial media matter-of-factly report that Institutional Window Dressing Activities" are in full swing. But that is as far, and as deep, as it ever goes. What are they talking about, and just what does it mean to you as an investor? There are at least three forms of Window Dressing, none of which should make you particularly happy and all of which should make you question the integrity of organizations that either authorize, implement, or condone their use. The better-known variety involves the culling from portfolios of stocks with significant losses and replacing them with shares of companies whose shares have been the most popular during recent months. Not only does this practice make the managers look smarter on reports sent to major clients, it also makes Mutual Fund performance numbers appear significantly more attractive to prospective "fund switchers". On the sell side of the ledger, prices of the weakest performing stocks are pushed down even further. Obviously, all fund managements will take part in the ritual if they choose to survive. This form of window dressing is, by most definitions, neither investing nor speculating. But no one seems to care about the ethics, the legality, or the fact that this "Buy High, Sell Low" picture is being painted with your Mutual Fund palette. A more subtle form of Window Dressing takes place throughout the calendar quarter, but is "unwound" before the portfolio's Quarterly Reports reach the glossies. In this less prevalent (but even more fraudulent) variety, the managers invest in securities that are clearly out of sync with the fund's published investment policy during a period when their particular specialty has fallen from grace with the gurus. For example, adding commodity ETFs, or popular emerging country issues to a Large Cap Value Fund, etc. Profits are taken before the Quarter Ends so that the fund's holdings report remains uncompromised, but with enhanced quarterly results. A third form of Window Dressing is referred to as "survivorship", but it impacts Mutual Fund investors alone while the others undermine the information used by (and the market performance of) individual security investors. You may want to research it. I cannot understand why the media reports so superficially on these "business as usual" practices. Perhaps ninety percent of the price movement in the equity markets is the result of institutional trading, and institutional money managers seem to be more concerned with politics and marketing than they are with investing. They are trying to impress their major clients with their brilliance by reporting ownership of all the hot tickets and none of the major losers. At the same time, they are manipulating the performance statistics contained in their promotional materials. They have made "Buy High, Sell Low" the accepted investment strategy of the Mutual Fund industry. Meanwhile, individual security investors receive inaccurate signals and incur collateral losses by moving in the wrong direction. From an analytical point of view, this quarterly market value reality (artificially created demand for some stocks and unwarranted weakness in others) throws almost any individual security or market sector statistic totally out of wack with the underlying company fundamentals. But it gets even more fuzzy, and not in the lovable sense. Just for the fun of it, think about the "demand pull" impact of an ever-growing list of ETFs. I don't think that I'm alone in thinking that the real meaning of security prices has less and less to do with corporate economics than it does with the morning betting line on ETF ponies... the dot-coms of the new millennium. [Do you remember the "Circle of Gold" from the seventies? Isn't GLD, or IAU, about the same thing?] As if all of these institutional forces weren't enough, you need also consider the impact of tax code motivated transactions during the always-entertaining final quarter of the year. One would never suspect (after watching millions of CPA directed taxpayers gleefully lose billions of dollars) that the purpose of investing is to make money! The net impact of these (euphemistically labeled) "year end tax saving strategies" is pretty much the same as that of the Type One Window Dressing described above. But here's an off-quarter buying opportunity that you really shouldn't pass up. Simply put, get out there and buy the November 52-week lows, wait for the periodic and mysterious "January Effect" to be reported by the media with eyes wide shut amazement, and pocket some easy profits. There just may not be a method to actually decipher the true value of a share of common stock. Is market price a function of company fundamentals, artificial demand for "derivative" securities, or various forms of Institutional Window Dressing? But this is a condition that can be used to great financial advantage. With security prices less closely related to those old fashioned fundamental issues such as dividends, projected profits, and unfunded pension liabilities and perhaps more closely related to artificial demand factors, the only operational alternative appears to be trading! Buy the downtrodden (but still fundamentally investment grade) issues and take your profits on those that have risen to inappropriately high levels based on basic measures of quality... and try to get it done before the big players do. To over simplify, a recipe for success would involve shopping for investment grade stocks at bargain prices, allowing them to simmer until a reasonable, pre-defined, profit target is reached, and seasoning the portfolio brew with the discipline to actually implement the profit taking plan. Just call me old fashioned, but I miss the days when there were just stocks and bonds... interesting place Wall Street.