This past week was quite quiet, not to say plain boring. There was no rally, no deep dive of any of the indexes, nothing to keep us from doozing off while watching the ticker tape. If it wasn’t for Madoff, with his Ponzi scheme, there would be nothing to remember.
Speaking of Madoff, here is what Clarence W. Barron, the founder of Barron’s newspaper, said in 1920, when he denounced the original Ponzi scheme: “This neglect in our educational system leaves the people’s financial education to the sensational press, to socialistic propaganda and to designing politicians. It permits schemers to defraud the small earner and small investor through making him believe that capital accumulations and great fortunes are matters of speculation or public robbery.” Barron’s – the newspaper – wrote a skeptical note on Madoff back in 2001, questioning his secretive tactics.
So let’s take a yawn – sorry, look – at the major indices and how they fare this past week. The DJIA closed at 8579.11, down 0.59%, Nasdaq closed at 1564.32, up 1.53% and S&P500 closed at 887.88, up 0.93%. That’s it! So, with nothing to talk about last week, everybody turned to predict the outlook in 2009. And the opinions abound. After a 2008 which had investors on their toes, ready to throw in the towel, or the shoe, everybody is hoping for a much calmer 2009. It must be the exhaustion talking, because I read somewhere that 1929 looked just like 2008. Brrrr!!
Because optimism is the most important of the humanly traits, let’s cross our fingers and take peek into what’s expected from 2009. Tall order, no less! The economists expect a deeper economic slide, and traders are waiting for companies to report their messy fourth-quarter earnings starting in February. There are three powerful forces that will keep investors guessing and markets volatile: the ongoing and unpredictable government intervention, the process of deleveraging, and the impact of the economic contraction on corporate profits. As the volatility will come down from its peak, so is the correlation between stocks, which will allow for a clear differentiation between winners and losers. Some dubbed 2009 “the stock picker’s paradise”. As the expectancy for growth increases, the first beneficiaries could be the technology and small stocks – Nasdaq rallied 13% in four weeks.
The Cash Bubble and the January Effect
We are probably in a cash bubble, as investors paid the government to keep their money safe. The “cash is king” mentality is all the rage now, and it may soon join the list of bubbles that burst over Wall Street, including stocks, oil, agricultural commodities and subprime mortgages. A lot of traders are buying – or debating doing so – bullish calls on stocks and sectors. The more battered the security the better. They see options as a cost-effective way to balance the risk that the market could worsen in 2009, rather than improve, while ensuring they do not miss any rallies. They are selling richly priced calls, and using the proceeds to lower the costs of buying stocks. One Credit Suisse derivatives strategist, is advising clients to sell calls against Exxon Mobil (XOM), which he says is the “T-bill of equities”. Exxon has a free cash flow of $37 billion, the highest in the S&P 500. Many investors, in their flight to safety, have bought Exxon recently, and it appears to be overbought. Selling January 85 call against the stock may be a good way to cash in the exuberance. The economy gives us good reasons not to part with cash. Conditions will worsen if the consumers don’t start consuming again. Rising unemployment is also a major risk factor. However, it is difficult to find another point in the modern time when investor sentiment was more negative than today. Three-month realized volatility of the S&P500 Index was recently 71.86% surpassing the high of 68% set during the Great Crash of 1929. A short term swing on the optimist side will see a great deal of cash reinvested. Jon Najarian, co-founder of optionmonster.com, said cash is so high on the sides that it could stress the financial system when reinvested, saying that “it could be the biggest January effect ever”. Now that’s a good way to start 2009.
Still in the Bear Territory
The bear market doesn’t go away that fast. So while a retracement may be in the cards, looks for the exit points while the rally lasts.In this information age we are all inundated by data, forecasts and opinions. Some based their forecasts on life experiences, statistical analysis, historical references, or even just opinion. In the end some will be correct, and most will be incorrect. To pick and choose among the various resources is a matter of personal preference. Yet, to pick and choose too many resources will result in information overload. We can all agree, economically these are treacherous times. Banks are dysfunctional, credit lines are tight, businesses that relied on ever expanding credit are failing, unemployment is rising, and deflationary pressures are everywhere. We can all also agree that this is a cyclical economic downturn and not just an equity bear market. In the past century all cyclical bear markets have displayed similar characteristics. First, the equity market loses 50% of its value. Second, there is a 50% retracement of the entire bear market. Third, the final downleg. We label these three events are Primary waves A, B and C. The 1937-1942 cyclical bear market: lost 50% in a year, retraced 50% in a few months, and then took three years to retest the lows. The 1929-1932 bear market: crashed 50% in a matter of months, retraced 50% within a few months, and then continued to decline for the next two years until the market lost about 90% of its value. Technically, the main difference between the two cyclical bear markets is the 1929-1932 bear market continued to make new lows for the next two years after the initial 50% decline. While the 1937-1942 bear market went sideways for a few years, and only made new lows at the end. Our current cyclical bear market has already declined 50%, but has yet to retrace 50% of that decline. The retracement may be underway now, as the market has already rallied 24% off its recent lows. When the retracement does complete, Primary waves A and B will have completed, and then Primary C will be underway. Only then can we estimate the potential total damage to the equity market. Prior to these two events occurring, many forecasters are just making educated guesses. Should the bear market stall we'll enter a 1937-1942 scenario. Should the bear market start making lower lows, 1929-1932. The 1929-1932 bear market displayed some characteristics of its own. More on this should the need arise. When this bear market does complete its 50% retracement, to remain in equities would be a high risk venture.
Tuesday, December 23, 2008
Monday, December 8, 2008
Company of the Week - Masimo Corp
Masimo.com
Ticker: MASI
Share price: $25.53
12-month sales: $293 million
5-year profit growth rate: 49%
The company’s new product, called SpHb, does real time blood test, without the blood. It tracks hemoglobin levels in blood without drawing any. The results don’t reach the levels of a lab test, but they provide many crucial uses, such as telling right away if the patient who just had surgery is suffering any internal bleeding, or telling a doctor when to administer a blood transfusion and how much to transfuse. It also detects anemia. The real advantage of SpHb for doctors is the real time aspect, as opposed to drawing blood, send it to the lab, and wait for the results few hours later. The SpHb is still in beta phase with a full launch expected early next year. The potential market for the product is around $1B, quite a bump for Masimo, which sales last year were $293 million.
Masimo’s original, and still dominant, product line is a pulse oximeter, which measures oxygen levels in the blood. They are the pinching plastic clothespin the doctors put on your fingers when you’re in the hospital. The competition is much larger Covidien (Ticker: COV), but Masimo is steadily taking market share from it, and currently sits at 27%, vs. Covidien’s 60%. In the third quarter, oximetry sales grew faster than some analysts predicted, and since the market is mature, it was almost entirely due to market-share gains.
The major differentiating factor is the algorithm inside of Masimo’s unit, which allows for higher sensitivity toward patient movement, and results in lower number of false readings.
The analysts have arrived at the $1 billion figure by counting the potential U.S. hospitals market. More than 400 million hemoglobin tests are done annually, and more than half of those are outside hospitals.
The firm’s business model is the “razor-blade” model: give away the razor, sell them the blades. Masimo gives away or loans its monitors n exchange for a five-year contract to supply its disposable sensors, which only fit Masimo’s devices. This has given the firm an installed base of more than half a million, plus a steady revenue stream. The company has more add-ons in the works. Late next year, it plans to launch Acoustic Respiration Monitoring, a device which can alert hospital staff to slowdowns or seizures in a patient’s breathing. In the third quarter, profit beat analysts’ view by rising 22% over the prior year to 22 cents a share. Sales increased 21% to $78.1 million. In the fourth quarter, analysts expect profit to decrease somewhat, due to lower royalties, higher research and development costs. In 2009, though, they expect 15% profit growth to 82 cents a share, accelerating to 35% the year after that.
Ticker: MASI
Share price: $25.53
12-month sales: $293 million
5-year profit growth rate: 49%
The company’s new product, called SpHb, does real time blood test, without the blood. It tracks hemoglobin levels in blood without drawing any. The results don’t reach the levels of a lab test, but they provide many crucial uses, such as telling right away if the patient who just had surgery is suffering any internal bleeding, or telling a doctor when to administer a blood transfusion and how much to transfuse. It also detects anemia. The real advantage of SpHb for doctors is the real time aspect, as opposed to drawing blood, send it to the lab, and wait for the results few hours later. The SpHb is still in beta phase with a full launch expected early next year. The potential market for the product is around $1B, quite a bump for Masimo, which sales last year were $293 million.
Masimo’s original, and still dominant, product line is a pulse oximeter, which measures oxygen levels in the blood. They are the pinching plastic clothespin the doctors put on your fingers when you’re in the hospital. The competition is much larger Covidien (Ticker: COV), but Masimo is steadily taking market share from it, and currently sits at 27%, vs. Covidien’s 60%. In the third quarter, oximetry sales grew faster than some analysts predicted, and since the market is mature, it was almost entirely due to market-share gains.
The major differentiating factor is the algorithm inside of Masimo’s unit, which allows for higher sensitivity toward patient movement, and results in lower number of false readings.
The analysts have arrived at the $1 billion figure by counting the potential U.S. hospitals market. More than 400 million hemoglobin tests are done annually, and more than half of those are outside hospitals.
The firm’s business model is the “razor-blade” model: give away the razor, sell them the blades. Masimo gives away or loans its monitors n exchange for a five-year contract to supply its disposable sensors, which only fit Masimo’s devices. This has given the firm an installed base of more than half a million, plus a steady revenue stream. The company has more add-ons in the works. Late next year, it plans to launch Acoustic Respiration Monitoring, a device which can alert hospital staff to slowdowns or seizures in a patient’s breathing. In the third quarter, profit beat analysts’ view by rising 22% over the prior year to 22 cents a share. Sales increased 21% to $78.1 million. In the fourth quarter, analysts expect profit to decrease somewhat, due to lower royalties, higher research and development costs. In 2009, though, they expect 15% profit growth to 82 cents a share, accelerating to 35% the year after that.
Weekly Recap - December 8, 2008
The recession of 2008 became official last week. According to the announcement Monday by the Business Cycle Dating Committee of the National Bureau of Economic Research, the recession began last December, which means it has already lasted 12 months. The average recession in the U.S. lasts about 10 months, so the good news is that this current recession has gone on longer than the past two recessions – in 2001 and in 1990-1991 – each eight months long. The news last week came both good and bad. We took solace at the news of recession declared, as we hope that the call often comes after a recession has peaked. In the ‘good news’ category was the fact that the U.S. government may force rates on new mortgages down to 4.5% to revive the housing market, and Europe has slashed interest rates to 2.5% from 3.25%. In the ‘bad news’, there are plenty. Manufacturing contracted in November by the fastest pace in 26 years, and 533,000 people were laid off – bringing jobs cut in the past three months to more than 1.25 million.
The Dow ended the week off 194, or 2.2% to 8635. The S&P500 gave up 20, or 2.3% to 876; it is 16% above an 11 ½ -year low reached on Nov. 20 and 44% below its 2007 peak. The Nasdaq Composite Index fell 26, or 1.7%, to 1509, while the Russell 2000 lost 12, or 2.6%, to 461. The economy may still go worse before it will improve, especially if the Americans continue to lose jobs and the government fails to repair consumer confidence, both likely events.
Inflation Rebound
Rather than betting on rebound in growth, a smarter bet would be on rebound in inflation, according to Don Rissmiller, economist at Strategas Research Partners. The government is fighting deflation by flooding the markets with cheap money, increasing the odds for inflation. When inflation returns, energy and basic-material stocks could lead the market once again, and resource-rich countries like Canada, Australia and Brazil could prosper. Shorting Treasuries and buying TIPS, or Treasury inflation-protected securities, might be the purest way to hedge against eventual inflation.
Option Strategies: Buy-Write
Options traders try to convert volatility into money. “Buy-writing” is a classic strategy that refers to buying a stock and selling, or writing, an out-of-money call on it, and it helps traders to harness volatility. The “buy-write” lowers the cost of buying the stock by the amount received for selling the call, and it also serves like a modest hedge. The strategy’s benchmark is the Chicago Board Options Exchange’s S&P500 BuyWrite Index, or BXM. In October, it had its largest monthly gain in 20 years – 8.1% - well above its two-decade average of 1.7%.To successfully implement this strategy one needs discipline.
Here are the rules, according to Michael Schwartz, Oppenheimer & Co.’s chief options strategist:
• Stock selection is primary, getting a premium is secondary. Pick stocks that you want to own, not calls that you want to sell.
• Never invest more than 10% of your capital in a buy-write. Leverage cuts two ways.• Sell slightly out-of-the-money calls to leave room for upside profit potential.
• Let time work for you. You can sell three- to six- month calls for higher premiums.
• Don’t annualize returns. Focus on the potential return for the trade’s actual duration; annualized returns are rarely earned.
• Ignore theoretical values. Expensive options stay expensive longer than expected, and vice versa. The current correction has shown that volatility, which always reverts to its mean, may not do so when expected.
• Don’t sell the call and try to buy the stock at a better price. This leaves you with a “naked call” and unlimited market risk. Enter buy-writes simultaneously. A net debit order is entered for any combination of prices to buy a stock and sell a call that equals your desired debit ($30 stock price less $3 option price equals $27 net debit).
• If stock fundamentals change, sell the stock and buy back the call.
• If you can earn a high percentage of the maximum profit before expiration, do it. Waiting for the last 10% to 15% of premium often means risking everything for no more than an incremental gain.
This strategy of “buy-write” gives investors a way to handle panic and use the market fear to their advantage.
Other news of the week:
• U.S. Shed 533,000 Jobs in November – on a percentage basis, that was the worst decline in 28 years and far worse than expected. Also, Sept. and Oct. job losses were revised sharply higher, lifting ’08 job cuts to 1.91 mil. The jobless rate hit a 15-year high of 6.7%. It would have climbed more, but many people simply stopped looking for work.
• Mortgage Delinquencies Jump – The share of home loans behind on payments rose to 6.99% in Q3 vs. Q2’s 6.42%. 20% of subprime loans are delinquent, but prime mortgage woes are rising as the recession affects more people. New foreclosure activity dipped as governments and lenders try to keep people in homes.
• Crude Oil Dives 7% to 4-year Low – The January crude contract is at $40.81 a barrel – 72% off the July peak – as the jobs report boded ill for energy demand. The Int’l Energy Agency also cut global oil-demand forecasts again. Natural gas tumbled 5% to $5.74 per mil Btu. Retail gas prices should fall to $1.60 a gallon, given the current gasoline futures.
• Fed Begins Buying Agency Debt – It bought $5 bil of Fannie Mae, Freddie Mac and Federal Home Loan Banks debt as part of a new $600 bil program to support mortgages and housing. Since the plan was announced Nov. 25, mortgage rates have plunged, triggering a refinancing boomlet. Also, the Treasury is legally bound to inject capital into Fannie and Freddie if needed, the Justice Dept. ruled.
• Consumer Borrowing Fell in Oct – Consumer credit outstanding declined $3.5 bil to $2.578 bil, the Fed said, the latest evidence of reined-in spending amid accelerating job losses and economic gloom. Borrowing rose a revised $6.7 bil in Sept and fell $6.4 bil in August. In Oct., credit card and other revolving debt fell $181.6 mil. Auto and other nonrevolving debt fell $3.4 bil
The Dow ended the week off 194, or 2.2% to 8635. The S&P500 gave up 20, or 2.3% to 876; it is 16% above an 11 ½ -year low reached on Nov. 20 and 44% below its 2007 peak. The Nasdaq Composite Index fell 26, or 1.7%, to 1509, while the Russell 2000 lost 12, or 2.6%, to 461. The economy may still go worse before it will improve, especially if the Americans continue to lose jobs and the government fails to repair consumer confidence, both likely events.
Inflation Rebound
Rather than betting on rebound in growth, a smarter bet would be on rebound in inflation, according to Don Rissmiller, economist at Strategas Research Partners. The government is fighting deflation by flooding the markets with cheap money, increasing the odds for inflation. When inflation returns, energy and basic-material stocks could lead the market once again, and resource-rich countries like Canada, Australia and Brazil could prosper. Shorting Treasuries and buying TIPS, or Treasury inflation-protected securities, might be the purest way to hedge against eventual inflation.
Option Strategies: Buy-Write
Options traders try to convert volatility into money. “Buy-writing” is a classic strategy that refers to buying a stock and selling, or writing, an out-of-money call on it, and it helps traders to harness volatility. The “buy-write” lowers the cost of buying the stock by the amount received for selling the call, and it also serves like a modest hedge. The strategy’s benchmark is the Chicago Board Options Exchange’s S&P500 BuyWrite Index, or BXM. In October, it had its largest monthly gain in 20 years – 8.1% - well above its two-decade average of 1.7%.To successfully implement this strategy one needs discipline.
Here are the rules, according to Michael Schwartz, Oppenheimer & Co.’s chief options strategist:
• Stock selection is primary, getting a premium is secondary. Pick stocks that you want to own, not calls that you want to sell.
• Never invest more than 10% of your capital in a buy-write. Leverage cuts two ways.• Sell slightly out-of-the-money calls to leave room for upside profit potential.
• Let time work for you. You can sell three- to six- month calls for higher premiums.
• Don’t annualize returns. Focus on the potential return for the trade’s actual duration; annualized returns are rarely earned.
• Ignore theoretical values. Expensive options stay expensive longer than expected, and vice versa. The current correction has shown that volatility, which always reverts to its mean, may not do so when expected.
• Don’t sell the call and try to buy the stock at a better price. This leaves you with a “naked call” and unlimited market risk. Enter buy-writes simultaneously. A net debit order is entered for any combination of prices to buy a stock and sell a call that equals your desired debit ($30 stock price less $3 option price equals $27 net debit).
• If stock fundamentals change, sell the stock and buy back the call.
• If you can earn a high percentage of the maximum profit before expiration, do it. Waiting for the last 10% to 15% of premium often means risking everything for no more than an incremental gain.
This strategy of “buy-write” gives investors a way to handle panic and use the market fear to their advantage.
Other news of the week:
• U.S. Shed 533,000 Jobs in November – on a percentage basis, that was the worst decline in 28 years and far worse than expected. Also, Sept. and Oct. job losses were revised sharply higher, lifting ’08 job cuts to 1.91 mil. The jobless rate hit a 15-year high of 6.7%. It would have climbed more, but many people simply stopped looking for work.
• Mortgage Delinquencies Jump – The share of home loans behind on payments rose to 6.99% in Q3 vs. Q2’s 6.42%. 20% of subprime loans are delinquent, but prime mortgage woes are rising as the recession affects more people. New foreclosure activity dipped as governments and lenders try to keep people in homes.
• Crude Oil Dives 7% to 4-year Low – The January crude contract is at $40.81 a barrel – 72% off the July peak – as the jobs report boded ill for energy demand. The Int’l Energy Agency also cut global oil-demand forecasts again. Natural gas tumbled 5% to $5.74 per mil Btu. Retail gas prices should fall to $1.60 a gallon, given the current gasoline futures.
• Fed Begins Buying Agency Debt – It bought $5 bil of Fannie Mae, Freddie Mac and Federal Home Loan Banks debt as part of a new $600 bil program to support mortgages and housing. Since the plan was announced Nov. 25, mortgage rates have plunged, triggering a refinancing boomlet. Also, the Treasury is legally bound to inject capital into Fannie and Freddie if needed, the Justice Dept. ruled.
• Consumer Borrowing Fell in Oct – Consumer credit outstanding declined $3.5 bil to $2.578 bil, the Fed said, the latest evidence of reined-in spending amid accelerating job losses and economic gloom. Borrowing rose a revised $6.7 bil in Sept and fell $6.4 bil in August. In Oct., credit card and other revolving debt fell $181.6 mil. Auto and other nonrevolving debt fell $3.4 bil
Sunday, November 30, 2008
Company of the Week - November 30, 2008 - Emergent Biosolutions, Inc.
What? An anthrax vaccine company? Yes, apparently there is big business here, at least for now. We might have forgotten about the whole anthrax debacle from 2001, but the government hasn’t. The Rockville, MD based Emergent has the only, the sole, the one vaccine approved in the U.S. for the deadly disease. Over the last decade, it has sold 30 million of its Bio Thrax vaccine to the government, mostly to the Department of Defense and the Department of Health and Human Services. About 2 million of these doses have gone to the troops. The rest have gone to strategic stockpiles to be used in case of a bio-chemical attack. The government is buying the vaccines as fast as the company can make them. They don’t want to be caught flat-footed in case a crisis develops again.
In the past year, the company has signed two large contracts to deliver more than 33 million dosages of the vaccine over the next three years at $25 a piece. The price will increase to $27 if the life of the vaccine can be extended to 4 years, as opposed to 3 years as it is today. This gives insight to company’s earnings until 2011, analysts say, which is valuable in today’s markets.
The race is also to secure government contracts for the next generation of the anthrax vaccines. Emergent is one of the companies in the run to produce a vaccine with faster immunity and fewer risks or side effects. The market could be huge. The government set aside $5.6 billion in 2004 under its Project BioShield to develop and stockpile next generations vaccines.
Emergent also has other products in its pipeline. It is working on two drugs to treat the anthrax toxins for people already infected. It also has two botulinum vaccine in development and other vaccines or treatments for typhoid, tuberculosis, Chlamydia and hepatitis B.
It’s also working to acquire other capabilities. Earlier this year, Emergent tried to buy Protein Sciences and its promising flu vaccine that is in the late stages of testing and approval. The deal is now in the hands of lawyers and there is doubt if it will go through however. The guidance posted by Emergent after its third quarter did not reflect any revenue from Protein Sciences.
The third-quarter earnings per share of 34 cents are up 240% from one year ago. Analysts polled by Thomson Reuters had expected just 18 cents. Sales were up 30% to $56.6 million. For the year the company expects earnings per share between 70 cents and 83 cents. The consensus is 77 cents.
The company’s future is not certain. There is no guarantee that it will win the race for the next generation vaccine, but it may get part of the contracts. Also, having one customer is dangerous. But there are many worse customers than Uncle Sam, in this current environment.
In the past year, the company has signed two large contracts to deliver more than 33 million dosages of the vaccine over the next three years at $25 a piece. The price will increase to $27 if the life of the vaccine can be extended to 4 years, as opposed to 3 years as it is today. This gives insight to company’s earnings until 2011, analysts say, which is valuable in today’s markets.
The race is also to secure government contracts for the next generation of the anthrax vaccines. Emergent is one of the companies in the run to produce a vaccine with faster immunity and fewer risks or side effects. The market could be huge. The government set aside $5.6 billion in 2004 under its Project BioShield to develop and stockpile next generations vaccines.
Emergent also has other products in its pipeline. It is working on two drugs to treat the anthrax toxins for people already infected. It also has two botulinum vaccine in development and other vaccines or treatments for typhoid, tuberculosis, Chlamydia and hepatitis B.
It’s also working to acquire other capabilities. Earlier this year, Emergent tried to buy Protein Sciences and its promising flu vaccine that is in the late stages of testing and approval. The deal is now in the hands of lawyers and there is doubt if it will go through however. The guidance posted by Emergent after its third quarter did not reflect any revenue from Protein Sciences.
The third-quarter earnings per share of 34 cents are up 240% from one year ago. Analysts polled by Thomson Reuters had expected just 18 cents. Sales were up 30% to $56.6 million. For the year the company expects earnings per share between 70 cents and 83 cents. The consensus is 77 cents.
The company’s future is not certain. There is no guarantee that it will win the race for the next generation vaccine, but it may get part of the contracts. Also, having one customer is dangerous. But there are many worse customers than Uncle Sam, in this current environment.
Weekly Recap - November 30, 2008
Back to normality? Some would say so, especially after the convincing rally for the past five days… ok, four and a half. Stocks jumped 18% in the four days leading to Thanksgiving, and they may establish a bottom, reinforcing hopes that the worst is over. The Dow Jones Industrial Average Index and the S&P500 have had their best five-day rally since the Great Depression. It could be that the government attempts to prop up an ailing financial system work? OK, keep your fingers crossed.
Dow Jones Industrials index closed at 8829.04, up 9.73% for the (short) week. S&P 500 climbed up to 896.24, for a weekly gain of 12.03% and Nasdaq closed at 1535.57, up 10.92%.
Next week may bring some down days. The history says the best five-days rallies were often followed by retreats averaging 2.4% over the next five days, according to Bespoke Investment Group.
There are reasons to be optimistic about the future. First, this is the human nature, and second, there are signs we can count on. China’s stock market, down 72% since 2007 peak, has recently recouped 11%. In the U.S., energy stocks have begun to outperform the S&P 500 since late-October. The markets may take a blow if there is another credit crisis blossoming somewhere (CMBS, maybe?) but we’ve gotten quite pessimistic lately. The public sentiment is really dismal. Hear this: the word of the year – “bailout” – according to Merriam-Webster, due to the highest lookups on its online dictionary. The VIX has made a lower low on November 20 at 81, which is less than its previous low, at 90. This means the panic is exhausting.
*Black Friday*
It’s called Black Friday because this is supposed to be the day when retailers are getting back to making a profit for the year. Well, early data shows that the holiday shopping season got off to a great start, much better than last year. Sales during the day after Thanksgiving rose 3% to $10.6 billion (preliminary data) compared to $10.3 billion last year. The data comes from 50,000 outlets tracked by ShopperTrak RCT Corp, a Chicago based firm. Now, that’s good, but a reason may be the deep discounts the retailers throw at consumers, to lure them into the stores. I think the holiday will still be one of the weakest ever, because the contraction in spending is still there, and the season is shorter – 27 days till Christmas compared to 32 last year.
*Thinking of buying Citi? Flip a coin. *
If you enviously watched Citi going from $3.11 to $8.29 in just one week, kicking yourself because you haven’t bought it then, you are not alone. But it will still be wiser to wait until the smoke clears until buying some shares. Yes, the shares are cheaper than dirt at $8.29 a piece, if you think that Citi will earn more than $2 per share later. The company has yet to prove itself that it can survive, let alone thrive, after receiving the lifeline from the government last week. Citi had to write down a staggering $44 billion since the third quarter of 2007, mostly because of the bad investment in the mortgage debt. As part of the rescue plan, the Treasury will invest $20 billion in Citi preferred stock via the Troubled Asset Relief Program, or TARP.
If you’re still keen to invest in Citi, despite its formidable challenges, you may be better served buying calls options. As of November 26, the premium for a January 2010 call with a strike price of $10 was around $2.65.
Dow Jones Industrials index closed at 8829.04, up 9.73% for the (short) week. S&P 500 climbed up to 896.24, for a weekly gain of 12.03% and Nasdaq closed at 1535.57, up 10.92%.
Next week may bring some down days. The history says the best five-days rallies were often followed by retreats averaging 2.4% over the next five days, according to Bespoke Investment Group.
There are reasons to be optimistic about the future. First, this is the human nature, and second, there are signs we can count on. China’s stock market, down 72% since 2007 peak, has recently recouped 11%. In the U.S., energy stocks have begun to outperform the S&P 500 since late-October. The markets may take a blow if there is another credit crisis blossoming somewhere (CMBS, maybe?) but we’ve gotten quite pessimistic lately. The public sentiment is really dismal. Hear this: the word of the year – “bailout” – according to Merriam-Webster, due to the highest lookups on its online dictionary. The VIX has made a lower low on November 20 at 81, which is less than its previous low, at 90. This means the panic is exhausting.
*Black Friday*
It’s called Black Friday because this is supposed to be the day when retailers are getting back to making a profit for the year. Well, early data shows that the holiday shopping season got off to a great start, much better than last year. Sales during the day after Thanksgiving rose 3% to $10.6 billion (preliminary data) compared to $10.3 billion last year. The data comes from 50,000 outlets tracked by ShopperTrak RCT Corp, a Chicago based firm. Now, that’s good, but a reason may be the deep discounts the retailers throw at consumers, to lure them into the stores. I think the holiday will still be one of the weakest ever, because the contraction in spending is still there, and the season is shorter – 27 days till Christmas compared to 32 last year.
*Thinking of buying Citi? Flip a coin. *
If you enviously watched Citi going from $3.11 to $8.29 in just one week, kicking yourself because you haven’t bought it then, you are not alone. But it will still be wiser to wait until the smoke clears until buying some shares. Yes, the shares are cheaper than dirt at $8.29 a piece, if you think that Citi will earn more than $2 per share later. The company has yet to prove itself that it can survive, let alone thrive, after receiving the lifeline from the government last week. Citi had to write down a staggering $44 billion since the third quarter of 2007, mostly because of the bad investment in the mortgage debt. As part of the rescue plan, the Treasury will invest $20 billion in Citi preferred stock via the Troubled Asset Relief Program, or TARP.
If you’re still keen to invest in Citi, despite its formidable challenges, you may be better served buying calls options. As of November 26, the premium for a January 2010 call with a strike price of $10 was around $2.65.
Sunday, November 23, 2008
Company of the Week - November 23, 2008 - Dollar Tree, Inc
Very fittingly in this environment, the company of the week is Dollar Tree (Ticker: DLTR), a deep discounter based in Chesapeake, Virginia. It sells gifts and novelty items at a dollar or less in price. But in the recent years, the company moved beyond themed holiday goods and party knickknacks to sell things people need every day: food, water, household cleaners, health and beauty. They sell brand names as well, like Bumble Bee, Del Monte and Progresso, all priced at a buck. The strategy seems to be paying off, Dollar Tree managing to increase same-store sales in nine of the 10 last quarters. The company will report its earnings on Tuesday, but they’ve already preannounced that same-store sales in the third quarter rose 6.2%. Overall sales grew by 11.6%. Company profit guidance is 40 to 43 cents a share, but analysts are looking for 44 cents. About an year ago, Dollar Tree began accepting Visa in their stores. Visa’s sales contributed a percentage point of sales growth, as Dollar Tree shoppers using Visa cards spend more. The average Dollar Tree customer paying by cash or check spends just $5 to $6, but Visa customers spend $16 to $17 on average. Another paying option, food stamps, is also helping drive traffic and sales. There is plenty of room to grow, according to CEO Sasser. At the end of the second quarter, the chain had 3,517 stores. In just the first half of this year, Dollar Tree opened 133 new stores. In time, it could have 5,000 to 7,000 stores in the U.S, according to Sasser. The newest acquision, Deal$, made in 2006 adds more goods at various price points, a slight departure from the buck-or-less formula. Last year, Dollar Tree added 23 new Deal$ stores, and another 14 were opened this year. Deal$ still represents a small portion of Dollar Tree sales, roughly 6% to 7%. As the consumers are under pressure to tighten their belts, Dollar Tree can prosper for a while.
Weekly Recap - November 23, 2008
A guy falling down a high rise thinks to himself “so far so good, so far so good” as he passes each floor on his way down. But is not the falling that counts, is the landing. The market is looking for any good news in this environment to stop the falling. Friday, the markets cheered the nomination of Timothy Geithner as the new Secretary of the Treasury, and rebounded about 6%. Who is Timothy Geithner? He is currently the head of the New York Federal Reserve, but I don’t think it would have mattered for the markets. Just the idea of change is enough to get them started.
However, the major indices are still down for the week, even with Friday’s nice rally. Dow Jones Industrial Average sits at 8,046, down 5.3% for the week, S&P500 dropped 8.4% to 800, after hitting 741 early Friday, and Nasdaq Composite Index lost 8.7% to 1,384. One of the interesting facts of this week is that S&P 500 dividend yield, about 3.79%, exceeded the 10-year Treasury yield, about 3.20%, for the first time in half a century. While many dividends will likely be cut next year, which will send the equity yields back down, the cross suggests that stocks are cheaply valued. The bear camp simply says that it means no more earnings growth for a while. One bearish indicator: the insider buying and company buybacks. With stocks almost down 50%, many would think that the companies are scrapping up cash in order to buy back their battered stock, but that’s not the case. For the 10 days ended November 19, announced new stock buybacks averaged $420 million a day, down almost 90% from $3.6 billion in November – December of 2007. Insiders follow the same pattern, buying back $3.4 billion in the past two months, down 24% from the year-ago period, when stocks were double than they are now.
There are not many places to hide these days. Strong health-care stocks, usually a defensive group, are getting thrown out with the financials. So far, they are down 35%. One of the companies being in this situation is Medco Health Solutions (MHS), the country’s biggest pharmacy benefits manager, which is down a third from its highs of $37.32. The indiscriminate selling has gotten Medco at a PE of 14 times forward earnings, lower than its growth rate, which is rare. The numbers look good: for the first nine months, Medco sales rose 17% to $38.3 billion and profits 25% to $829 million, or $1.74 a share. Medco expects 2008 earnings of $2.30 - $2.33 a share, up 20% from 2007, and $2.67-$2.77 next year, up 15%. It also plans to buy back $3 billion of shares.
Wild VIX
We are heading towards the most volatile market ever. The S&P 500 three-month realized volatility is now 66%, within striking distance of the 68% peak of the 1929 crash. We will likely pass it in short time, making this market the highest sustained volatility environment in S&P 500 history. No one trading options these days has experienced situations like this one. The average peak in volatility during the last nine bear markets since 1950 was 30%, with a high of 64% in 1987. The options market’s fear gauge, the Chicago Board Options Exchange’s Market Volatility Index (VIX) which is calculated by measuring the implied volatility of certain S&P500 index options expiring in 30 days, set a new all-time closing high of 80.90 on Thursday. This spells trouble for stocks. VIX at 80 implies a S&P500 average daily move of about 5%.
Other news:
- Detroit automakers failed to secure $25 bil in loans from Congress as lawmakers required a business plan to return to profitability. I wonder how could the Big 3 go to Capitol Hill without a plan.
- Citi and JP Morgan Tumble – As a proof that we still don’t know how many more losses are to come from the big financials, Citi and JPM shares plunged 60% and 34%, respectively, as concerns grew that the banks will be forced to write off billions of dollars in losses in the coming quarter.
- New jobless claims hit a 16-year high of 545,000 while continuing claims topped 4 mil for the first time since ’82.
- Housing starts in October fell to their slowest pace going back 50 years
However, the major indices are still down for the week, even with Friday’s nice rally. Dow Jones Industrial Average sits at 8,046, down 5.3% for the week, S&P500 dropped 8.4% to 800, after hitting 741 early Friday, and Nasdaq Composite Index lost 8.7% to 1,384. One of the interesting facts of this week is that S&P 500 dividend yield, about 3.79%, exceeded the 10-year Treasury yield, about 3.20%, for the first time in half a century. While many dividends will likely be cut next year, which will send the equity yields back down, the cross suggests that stocks are cheaply valued. The bear camp simply says that it means no more earnings growth for a while. One bearish indicator: the insider buying and company buybacks. With stocks almost down 50%, many would think that the companies are scrapping up cash in order to buy back their battered stock, but that’s not the case. For the 10 days ended November 19, announced new stock buybacks averaged $420 million a day, down almost 90% from $3.6 billion in November – December of 2007. Insiders follow the same pattern, buying back $3.4 billion in the past two months, down 24% from the year-ago period, when stocks were double than they are now.
There are not many places to hide these days. Strong health-care stocks, usually a defensive group, are getting thrown out with the financials. So far, they are down 35%. One of the companies being in this situation is Medco Health Solutions (MHS), the country’s biggest pharmacy benefits manager, which is down a third from its highs of $37.32. The indiscriminate selling has gotten Medco at a PE of 14 times forward earnings, lower than its growth rate, which is rare. The numbers look good: for the first nine months, Medco sales rose 17% to $38.3 billion and profits 25% to $829 million, or $1.74 a share. Medco expects 2008 earnings of $2.30 - $2.33 a share, up 20% from 2007, and $2.67-$2.77 next year, up 15%. It also plans to buy back $3 billion of shares.
Wild VIX
We are heading towards the most volatile market ever. The S&P 500 three-month realized volatility is now 66%, within striking distance of the 68% peak of the 1929 crash. We will likely pass it in short time, making this market the highest sustained volatility environment in S&P 500 history. No one trading options these days has experienced situations like this one. The average peak in volatility during the last nine bear markets since 1950 was 30%, with a high of 64% in 1987. The options market’s fear gauge, the Chicago Board Options Exchange’s Market Volatility Index (VIX) which is calculated by measuring the implied volatility of certain S&P500 index options expiring in 30 days, set a new all-time closing high of 80.90 on Thursday. This spells trouble for stocks. VIX at 80 implies a S&P500 average daily move of about 5%.
Other news:
- Detroit automakers failed to secure $25 bil in loans from Congress as lawmakers required a business plan to return to profitability. I wonder how could the Big 3 go to Capitol Hill without a plan.
- Citi and JP Morgan Tumble – As a proof that we still don’t know how many more losses are to come from the big financials, Citi and JPM shares plunged 60% and 34%, respectively, as concerns grew that the banks will be forced to write off billions of dollars in losses in the coming quarter.
- New jobless claims hit a 16-year high of 545,000 while continuing claims topped 4 mil for the first time since ’82.
- Housing starts in October fell to their slowest pace going back 50 years
Tuesday, November 18, 2008
Weekly Recap - November 16, 2008
Stocks have hit a new low during Thursday’s session, on mounting evidence of quickening economic decline, but the buyers returned from the sidelines once the Dow hit 8000, and sent it straight up. And speaking the language of technical analysis, S&P500 has held to its support of 840. Should it break through it, the next level of support is 769, its October 2002 low. The 840 pts support line could be tested next week as well, as we helplessly noticed during Thursday’s final hour. Oil has continued its astonishing descent, from a peak of $147 in July to $57 this week, on continuing weak global demand, which puts some money back into consumers’ pockets. It seems that just yesterday – OK, July – that the picture was reversed and the $147 price was ‘justified’ by the increased global demand. Huh?
Every bit of help in the right direction is welcome. Governments around the world continue to throw money at the problem, with China announcing the $586 bailout – the Chinese TARP – and Korea cutting rates. Europe is already in recession, WSJ announced yesterday, and the leaders gathered in D.C. this weekend to figure out a solution. It’s the first recession for the euro zone – the 15 countries that now use the euro currency – since 1999, when the shared currency was launched. Most economists doubt that any new rescue plan will come out of D.C.
On other news:
- U.S. Won’t Buy Mortgages – Treasury Secretary Henry Paulson said the government won’t buy troubled mortgage debt from banks – the original focus of the $700 billion financial rescue plan. Instead, it’ll keep injecting capital directly into banks and will try to help revive securitization markets for credit card, auto and other consumer debt. Paulson said the TARP should not be used for automaker aid. Hmm, you wanna bet?
- Retail Sales, Outlook Grim – October retails sales fell a record 2.8% vs. Sept, as job losses and other economic woes kept consumers on hold. Circuit City filed for bankruptcy amid what larger rival Best Buy called the worst retail climate in its history. Several dept stores and apparel chains also expect a tough holiday season. Wal-Mart beat Q3 views and is reasonably upbeat.
- Jobless Claims Hit 516,000 – New claims rose 32,000 to their highest since just after 9/11. The number of people still collecting benefits jumped 65,000 to 3.987 million, a 25-yr high. Businesses continue to slash jobs, as Sun Microsystems will cut 5,000-6,000 jobs, or 15-18% of its job force. Citi will cut 10,000 jobs. Applied Materials, Fidelity, Office Max, Textron, US Steel and others announced layoffs.
- Intel, Nokia Weigh On Tech – Intel sees Q4 sales of roughly $9 billion vs. its old midpoint of $10.5 billion, citing weakness across the board. No. 1 cell phone firm Nokia cut industry targets for Q4 and ’09. Researcher IDC cut its ’09 tech spending growth forecast to 2.6%. Intel fell 9%, Nokia 18%.
- Lenders Redo Mortgages – Owning or backing $5 trillion in mortgages, Freddie Mac and Fannie Mae will modify delinquent loans by cutting rates, extending terms or reducing principal. Citi offered to revise $20 billion in home loans. The FDIC called for using $24 billion of the $700 bil rescue fund to help 1.5 million homeowners avoid foreclosure.
- Dollar Firms, Crude Slips – The dollar fell hard Thursday, but ended the week higher vs. the euro as data showed the euro zone in its first recession. December crude settled $1.20 lower to $57.04 a barrel, a 7% drop for the week. Copper and silver jumped 8%, as gold edged up 1%.
- Credit Markets Gains Stall – The 3-month dollar Libor rate rose Thu-Fri from 4-yr lows after diving from the Oct. 10 4.82% peak. Despite Fed buys, commercial paper barely rose last week after big gains the prior 2 weeks. But there were signs that huge Fed liquidity efforts are satisfying banks.
Every bit of help in the right direction is welcome. Governments around the world continue to throw money at the problem, with China announcing the $586 bailout – the Chinese TARP – and Korea cutting rates. Europe is already in recession, WSJ announced yesterday, and the leaders gathered in D.C. this weekend to figure out a solution. It’s the first recession for the euro zone – the 15 countries that now use the euro currency – since 1999, when the shared currency was launched. Most economists doubt that any new rescue plan will come out of D.C.
On other news:
- U.S. Won’t Buy Mortgages – Treasury Secretary Henry Paulson said the government won’t buy troubled mortgage debt from banks – the original focus of the $700 billion financial rescue plan. Instead, it’ll keep injecting capital directly into banks and will try to help revive securitization markets for credit card, auto and other consumer debt. Paulson said the TARP should not be used for automaker aid. Hmm, you wanna bet?
- Retail Sales, Outlook Grim – October retails sales fell a record 2.8% vs. Sept, as job losses and other economic woes kept consumers on hold. Circuit City filed for bankruptcy amid what larger rival Best Buy called the worst retail climate in its history. Several dept stores and apparel chains also expect a tough holiday season. Wal-Mart beat Q3 views and is reasonably upbeat.
- Jobless Claims Hit 516,000 – New claims rose 32,000 to their highest since just after 9/11. The number of people still collecting benefits jumped 65,000 to 3.987 million, a 25-yr high. Businesses continue to slash jobs, as Sun Microsystems will cut 5,000-6,000 jobs, or 15-18% of its job force. Citi will cut 10,000 jobs. Applied Materials, Fidelity, Office Max, Textron, US Steel and others announced layoffs.
- Intel, Nokia Weigh On Tech – Intel sees Q4 sales of roughly $9 billion vs. its old midpoint of $10.5 billion, citing weakness across the board. No. 1 cell phone firm Nokia cut industry targets for Q4 and ’09. Researcher IDC cut its ’09 tech spending growth forecast to 2.6%. Intel fell 9%, Nokia 18%.
- Lenders Redo Mortgages – Owning or backing $5 trillion in mortgages, Freddie Mac and Fannie Mae will modify delinquent loans by cutting rates, extending terms or reducing principal. Citi offered to revise $20 billion in home loans. The FDIC called for using $24 billion of the $700 bil rescue fund to help 1.5 million homeowners avoid foreclosure.
- Dollar Firms, Crude Slips – The dollar fell hard Thursday, but ended the week higher vs. the euro as data showed the euro zone in its first recession. December crude settled $1.20 lower to $57.04 a barrel, a 7% drop for the week. Copper and silver jumped 8%, as gold edged up 1%.
- Credit Markets Gains Stall – The 3-month dollar Libor rate rose Thu-Fri from 4-yr lows after diving from the Oct. 10 4.82% peak. Despite Fed buys, commercial paper barely rose last week after big gains the prior 2 weeks. But there were signs that huge Fed liquidity efforts are satisfying banks.
Sunday, November 9, 2008
Company of the Week - November 9, 2008 - ICU Medical
The company’s niche is single-use medical and surgical products.
Its line includes:
• Caterers and disposable connectors that cut the chances of catheter-related infections
• Safe needles to prevent accidental harm to practitioners
• Heart-monitoring systems
• Devices for administering intravenous cancer drugs without the risk of contamination to the drug or exposure of health workers to dangerous spray or vapor.
• Customized intravenous sets built to order for the health professionals who use them to administer infused drugs to patients.
The company focuses on niches where there’s no competition. That’s an interesting concept. Instead of going after markets already dominated by health industry giants, their philosophy has been to attack the empty markets. The company has competition – bummer!- from Baxter International, Cardinal Health, Becton Dickinson, Fresenius, Edwards Lifesciences, Merit Medical and Hospira, but none of them competes across all of ICU’s product lines.It’s quite a recession proof company, as they are not affected by consumer consumption. On Oct. 16, the company raised guidance for fiscal 2008 revenue to $199 million to $203 million. Its previous target was $190 million to $200 million. Earnings expectations are of $1.48 to $1.53, up from $1.35 to $1.45. It also reported a 68% third-quarter earnings increase, pushing the stock from 27 to 35. The company sits on $100 million in cash, but the investors are more excited about a deal ICU Medical has made with Premier, a distributor of health and surgical products to hospitals. Premier is a bulk buyer, giving hospitals, clinics and group practices extra purchasing power. Starting in 2009, Premier will market and distribute products from ICU. The deal will give ICU access to 2,000 hospitals and 50,000 other sites it could not previously reach. The deal was signed on August 7, and it runs for five years. Dr. George Lopez, the company CEO, is focusing attention to expanding its European sales, where he sees a lot of opportunity. It’s building a plant in Slovakia, to be able to deliver anywhere in Europe within 48-72 hours.
Its line includes:
• Caterers and disposable connectors that cut the chances of catheter-related infections
• Safe needles to prevent accidental harm to practitioners
• Heart-monitoring systems
• Devices for administering intravenous cancer drugs without the risk of contamination to the drug or exposure of health workers to dangerous spray or vapor.
• Customized intravenous sets built to order for the health professionals who use them to administer infused drugs to patients.
The company focuses on niches where there’s no competition. That’s an interesting concept. Instead of going after markets already dominated by health industry giants, their philosophy has been to attack the empty markets. The company has competition – bummer!- from Baxter International, Cardinal Health, Becton Dickinson, Fresenius, Edwards Lifesciences, Merit Medical and Hospira, but none of them competes across all of ICU’s product lines.It’s quite a recession proof company, as they are not affected by consumer consumption. On Oct. 16, the company raised guidance for fiscal 2008 revenue to $199 million to $203 million. Its previous target was $190 million to $200 million. Earnings expectations are of $1.48 to $1.53, up from $1.35 to $1.45. It also reported a 68% third-quarter earnings increase, pushing the stock from 27 to 35. The company sits on $100 million in cash, but the investors are more excited about a deal ICU Medical has made with Premier, a distributor of health and surgical products to hospitals. Premier is a bulk buyer, giving hospitals, clinics and group practices extra purchasing power. Starting in 2009, Premier will market and distribute products from ICU. The deal will give ICU access to 2,000 hospitals and 50,000 other sites it could not previously reach. The deal was signed on August 7, and it runs for five years. Dr. George Lopez, the company CEO, is focusing attention to expanding its European sales, where he sees a lot of opportunity. It’s building a plant in Slovakia, to be able to deliver anywhere in Europe within 48-72 hours.
Weekly Recap - November 9, 2008
Not a bad week after all. We have elected a new president, Barack Obama, and the Chicago Business School got a new name: Chicago Booth, for a cool $300 million, both historical events that will affect our lives for years to come. As hope usually dies last, we can all hope that these changes will bring better life for ourselves. That’s fine, but prepare for the worst and hope for the best. Because the economy is not getting any better any time soon. President-elect Obama has his work cut out for him, dealing with so many issues that it pains me just to enumerate them here. I’d say, why wait until January 20th to let Obama in the White House? The sooner, the better as it stops Bush from making other mistakes and increase the risk of ruin for the economy.
Under Obama, there will be clearly some winners and some losers. Let’s take a look.
The Market
Latest swings in the market – the huge rally on the election day followed by erasing the gains the days after the election – signaled market’s uneasiness about what’s to come in the next two months, as it looks for direction from Obama’s cabinet. The seesawing may very well continue, until we know how will Obama deal with the credit crisis. One of the first moves will probably be replacing Mr. Paulson with either Lawrence Summers, former Clinton Treasury Secretary or New York Fed President Timothy Geithner, but Mr. Obama has said that it will approach this decision with great care.
Financial Services
The banks may take some more beating under Obama, as more regulations may be implemented, which will reduce returns. The financial stocks have gotten so cheap now that they will be the first ones to bounce back once the smoke clears. The S&P financial index is down about 51% this year, trading at 11.3 ’09 earnings, versus a 36.6% drop for the S&P500.
Infrastructure
Muni bonds are gaining some appeal lately, as Obama has made clear that the infrastructure of
the nation needs improvement. The Obama administration will likely send money to the states to allow them to complete old project and start new ones. But playing in the infrastructure stocks may be trickier. Don’t just hope that this government spending plan will turn around entire industries, like steel for example, where United States Steel (ticker: X) is down 72% for the year.
Defense
You may be tempted to put defense sector under losers, as lovable House Financial Services Chairman Barney Frank said that the budget defense should be cut 25%. Not so fast! Obama is in a tight situation, and with other issues at stake, he has little room to maneuver here. Even if he pulls troops out of Iraq (pulling them out costs as much as putting them into the country), he wants to add more troops in Afghanistan, so it’s a wash. He can’t really cut the weapons spending. The unintended consequences of cutting Lockheed Martin’s F-35 jet, for example, could be disastrous. Some of the U.S. key allies may be hurt, as they want to buy the jet and put money into the R&D budget. For these reasons, the defense stocks may be oversold. Raytheon (Ticker: RTN) boosted estimates for 2009 earnings in recent weeks, and it’s now trading at a reasonable 10.6 times estimated earnings for 2009. Lockheed’s shares (Ticker: LMT) have fallen 25% this year and trade at a reasonable 9.8 times estimated 2009 earnings. Northrop Grumman (Ticker: NOC), down 44% year to date, trades at 8.2 times 2009 estimates.
Green Energy
Obama’s promise to create a green energy industry has alternative energy stocks in everyone’s attention now, despite recent sell-offs in the sector. Manufacturing capacity is constrained by the high cost of credit, but the winners may emerge from the better positioned players, such as Danish wind-turbine producer Vestas Wind Systems (Ticker: VWDRY), and solar MEMC Electronic Materials (Ticker: WFR). Because Obama supports a carbon cap-and-trade system to curb greenhouse gases, U.S. utilities could move away from coal to alternatives like natural gas. Given the weak economy, the plan may be put on hold for a while, but eventually it could hurt coal producers like Peabody Energy (Ticker: BTU) and Massey Energy (Ticker: MEE).
Auto Makers
Obama is committed to rescue the U.S. auto industry, which he called “the backbone of American manufacturing.” But this has to be treated carefully, for all we remember Fannie and Freddie disasters. Detroit’s costs are too high and there is excess capacity.
Health Care
Drug companies may take some big hits, as Obama and the Democrats are trying to come up with an universal health care system, which will bring down the costs of drugs and services. Shares of Pfizer (Ticker: PFE) and GlaxoSmith-Kline (Ticker: GSK) both fell 8% the day after the election. Some winners may be Teva Pharmaceutical (Ticker: TEVA), a generic drug maker. Medco Health Solutions (Ticker: MHS) and Express Scripts (Ticker: ESRX) could also benefit, as each offers pharmacy-benefits services. But the best hope for the health care sector is this: the public needs a hefty dose of painkillers while Obama finds a way out of the current fiscal mess.
Other news:
• Joblessness hits 14-Yr High of 6.5% - Employers cut 240,000 jobs in October, worse than expected, with broad declines across industries, and pointing to a severe and rapid recession
• Pending home sales fall 4.6% - and they could fall even more in October and November, signaling that the sharp recession may pressure home sales.
• Bank lending rates keep falling – the 3-month dollar-based LIBOR fell 10 ticks to 2.29%, a 4-yr low and well off the Oct. 10 peak of 4.83%. The overnight rate held at a record low.
• Factory, service data dive – the ISM manufacturing index fell 4.6 points in October to 38.9, a 26-yr low, with a plunge in output and orders – including export demand. ISM’s service-sector index slid 5.8 pts to a new low of 44.2. Factory and service indexes fell sharply worldwide, even in China.
• The dollar strengthens, oil dips – the dollar gained against the euro and pound, but the yen outpaced the pack. Crude futures settled off $6.77 for the week to $61.04 a barrel. Gold climbed 2.2%. Other metals were mixed.
Under Obama, there will be clearly some winners and some losers. Let’s take a look.
The Market
Latest swings in the market – the huge rally on the election day followed by erasing the gains the days after the election – signaled market’s uneasiness about what’s to come in the next two months, as it looks for direction from Obama’s cabinet. The seesawing may very well continue, until we know how will Obama deal with the credit crisis. One of the first moves will probably be replacing Mr. Paulson with either Lawrence Summers, former Clinton Treasury Secretary or New York Fed President Timothy Geithner, but Mr. Obama has said that it will approach this decision with great care.
Financial Services
The banks may take some more beating under Obama, as more regulations may be implemented, which will reduce returns. The financial stocks have gotten so cheap now that they will be the first ones to bounce back once the smoke clears. The S&P financial index is down about 51% this year, trading at 11.3 ’09 earnings, versus a 36.6% drop for the S&P500.
Infrastructure
Muni bonds are gaining some appeal lately, as Obama has made clear that the infrastructure of
the nation needs improvement. The Obama administration will likely send money to the states to allow them to complete old project and start new ones. But playing in the infrastructure stocks may be trickier. Don’t just hope that this government spending plan will turn around entire industries, like steel for example, where United States Steel (ticker: X) is down 72% for the year.
Defense
You may be tempted to put defense sector under losers, as lovable House Financial Services Chairman Barney Frank said that the budget defense should be cut 25%. Not so fast! Obama is in a tight situation, and with other issues at stake, he has little room to maneuver here. Even if he pulls troops out of Iraq (pulling them out costs as much as putting them into the country), he wants to add more troops in Afghanistan, so it’s a wash. He can’t really cut the weapons spending. The unintended consequences of cutting Lockheed Martin’s F-35 jet, for example, could be disastrous. Some of the U.S. key allies may be hurt, as they want to buy the jet and put money into the R&D budget. For these reasons, the defense stocks may be oversold. Raytheon (Ticker: RTN) boosted estimates for 2009 earnings in recent weeks, and it’s now trading at a reasonable 10.6 times estimated earnings for 2009. Lockheed’s shares (Ticker: LMT) have fallen 25% this year and trade at a reasonable 9.8 times estimated 2009 earnings. Northrop Grumman (Ticker: NOC), down 44% year to date, trades at 8.2 times 2009 estimates.
Green Energy
Obama’s promise to create a green energy industry has alternative energy stocks in everyone’s attention now, despite recent sell-offs in the sector. Manufacturing capacity is constrained by the high cost of credit, but the winners may emerge from the better positioned players, such as Danish wind-turbine producer Vestas Wind Systems (Ticker: VWDRY), and solar MEMC Electronic Materials (Ticker: WFR). Because Obama supports a carbon cap-and-trade system to curb greenhouse gases, U.S. utilities could move away from coal to alternatives like natural gas. Given the weak economy, the plan may be put on hold for a while, but eventually it could hurt coal producers like Peabody Energy (Ticker: BTU) and Massey Energy (Ticker: MEE).
Auto Makers
Obama is committed to rescue the U.S. auto industry, which he called “the backbone of American manufacturing.” But this has to be treated carefully, for all we remember Fannie and Freddie disasters. Detroit’s costs are too high and there is excess capacity.
Health Care
Drug companies may take some big hits, as Obama and the Democrats are trying to come up with an universal health care system, which will bring down the costs of drugs and services. Shares of Pfizer (Ticker: PFE) and GlaxoSmith-Kline (Ticker: GSK) both fell 8% the day after the election. Some winners may be Teva Pharmaceutical (Ticker: TEVA), a generic drug maker. Medco Health Solutions (Ticker: MHS) and Express Scripts (Ticker: ESRX) could also benefit, as each offers pharmacy-benefits services. But the best hope for the health care sector is this: the public needs a hefty dose of painkillers while Obama finds a way out of the current fiscal mess.
Other news:
• Joblessness hits 14-Yr High of 6.5% - Employers cut 240,000 jobs in October, worse than expected, with broad declines across industries, and pointing to a severe and rapid recession
• Pending home sales fall 4.6% - and they could fall even more in October and November, signaling that the sharp recession may pressure home sales.
• Bank lending rates keep falling – the 3-month dollar-based LIBOR fell 10 ticks to 2.29%, a 4-yr low and well off the Oct. 10 peak of 4.83%. The overnight rate held at a record low.
• Factory, service data dive – the ISM manufacturing index fell 4.6 points in October to 38.9, a 26-yr low, with a plunge in output and orders – including export demand. ISM’s service-sector index slid 5.8 pts to a new low of 44.2. Factory and service indexes fell sharply worldwide, even in China.
• The dollar strengthens, oil dips – the dollar gained against the euro and pound, but the yen outpaced the pack. Crude futures settled off $6.77 for the week to $61.04 a barrel. Gold climbed 2.2%. Other metals were mixed.
Wednesday, November 5, 2008
Weekly Recap - November 2, 2008
The worst month in 21 years for the stocks finished with a bang. The major indexes closed the month with double digit gain for the last week, one of the best weeks ever. The Dow Jones Industrial Average ended last week up 946, or 11.3% to 9325. It was the Dow’s biggest one-week point gain ever and its best percentage rise since 1974, but the blue chips are still down 29.7% this year. The S&P500 jumped 92 to 969, and that 10.5% rise was its best since 1974. The Nasdaq Composite Index enjoyed its best week since April 2001 in point or percentage terms as it rallied 169, or 10.9%, to 1721. The Russell 2000 had its best week ever, rising 66, or 14.1%, to 538.
One hot, one cold. The Dow’s 14.1% slide was its worst monthly loss since 1998. The S&P500 absorbed its biggest monthly beating since October 1987 as it fell 16.9%. The Nasdaq skidded 17.7%; the Russell 20.9%.So far, the S&P500 has bounced hard each time it approached its Oct. 10 low near 840, and its ability to hold above that threshold will help sway undecided traders. But a warning sign: Each bounce since has lifted the index to a series of weaker peaks – reaching 1044 on Oct. 14, and the 985 on Oct. 21 and 984 on Friday, hardly a picture of gathering strength. Until that improves, stocks remain mired in a downtrend, with last week’s rise a bear-market bounce.
IBD's Top 10 - Friday Big Week Ends With More Gains
1) The Nasdaq and NYSE composite rose for a 4th straight day, ending a week of big gains. The session also capped one of the worst months ever on Wall Street. On Fri., the Dow gained 1.6%, the S&P 500 1.5%, the NYSE 1.4% and the Nasdaq 1.3%. Volume retreated moderately. Consumer stocks such as auto parts and housewares were among the day's best. Credit Rates Extend Rapid Slide
2) The Libor rate for 3-month bank-to-bank loans in dollars fell nearly 17 basis points to 3.03% — well off the Oct. 10 peak of 4.82% — as global rescue efforts help. The overnight rate fell to 0.4% from 0.73%, well below the Fed's 1% target rate. Some signs point to further big Libor rates on Mon. But there is still some doubt as to how much interbank lending actually is happening.McCain Calls Obama 'Far Left'
3) GOP candidate John McCain warned in Ohio that Dem rival Barack Obama's "far left" policies would undermine an already weak economy, a top concern among voters in a state where unemployment is well above the nat'l average. Obama, in Ill., Iowa and Ind., repeatedly blamed McCain's support of Bush policies for current woes.Chicago Factory Activity Plunges
4) The NAPM-Chicago purchasers index dived to 37.8 in Oct. from 57.7 in Sept., signaling the fastest fall in regional factory activity in 7 years. Output and orders also plunged, labor conditions deteriorated and price pressures eased. It's the latest report showing a rapid reversal in Oct. for factories and the economy overall. ISM releases its U.S. manufacturing index Mon. Dollar Turns After 3-Day Slide
5) A late rally drove Dec. crude futures 3% higher, up $1.85 to $67.81 per barrel. Natural gas sparked 4%. Retail gasoline fell to $2.50 a gallon, down 31% for the month. Copper futures pared losses but closed lower, and down more than 30% in Oct. The dollar, the Swiss franc and the yen rose vs. the euro amid the prospect of European Central Bank rate cuts this week. Japan Cuts Key Rate To 0.3%
6) The Bank of Japan cut its lending rate by 20 basis points, a little less than the 25 ticks investors had expected. That follows rate cuts earlier in the week from the Fed, China, Hong Kong, Taiwan and others. Talk of BoJ action had buoyed Japanese stocks earlier in the week, but the Nikkei fell 5% Fri. on the actual move. Hong Kong stocks fell 2.5%, but Korea's Kospi gained 2.6%.Consumer Spending Fell In Sept.
7) Sept. spending fell 0.3% as job losses and Wall St. woes hurt consumers' ability and will to make purchases. The drop wasn't a surprise after Thu.'s Q3 GDP — also a Commerce Dept. report — showed real consumer spending falling at the fastest pace in 28 years. All signs suggest Oct. and Q4 will be even worse. Real disposable income is flat vs. a year ago.Leading U.S. Index At New Low
8) The Economic Cycle Research Index fell 1.1 points to 112.9 in the week ended Oct. 24. That's the lowest since Oct. '01. The annualized growth rate slumped to -21.9%, the lowest ever, from -19.3% in the prior week. It was -11.6% in mid-Sept. and just -0.6% a year earlier. "The outlook for the economy has darkened dramatically," ECRI said.JPMorgan Holds Off Foreclosures
9) The bank temporarily halted foreclosures as it renegotiates $70 bil in mortgages held by 400,000 customers.JPMorgan, (JPM) which bought Washington Mutual in Sept., is working with owner-occupied mortgages and "homeowners who show a willingness to pay." The bank said it's already modified 250,000 mortgages worth $40 bil in '08.Bernanke: Back Freddie, Fannie
10) Fed chief Ben Bernanke said the gov't should keep backing the seized mortgage lenders' debt, for now. Longer-term, he said the gov't could makeFreddie Mac (FRE) andFannie Mae (FNM) more public — or fully privatize them. The gov't also could create a bond insurer much like the FDIC, which protects bank deposits. Bernanke says mortgage securitization may need some gov't backstop.
One hot, one cold. The Dow’s 14.1% slide was its worst monthly loss since 1998. The S&P500 absorbed its biggest monthly beating since October 1987 as it fell 16.9%. The Nasdaq skidded 17.7%; the Russell 20.9%.So far, the S&P500 has bounced hard each time it approached its Oct. 10 low near 840, and its ability to hold above that threshold will help sway undecided traders. But a warning sign: Each bounce since has lifted the index to a series of weaker peaks – reaching 1044 on Oct. 14, and the 985 on Oct. 21 and 984 on Friday, hardly a picture of gathering strength. Until that improves, stocks remain mired in a downtrend, with last week’s rise a bear-market bounce.
IBD's Top 10 - Friday Big Week Ends With More Gains
1) The Nasdaq and NYSE composite rose for a 4th straight day, ending a week of big gains. The session also capped one of the worst months ever on Wall Street. On Fri., the Dow gained 1.6%, the S&P 500 1.5%, the NYSE 1.4% and the Nasdaq 1.3%. Volume retreated moderately. Consumer stocks such as auto parts and housewares were among the day's best. Credit Rates Extend Rapid Slide
2) The Libor rate for 3-month bank-to-bank loans in dollars fell nearly 17 basis points to 3.03% — well off the Oct. 10 peak of 4.82% — as global rescue efforts help. The overnight rate fell to 0.4% from 0.73%, well below the Fed's 1% target rate. Some signs point to further big Libor rates on Mon. But there is still some doubt as to how much interbank lending actually is happening.McCain Calls Obama 'Far Left'
3) GOP candidate John McCain warned in Ohio that Dem rival Barack Obama's "far left" policies would undermine an already weak economy, a top concern among voters in a state where unemployment is well above the nat'l average. Obama, in Ill., Iowa and Ind., repeatedly blamed McCain's support of Bush policies for current woes.Chicago Factory Activity Plunges
4) The NAPM-Chicago purchasers index dived to 37.8 in Oct. from 57.7 in Sept., signaling the fastest fall in regional factory activity in 7 years. Output and orders also plunged, labor conditions deteriorated and price pressures eased. It's the latest report showing a rapid reversal in Oct. for factories and the economy overall. ISM releases its U.S. manufacturing index Mon. Dollar Turns After 3-Day Slide
5) A late rally drove Dec. crude futures 3% higher, up $1.85 to $67.81 per barrel. Natural gas sparked 4%. Retail gasoline fell to $2.50 a gallon, down 31% for the month. Copper futures pared losses but closed lower, and down more than 30% in Oct. The dollar, the Swiss franc and the yen rose vs. the euro amid the prospect of European Central Bank rate cuts this week. Japan Cuts Key Rate To 0.3%
6) The Bank of Japan cut its lending rate by 20 basis points, a little less than the 25 ticks investors had expected. That follows rate cuts earlier in the week from the Fed, China, Hong Kong, Taiwan and others. Talk of BoJ action had buoyed Japanese stocks earlier in the week, but the Nikkei fell 5% Fri. on the actual move. Hong Kong stocks fell 2.5%, but Korea's Kospi gained 2.6%.Consumer Spending Fell In Sept.
7) Sept. spending fell 0.3% as job losses and Wall St. woes hurt consumers' ability and will to make purchases. The drop wasn't a surprise after Thu.'s Q3 GDP — also a Commerce Dept. report — showed real consumer spending falling at the fastest pace in 28 years. All signs suggest Oct. and Q4 will be even worse. Real disposable income is flat vs. a year ago.Leading U.S. Index At New Low
8) The Economic Cycle Research Index fell 1.1 points to 112.9 in the week ended Oct. 24. That's the lowest since Oct. '01. The annualized growth rate slumped to -21.9%, the lowest ever, from -19.3% in the prior week. It was -11.6% in mid-Sept. and just -0.6% a year earlier. "The outlook for the economy has darkened dramatically," ECRI said.JPMorgan Holds Off Foreclosures
9) The bank temporarily halted foreclosures as it renegotiates $70 bil in mortgages held by 400,000 customers.JPMorgan, (JPM) which bought Washington Mutual in Sept., is working with owner-occupied mortgages and "homeowners who show a willingness to pay." The bank said it's already modified 250,000 mortgages worth $40 bil in '08.Bernanke: Back Freddie, Fannie
10) Fed chief Ben Bernanke said the gov't should keep backing the seized mortgage lenders' debt, for now. Longer-term, he said the gov't could makeFreddie Mac (FRE) andFannie Mae (FNM) more public — or fully privatize them. The gov't also could create a bond insurer much like the FDIC, which protects bank deposits. Bernanke says mortgage securitization may need some gov't backstop.
Thursday, October 30, 2008
Weekly Recap - October 26, 2008
Halloween came early this year. On Friday, we’ve almost closed down the shops, i.e. NYSE, to go home early. Before the opening, the markets have promised us a good beating, pointing to a lower low. The Dow reached 500 pts drop intraday but then recovered and dropped “only” 312 pts at the close. Much of the blame this week was on the weakening economy, hedge fund selling for redemption, and jitters about the global depression… sorry, recession.
The Dow ended the week off 5.35% to 8378.95, which is 40.85% down from its October 2007 record of $14,164. The S&P500 fell 6.78% during the week to 876.77, its lowest close since April 2003. And the Nasdaq fell 9.3% on the week to 1552.03, down 45.7% from its Oct. 31 multiyear high of 2859.12.
The dollar may provide a clue when the bottom may appear. The majority of the positions people are being forced to unwind have been financed with dollars. The hedge funds redemptions contributed to the 6.5% increase in the dollar against the euro this week alone, so a slowing in the dollar may give us a clue. Many funds have a November 15 notification deadline for year-end redemption requests, so money may be flowing back into the markets after that date. We do expect a short term rebound. The S&P 500 is 25% below its 50-day moving average, something that’s only happened five times since 1928. Each time the S&P 500 has typically rallied at least 14%, according to Bespoke Group. Many companies are now priced like never before, especially in the technology sector. In the contract-manufacturing industry, stocks have shrunk to nearly unheard of price/earnings multiples. Sanmina SCI (SANM) now trades for 4.3 times forward earnings, Jabil (JBL) trades for 6.5 times, Flextronics (FLEX) trades for just 3.4 times next year’s estimates. The stocks are priced as if the entire industry is bankrupt.
Other news:
- Around the world – Russia’s exchanges were closed early on Friday and won’t reopen until Tuesday. The Russian market is down 76% for the year. Other emerging markets have also suffered big losses: Brazil is off 50% and China is down 56%.
- Currency – the Japanese yen hit a 13-yr high of 90.35 against the U.S. dollar, as the carry trade continued to unwind. The Russian ruble fell to a two-yr low despite Moscow’s efforts to support it with billions; the Mexican peso fell to a record low against the dollar. Brazil, which has seen the real lose one-third of its value in August, flooded the market with dollars. South Korea’s won plunged to a 10-yr low against the dollar. Gold futures rose 2.2% Friday but fell 7.3% on the week to $730.30 an ounce.
- Goldman Sachs will cut 10% of its work force
- Chrysler is slashing 25% of its white-collar jobs
The Dow ended the week off 5.35% to 8378.95, which is 40.85% down from its October 2007 record of $14,164. The S&P500 fell 6.78% during the week to 876.77, its lowest close since April 2003. And the Nasdaq fell 9.3% on the week to 1552.03, down 45.7% from its Oct. 31 multiyear high of 2859.12.
The dollar may provide a clue when the bottom may appear. The majority of the positions people are being forced to unwind have been financed with dollars. The hedge funds redemptions contributed to the 6.5% increase in the dollar against the euro this week alone, so a slowing in the dollar may give us a clue. Many funds have a November 15 notification deadline for year-end redemption requests, so money may be flowing back into the markets after that date. We do expect a short term rebound. The S&P 500 is 25% below its 50-day moving average, something that’s only happened five times since 1928. Each time the S&P 500 has typically rallied at least 14%, according to Bespoke Group. Many companies are now priced like never before, especially in the technology sector. In the contract-manufacturing industry, stocks have shrunk to nearly unheard of price/earnings multiples. Sanmina SCI (SANM) now trades for 4.3 times forward earnings, Jabil (JBL) trades for 6.5 times, Flextronics (FLEX) trades for just 3.4 times next year’s estimates. The stocks are priced as if the entire industry is bankrupt.
Other news:
- Around the world – Russia’s exchanges were closed early on Friday and won’t reopen until Tuesday. The Russian market is down 76% for the year. Other emerging markets have also suffered big losses: Brazil is off 50% and China is down 56%.
- Currency – the Japanese yen hit a 13-yr high of 90.35 against the U.S. dollar, as the carry trade continued to unwind. The Russian ruble fell to a two-yr low despite Moscow’s efforts to support it with billions; the Mexican peso fell to a record low against the dollar. Brazil, which has seen the real lose one-third of its value in August, flooded the market with dollars. South Korea’s won plunged to a 10-yr low against the dollar. Gold futures rose 2.2% Friday but fell 7.3% on the week to $730.30 an ounce.
- Goldman Sachs will cut 10% of its work force
- Chrysler is slashing 25% of its white-collar jobs
Sunday, October 19, 2008
Weekly Recap - October 19, 2008
In one of my favorite classes at the GSB, “Power and Influence in Organizations”, Tanya Menon divulged the secret of happiness right from the start of the first class. I felt like I got my money worth. The secret of happiness is “low expectations”, therefore limiting the downside.
Now we have the same low expectations for the markets as well. To us, the quants at the GSB, that means lower prices today. The market is on sale, and instead of running to buy some more, the investors are running for the exits. The most quoted person this week was Warren Buffett, who said again and again “Be fearful when others are greedy and greedy when others are fearful.” The expectations bar is set pretty low because now its benchmark is the Great Depression!
In my previous email, I made the case for the next stage of investors’ panic – capitulation. And we see some of that now in the market. IBD reports that shareholders yanked a net $104.4 billion from stock and bond mutual funds in September, because they received their statements and were staring at declines of 20-40% in their account balances. In an bout of overreacting, they project the same losses in the future, and they don’t like what they see. Panic sets it and they pulled the plug. This starts to look like capitulation. That also means we’re very close to a bottom, if we did not already reach it.
Some data for the week
DJIA – closed at 8852, up 401 pts, or 4.8%
Nasdaq – closed at 1711, up 62 pts, or 3.8%
S&P 500 – closed at 941, up 41 pts, or 4.6%
Credit crisis continues to choke the economy. Retail sales fell 1.2% in September, factory activity shrank and consumer confidence suffered it sharpest drop in more than five decades. There were some bright spots when Google(Ticker: GOOG), Johnson & Johnson (Ticker: JNJ) and Coca-Cola (KO) reported strong earnings showing some economic resilience.
While we see evidence that credit woes are having a more serious impact on the economy, there are also encouraging signs. The London interbank offered rate (LIBOR) on three-month dollar loans between banks fell eight basis points to 4.42% on Friday, and 40 basis points for the week. Some pundits say that it will fell sharply this week, as banks resume lending. There is a report cited that JP Morgan loaned $15 billion into the interbank market.
New home construction sank 6.3% last month to an annual rate of 817,000 units, the lowest since the 1991 recession. Applications for building permits, a gauge of future building, fell 8.3% to a rate of 786,000, matching a 17 ½ year low. This is not all bad news, because it means that the building inventory will start to come down.
Other news:
Consumer Sentiment Plunges – The Reuters / Univ. of Michigan confidence gauge dived to 57.5 in mid-Oct from 70.3 in Sept. That’s just above June’s long-time low, and the sharpest 1-month decline since the survey began in 1952.
Credit Card Charge-Offs Soar – Moody’s said balances written off as not being repaid shot up to 6.82% in August, up 48% from an year earlier. The July charge-off rate was 6.36%. Moody’s expects charge-offs to continue to rise through ’09, surpassion peaks in past recessions.
Inflation Pressures Fading – September consumer prices were flat, while core costs, ex food and energy, rose 0.1%. Core inflation held at an elevated 2.5%, but producer price data showed a rapid retreat far up the pipeline.
Now we have the same low expectations for the markets as well. To us, the quants at the GSB, that means lower prices today. The market is on sale, and instead of running to buy some more, the investors are running for the exits. The most quoted person this week was Warren Buffett, who said again and again “Be fearful when others are greedy and greedy when others are fearful.” The expectations bar is set pretty low because now its benchmark is the Great Depression!
In my previous email, I made the case for the next stage of investors’ panic – capitulation. And we see some of that now in the market. IBD reports that shareholders yanked a net $104.4 billion from stock and bond mutual funds in September, because they received their statements and were staring at declines of 20-40% in their account balances. In an bout of overreacting, they project the same losses in the future, and they don’t like what they see. Panic sets it and they pulled the plug. This starts to look like capitulation. That also means we’re very close to a bottom, if we did not already reach it.
Some data for the week
DJIA – closed at 8852, up 401 pts, or 4.8%
Nasdaq – closed at 1711, up 62 pts, or 3.8%
S&P 500 – closed at 941, up 41 pts, or 4.6%
Credit crisis continues to choke the economy. Retail sales fell 1.2% in September, factory activity shrank and consumer confidence suffered it sharpest drop in more than five decades. There were some bright spots when Google(Ticker: GOOG), Johnson & Johnson (Ticker: JNJ) and Coca-Cola (KO) reported strong earnings showing some economic resilience.
While we see evidence that credit woes are having a more serious impact on the economy, there are also encouraging signs. The London interbank offered rate (LIBOR) on three-month dollar loans between banks fell eight basis points to 4.42% on Friday, and 40 basis points for the week. Some pundits say that it will fell sharply this week, as banks resume lending. There is a report cited that JP Morgan loaned $15 billion into the interbank market.
New home construction sank 6.3% last month to an annual rate of 817,000 units, the lowest since the 1991 recession. Applications for building permits, a gauge of future building, fell 8.3% to a rate of 786,000, matching a 17 ½ year low. This is not all bad news, because it means that the building inventory will start to come down.
Other news:
Consumer Sentiment Plunges – The Reuters / Univ. of Michigan confidence gauge dived to 57.5 in mid-Oct from 70.3 in Sept. That’s just above June’s long-time low, and the sharpest 1-month decline since the survey began in 1952.
Credit Card Charge-Offs Soar – Moody’s said balances written off as not being repaid shot up to 6.82% in August, up 48% from an year earlier. The July charge-off rate was 6.36%. Moody’s expects charge-offs to continue to rise through ’09, surpassion peaks in past recessions.
Inflation Pressures Fading – September consumer prices were flat, while core costs, ex food and energy, rose 0.1%. Core inflation held at an elevated 2.5%, but producer price data showed a rapid retreat far up the pipeline.
Sunday, October 12, 2008
Company of the Week - October 12, 2008 - Axsys Technologies
Company of the Week: Axsys Technologies, Inc.
Axsys Technologies, Inc (Ticker: AXYS) makes lenses and systems that help see incoming missiles through dark, cloudy skies, or peer down on troops in distant battlefields. It sells them faster than it can make them.
Sales for the second quarter came in at $60.3M, up 40% from a year ago. The backlog of orders grew to a record $174.1M. Earnings per share of $0.54 was also up 54% from a year ago.
Company’s exposure to the fast-growing infrared market position it for long term success. Infrared imaging is a $5B a year market globally, with about 80% of that being military spending. The Pentagon is increasingly fond of pilotless drones, which can safely and stealthily prowl over battlefields and insurgent bases. It more than doubled use of such drones in 2007, logging more than 500,000 hours in Iraq and Afghanistan.
Axsys is split into two divisions. The Imaging Systems Group makes optical and motion-control components that are sold to other contractors and incorporated into larger systems. Sales there made up 65% of total revenue in the last quarter. Infrared lenses were a high-margin, fast growing product in that group. The Surveillance Systems Group division designs and makes stabilized and non-stabilized camera systems for air, sea and land mounts. Sales grew 94% over the first six months of 2008 compared with a 33% increase for Imaging Systems.
The U.S. government is the top end user, with direct sales accounting for 3.6% of revenue in 2007. But 66.4% of the year’s revenue came from subcontractors that incorporated Axsys’ parts into larger systems and weapons platforms.
The company is ramping up engineering to develop new products and improve existing ones. It’s developing laser range finders and new radar sensors.
Its competitors are Flir Systems (FLIR), L-3 Communications Holdings (LLL) and Raytheon (RTN). All are subject to the same lumpiness inherent in weapons systems contracts. They all face the same uncertainty around future military spending in the next presidential administration. But most military budget analysts think that whoever wins, spending on sensors and vision technologies will continues.
For the entire fiscal year, the company said to expect sales of between $237M and $241M, up from the previous guidance of $224M to $228M. The company expects EPS to come in between $2.09 and $2.15, up from previously expected range of $1.88 to $1.92. Analysts surveyed by Thomson Financial expect $2.13 per share for the year, which is a 61% increase from 2007.
Axsys Technologies, Inc (Ticker: AXYS) makes lenses and systems that help see incoming missiles through dark, cloudy skies, or peer down on troops in distant battlefields. It sells them faster than it can make them.
Sales for the second quarter came in at $60.3M, up 40% from a year ago. The backlog of orders grew to a record $174.1M. Earnings per share of $0.54 was also up 54% from a year ago.
Company’s exposure to the fast-growing infrared market position it for long term success. Infrared imaging is a $5B a year market globally, with about 80% of that being military spending. The Pentagon is increasingly fond of pilotless drones, which can safely and stealthily prowl over battlefields and insurgent bases. It more than doubled use of such drones in 2007, logging more than 500,000 hours in Iraq and Afghanistan.
Axsys is split into two divisions. The Imaging Systems Group makes optical and motion-control components that are sold to other contractors and incorporated into larger systems. Sales there made up 65% of total revenue in the last quarter. Infrared lenses were a high-margin, fast growing product in that group. The Surveillance Systems Group division designs and makes stabilized and non-stabilized camera systems for air, sea and land mounts. Sales grew 94% over the first six months of 2008 compared with a 33% increase for Imaging Systems.
The U.S. government is the top end user, with direct sales accounting for 3.6% of revenue in 2007. But 66.4% of the year’s revenue came from subcontractors that incorporated Axsys’ parts into larger systems and weapons platforms.
The company is ramping up engineering to develop new products and improve existing ones. It’s developing laser range finders and new radar sensors.
Its competitors are Flir Systems (FLIR), L-3 Communications Holdings (LLL) and Raytheon (RTN). All are subject to the same lumpiness inherent in weapons systems contracts. They all face the same uncertainty around future military spending in the next presidential administration. But most military budget analysts think that whoever wins, spending on sensors and vision technologies will continues.
For the entire fiscal year, the company said to expect sales of between $237M and $241M, up from the previous guidance of $224M to $228M. The company expects EPS to come in between $2.09 and $2.15, up from previously expected range of $1.88 to $1.92. Analysts surveyed by Thomson Financial expect $2.13 per share for the year, which is a 61% increase from 2007.
The Neuroscience Behind the Investor Panic
The Science behind the Investor Panic
More likely, the neuroscience behind it. In the past five years, neuroscience has made breakthroughs in understanding how the human mind works.
When investors dump mutual funds in panic, it raises questions about the decision of their purchase. From a biological perspective, these investors refuse to face the emotion, which builds up and explodes in an impulsive decision. With an MRI, we can watch a live brain make a risk-and-reward decision. Two seconds before we start thinking about the facts, there is a feeling part already weighing in. The successful traders focus on what the other people are doing now and are likely to do later, where the weak players focus on prices.
How to deal with panic? Face the fear of losing it all and ask how likely that outcome is.
More likely, the neuroscience behind it. In the past five years, neuroscience has made breakthroughs in understanding how the human mind works.
When investors dump mutual funds in panic, it raises questions about the decision of their purchase. From a biological perspective, these investors refuse to face the emotion, which builds up and explodes in an impulsive decision. With an MRI, we can watch a live brain make a risk-and-reward decision. Two seconds before we start thinking about the facts, there is a feeling part already weighing in. The successful traders focus on what the other people are doing now and are likely to do later, where the weak players focus on prices.
How to deal with panic? Face the fear of losing it all and ask how likely that outcome is.
The Psychology of Fear - weekly recap
These days there is no other subject in people’s mind but the economy. For the past weeks, I’ve been taking calls from friends who, concerned about the economic situation, decided to “do something about it”. A friend is buying few extra guns, extra canisters with gasoline, canned food, water, tent, and other supplies in case “there will be a civil war”. Not a joke, I swear. Others are looking for comfort, for reassurance that this too shall pass and we’re returning to a normal life. Now, notice, these are people who don’t know who or what Dow Jones is, nor their personal lives have been impacted in any way by this crisis in a sensible way. They still have their jobs. True, they see their 401(k) shrinking faster than you say “bailout” but still … the gallon of gas is still $3.752 (average, in Chicago), the gallon of milk is about $3.52 … the unemployment rate is 6.15; it will likely increase in the coming months close to 7%, but is still a far cry from 25% of the Great Depression.
Should we be so concerned?
To me this is a reverse of the 2004 – 2005 euphoria, when everybody and their grandmother were rushing to buy a condominium in Florida, Nevada or California, only to flip it over the next day for a quick profit. There were waiting lists for the ‘unlucky’ ones who did not get in on the first try. I now see the same thing, only in reverse. When everybody is so panicked about the economy that it makes for a good conversation anywhere, and at any time, it may not be too bad of a time to think about getting back in. No, I am not calling a bottom; I don’t know when is going to happen. But it seems that we’re getting ahead of ourselves by succumbing to panic.
Let’s look at some facts.
The stocks are down 40% for the past 12 months and far surpass the average bear-market slide of 30% since 1940. They seem to be running ahead of any recession, by pricing in pretty horrible times ahead. The Dow is down almost as the 45% downslide in the 1973-1975 recession, and its 12-month decline far exceeds the 24% it lost in the period leading up to and during the 1981-1982 recession.
The prices look much more reasonable today. The S&P 500 trades at 11.6 times the profits that analysts expect them to earn next year. The index trades at 17.1 times the companies’ most recent earnings. That’s only slightly below the market’s 60-year average P/E multiple of 17.8. Granted, the current P/E is still high compared to the low P/Es of previous major recessions. During the ’74, ’80 and ’82 recessions, the S&P’s trailing P/E dropped to between 6.8 and 7.2.
These are not reasons to get out of the stock market. Think about the following: $1 invested in stocks from February 1966 through May 2007 would have grown to $16.58 in that period, which calculates to a 7% annual return. By contrast, investors who were out of the market in the five best days (five!) each year during that span were left with only 11 cents. Stay invested, my friends!
The “deer in the headlights” feeling
How do we explain the irrational price of Anheuser-Busch (BUD) shares? BUD is set to be acquired by InBev (INB) for $70 a share in cash, with a closing this quarter that looks on track. The stock closed Friday at $58.50. What gives? Maybe the expectation that the deal will not close in these economic conditions. Possibly, but unlikely. So this irrationality, or as behavioralists would say, an ‘anomaly’, would give you a 20% upside to the bid price, or an 80% annualized return.
The market is moving now on fear, not facts. That is the only resemblance with the Great Depression. The government’s actions are tough, swift and the markets will soon move in the right direction. Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it’s hard not to step on them. Out of 9,194 stocks tracked by Standard & Poor’s Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year – or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks trade below the value of their per-share holdings of cash – an even greater proportion than Ben Graham found in 1932.
For example, Charles Schwab Corp (Ticker: SCHW) holds $27.8 billion in cash and has a stock market value of $23.26 billion. Nam Tai Electronics (Ticker: NTE), a Chinese contract maker of consumer electronics and other goods, has $271.85 million in cash and a market value of $266.23 million. GSI Group (Ticker: GSIG), a supplier of precision motion component products, has a market cap of $102.13 million and a cash position of $183.27 million. And these are companies which have more cash than market cap. But there are plenty with solid cash position as a percentage of market cap. To name a few here: Microsoft (MSFT) 11.6% cash as % of market value, Apple (AAPL) 26.4%, Motorola (MOT) 29.9%, Electronic Arts (ERTS) 30.2%, Loews (L) 30.2%, RealNetworks (RNWK) 81%, InterActive Corp (IACI) 65%, etc.
Back to psychology. Many of us, it seems, are in the grip of what psychologists call “the disposition effect”, or an inability to confront financial losses. (By the way, in behavioral finance, this effect also describes the tendency of investors to ride losers, and sell winners.) The natural way to moderate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, they seem to have gone numb, judging by the unexpectedly low number of calls to financial advisors and investment consultants. Stupor may have set in, and if that’s the case, the next stage will be ‘capitulation’, when the investors ‘let go’ and sell in panic. That will be the signal that the markets are ready to rise again. However timing the bottom is dangerous. It may be better to get in somewhere near the bottom, than wait for it and miss it.
Good luck!
Sources: The above data draws from Barron’s, Wall Street Journal and Investor’s Business Daily and also from several sources cited by these newspapers.
Should we be so concerned?
To me this is a reverse of the 2004 – 2005 euphoria, when everybody and their grandmother were rushing to buy a condominium in Florida, Nevada or California, only to flip it over the next day for a quick profit. There were waiting lists for the ‘unlucky’ ones who did not get in on the first try. I now see the same thing, only in reverse. When everybody is so panicked about the economy that it makes for a good conversation anywhere, and at any time, it may not be too bad of a time to think about getting back in. No, I am not calling a bottom; I don’t know when is going to happen. But it seems that we’re getting ahead of ourselves by succumbing to panic.
Let’s look at some facts.
The stocks are down 40% for the past 12 months and far surpass the average bear-market slide of 30% since 1940. They seem to be running ahead of any recession, by pricing in pretty horrible times ahead. The Dow is down almost as the 45% downslide in the 1973-1975 recession, and its 12-month decline far exceeds the 24% it lost in the period leading up to and during the 1981-1982 recession.
The prices look much more reasonable today. The S&P 500 trades at 11.6 times the profits that analysts expect them to earn next year. The index trades at 17.1 times the companies’ most recent earnings. That’s only slightly below the market’s 60-year average P/E multiple of 17.8. Granted, the current P/E is still high compared to the low P/Es of previous major recessions. During the ’74, ’80 and ’82 recessions, the S&P’s trailing P/E dropped to between 6.8 and 7.2.
These are not reasons to get out of the stock market. Think about the following: $1 invested in stocks from February 1966 through May 2007 would have grown to $16.58 in that period, which calculates to a 7% annual return. By contrast, investors who were out of the market in the five best days (five!) each year during that span were left with only 11 cents. Stay invested, my friends!
The “deer in the headlights” feeling
How do we explain the irrational price of Anheuser-Busch (BUD) shares? BUD is set to be acquired by InBev (INB) for $70 a share in cash, with a closing this quarter that looks on track. The stock closed Friday at $58.50. What gives? Maybe the expectation that the deal will not close in these economic conditions. Possibly, but unlikely. So this irrationality, or as behavioralists would say, an ‘anomaly’, would give you a 20% upside to the bid price, or an 80% annualized return.
The market is moving now on fear, not facts. That is the only resemblance with the Great Depression. The government’s actions are tough, swift and the markets will soon move in the right direction. Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it’s hard not to step on them. Out of 9,194 stocks tracked by Standard & Poor’s Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year – or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks trade below the value of their per-share holdings of cash – an even greater proportion than Ben Graham found in 1932.
For example, Charles Schwab Corp (Ticker: SCHW) holds $27.8 billion in cash and has a stock market value of $23.26 billion. Nam Tai Electronics (Ticker: NTE), a Chinese contract maker of consumer electronics and other goods, has $271.85 million in cash and a market value of $266.23 million. GSI Group (Ticker: GSIG), a supplier of precision motion component products, has a market cap of $102.13 million and a cash position of $183.27 million. And these are companies which have more cash than market cap. But there are plenty with solid cash position as a percentage of market cap. To name a few here: Microsoft (MSFT) 11.6% cash as % of market value, Apple (AAPL) 26.4%, Motorola (MOT) 29.9%, Electronic Arts (ERTS) 30.2%, Loews (L) 30.2%, RealNetworks (RNWK) 81%, InterActive Corp (IACI) 65%, etc.
Back to psychology. Many of us, it seems, are in the grip of what psychologists call “the disposition effect”, or an inability to confront financial losses. (By the way, in behavioral finance, this effect also describes the tendency of investors to ride losers, and sell winners.) The natural way to moderate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, they seem to have gone numb, judging by the unexpectedly low number of calls to financial advisors and investment consultants. Stupor may have set in, and if that’s the case, the next stage will be ‘capitulation’, when the investors ‘let go’ and sell in panic. That will be the signal that the markets are ready to rise again. However timing the bottom is dangerous. It may be better to get in somewhere near the bottom, than wait for it and miss it.
Good luck!
Sources: The above data draws from Barron’s, Wall Street Journal and Investor’s Business Daily and also from several sources cited by these newspapers.
Monday, October 6, 2008
Weekly Recap - October 6, 2008
It’s the Economy! Duh!
I like the title of one of this week’s Barron’s articles: ‘One Problem Down, Many, Many to Go’. We all cheered when the bailout bill passed this week, but it did little to calm the markets. All it did was to allow the investors to focus back on the economy, which, I may add, stinks.
With 159,000 job cuts in September, the worst decline since March ’03, and a total 9-month job loss of 760,000, the jobless rate is now at 6.1%, a 5-yr high. The ISM manufacturing index dived 6.4 pts in September, to 43.5, the lowest in 7 years. ISM’s service-sector index signaled little sector growth. Auto sales plunged amid economic woes, tight credit and high gas prices.
The ‘financial flu’ spread to Europe, which saw several bank bailouts. EU leaders planned a summit to address the crisis. For the week, the euro dived, the pound and Swiss franc also fell, as did the Australian dollar and Brazilian real.
Recap of the week
How deep is this global recession?
After Wednesday’s bailout approval, investors turned their attention back on the economy and punished the Dow with a 348 pts punch, while the Friday morning gain of 313 pts quickly vanished into a 157 pts loss. It doesn’t seem that the investors believe that passing the TARP – the Troubled Asset Relief Program, how the bailout is called – helped, and that many other “Paulson tools” are needed to ‘fix’ the economy.
777.7
The stocks suffered their worst week since September 11, 2001. The S&P500 ended the week down 114, or 9.4%, to 1099. It has fallen 12% in two weeks, and is 30% off its peak a year ago. The Dow fell 818, or 7.3%, to 10325. The Nasdaq Composite Index tumbled 236, or 11%, to 1947. The Russell 2000 slipped 85, or 12%, to 619.
The Buffett Way
Eight days after tossing $5 billion Goldman Sachs’ way in return for a preferred issue that yields 10% a year, Mr. Buffett, or Berkshire Hathaway to be precise, put another $3 billion in a similar issue of GE. Mr. Buffett has bought into companies when their stocks were rather thoroughly beaten down (Goldman was selling at less than half its peak of $250 a share a year ago and ditto GE, some $20 below its 12-month high of 42).
Cash is king these days!
I like the title of one of this week’s Barron’s articles: ‘One Problem Down, Many, Many to Go’. We all cheered when the bailout bill passed this week, but it did little to calm the markets. All it did was to allow the investors to focus back on the economy, which, I may add, stinks.
With 159,000 job cuts in September, the worst decline since March ’03, and a total 9-month job loss of 760,000, the jobless rate is now at 6.1%, a 5-yr high. The ISM manufacturing index dived 6.4 pts in September, to 43.5, the lowest in 7 years. ISM’s service-sector index signaled little sector growth. Auto sales plunged amid economic woes, tight credit and high gas prices.
The ‘financial flu’ spread to Europe, which saw several bank bailouts. EU leaders planned a summit to address the crisis. For the week, the euro dived, the pound and Swiss franc also fell, as did the Australian dollar and Brazilian real.
Recap of the week
How deep is this global recession?
After Wednesday’s bailout approval, investors turned their attention back on the economy and punished the Dow with a 348 pts punch, while the Friday morning gain of 313 pts quickly vanished into a 157 pts loss. It doesn’t seem that the investors believe that passing the TARP – the Troubled Asset Relief Program, how the bailout is called – helped, and that many other “Paulson tools” are needed to ‘fix’ the economy.
777.7
The stocks suffered their worst week since September 11, 2001. The S&P500 ended the week down 114, or 9.4%, to 1099. It has fallen 12% in two weeks, and is 30% off its peak a year ago. The Dow fell 818, or 7.3%, to 10325. The Nasdaq Composite Index tumbled 236, or 11%, to 1947. The Russell 2000 slipped 85, or 12%, to 619.
The Buffett Way
Eight days after tossing $5 billion Goldman Sachs’ way in return for a preferred issue that yields 10% a year, Mr. Buffett, or Berkshire Hathaway to be precise, put another $3 billion in a similar issue of GE. Mr. Buffett has bought into companies when their stocks were rather thoroughly beaten down (Goldman was selling at less than half its peak of $250 a share a year ago and ditto GE, some $20 below its 12-month high of 42).
Cash is king these days!
Sunday, September 28, 2008
Weekly Recap - September 28, 2008
Motto: ““IF you can keep your head when all about you are losing their” … then you may not fully understand the problem.
Oh, the uncertainty! The promise is still there. The bailout, on the other hand, isn’t. What we get is promises, promises! The bailout was supposed to be finalized this past Thursday, then Friday, and now it’s Monday. You wanna bet? Why do we care when the $700 billion proposal comes? Because the markets will salute it with an upside swing. After that, more likely the markets will still display a healthy pessimism going into October. The signs of this week still show weakness in the economy: a rise in weekly jobless claims to a seven-year high near 500,000; a sharper-than-expected 4.5% drop in big-ticket items ordered; an uptick in the 30-year mortgage rates. On the bright side, there is a sense that the bottom is drawing closer. The investor sentiment could not be worse. The panicked flight from private-sector assets into Treasury bonds has at least given the government more ammunition to fight the credit crunch. Analysts’ revisions are about to capitulate. The ratio of analyst upgrades has fallen to just 34% of total estimate changes, the lowest since mid-2002. A rally is in the cards when the analysts are revising down their estimates.
All major indices ended the week lower.
The Dow Jones (DJIA) ended at 11,143.13, down 2.15% for the week. The NASDAQ ended at 2,183.34, down 3.98% for the week, and the S&P 500 ended at 1,213.27, or -3.13%.
Other news:
- Washington Mutual (WM) is the latest victim on the financials front. The company was seized by the federal regulators and its assets sold to JP Morgan Chase (JPM)
- Wachovia’s (WB) shares took a dive of 27% on Friday during regular business hours, and another 10% in after-trading hours, on concerns about another big mortgage-related write-down.
- Microsoft (MSFT) authorized a $40B stock buyback over the next five years, the largest ever. The new program replaces the a previous one, now completed. Hewlett –Packard (HPQ) follows suit with $8B stock repurchase program, in addition to the last year’s $8B, of which there is $3B remaining. Nike (NKE) also announced a $5B stock buyback program.
Oh, the uncertainty! The promise is still there. The bailout, on the other hand, isn’t. What we get is promises, promises! The bailout was supposed to be finalized this past Thursday, then Friday, and now it’s Monday. You wanna bet? Why do we care when the $700 billion proposal comes? Because the markets will salute it with an upside swing. After that, more likely the markets will still display a healthy pessimism going into October. The signs of this week still show weakness in the economy: a rise in weekly jobless claims to a seven-year high near 500,000; a sharper-than-expected 4.5% drop in big-ticket items ordered; an uptick in the 30-year mortgage rates. On the bright side, there is a sense that the bottom is drawing closer. The investor sentiment could not be worse. The panicked flight from private-sector assets into Treasury bonds has at least given the government more ammunition to fight the credit crunch. Analysts’ revisions are about to capitulate. The ratio of analyst upgrades has fallen to just 34% of total estimate changes, the lowest since mid-2002. A rally is in the cards when the analysts are revising down their estimates.
All major indices ended the week lower.
The Dow Jones (DJIA) ended at 11,143.13, down 2.15% for the week. The NASDAQ ended at 2,183.34, down 3.98% for the week, and the S&P 500 ended at 1,213.27, or -3.13%.
Other news:
- Washington Mutual (WM) is the latest victim on the financials front. The company was seized by the federal regulators and its assets sold to JP Morgan Chase (JPM)
- Wachovia’s (WB) shares took a dive of 27% on Friday during regular business hours, and another 10% in after-trading hours, on concerns about another big mortgage-related write-down.
- Microsoft (MSFT) authorized a $40B stock buyback over the next five years, the largest ever. The new program replaces the a previous one, now completed. Hewlett –Packard (HPQ) follows suit with $8B stock repurchase program, in addition to the last year’s $8B, of which there is $3B remaining. Nike (NKE) also announced a $5B stock buyback program.
Friday, September 19, 2008
US Dollar and The Financial Crisis - by Rob Booker, IBFX
US Dollar and The Financial Crisis The Three Factors that Influence the Currency Markets Right Now by Rob Booker |
As fear grips the financial markets and investors panic worldwide, what are consequences for the US Dollar? How do turmoil in the credit markets, the failure of major US investment banks and insurance companies, and sharp declines in stock market indexes affect the value of the world's major currencies? Despite the fact that discussion of the currency markets has taken a back seat to the rest of the issues surrounding the current credit crunch, the value of the US Dollar and other major currencies have been, and will continue to be, heavily influenced by what is happening in the world of investment banking, the stock market, and especially the bond market. The first major influence on the currency markets is uncertainty about the quality of US and European investments - primarly the stock market. The second influence is speculation about what the US Federal Reserve and the European Central Bank will do next. The third influence is all about whether the world begins to look at the Euro as the world's reserve currency. US Dollar Scenario Number One: US Dollar Gains Here's the bottom line: when investor confidence crumbles, they start buying US government debt. The dollar benefits because what do investors need in order to buy US Treasurys? They need dollars. The world financial markets are complex but they depend on one major characteristic: investor confidence. At present, major banks, central bankers, hedge funds, and home-based investors share one common emotion: uncertainty. Generally, when traders worldwide feel unsure about market direction, they sell off their riskier assets -- like real estate, stocks, corporate bonds, and complex financial instruments called derivatives -- and they buy safer investments. This is why you've been hearing about a "flight to safety" on television, radio, and financial press. What this means is that global investors are buying US Treasurys, which are viewed as safe investments (because they are backed by the US Government, which can tax its population or print money in order to pay back its debt; don't you wish you could print money or tax the government to pay off your own debts?). Here is a chart that shows the price on the 2-year Treasury note and the US Dollar Index. You'll notice that as the price of the Treasury increased in the last 60 days, the value of the dollar increased. he demand for "safe" US Government debt is so high that the Wall Street Journal reported on Thursday, September 17: "The desperation was especially striking in the market for U.S. government debt, long considered the safest of investments. At one point during the day, investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment." Summary of Scenario One: As global investors sell stocks, bonds, and anything else (denominated in their local currency), they can force up the value of the US Dollar as they buy US government debt. If this continues to happen, the greenback could continue to rise against the Euro, the Pound, and other currencies. What to Watch: Watch for news about the US Treasury market. Remember that Treasury prices increase as their interest rate decreases -- if you hear that Treasury prices are decreasing, or that Treasury yields are decreasing, that is a sign that investors are actually buying more Treasurys. US Dollar Scenario Number Two: The US Dollar Neutral The bottom line: The European Central Bank and the US Federal Reserve could make moves which essentially cancel each other's effect on the US Dollar. First, let's get a basic principle out of the way. Generally speaking, a nation with a higher interest rate will attract more investment into its currency than a nation with a lower interest rate. The currency of the nation with the increased investment can rise in value as the demand for that currency increases. Central banks generally have two competing purposes: to fight inflation and to maintain stable economic growth. Although some central banks favor one mission over the other, it is unusual for a central bank to ignore rampant inflation or an exploding economy in order to focus on some other purpose. Right now, the European Central Bank is wildly regarded as focusing much more on inflation than on the economy. In the midst of a world economic slowdown, the ECB has repeatedly stood firm and refused to lower its base interest rate. But what if the ECB buckles under the pressure to lower interest rates and provide some relief to its economy? Such a move would include statements (as we have heard recently from the Bank of England) about weakness in the European economy; such statements plus any rate cuts tend to drive down the value of a nation's currency. We've already seen this effect recently as the Euro has fallen against the Dollar in the last 60 days. Essentially, the currency markets are betting that the ECB is going to have to eventually move to lower interest rates to spur economic activity. If the ECB actually does this, the Euro could fall significantly lower. However, at the same time, the US Federal Reserve refused this week to lower the Fed Funds Rate -- which signaled to the marke that the Fed might be done lowering its rate. Summary for US Dollar Scenario Two: If, as we discussed, the interest rates are correlated to the value of the Euro and the Dollar, then we could see a stalemate. A US Fed which refuses to lower rates (and may increase rates in the next 6-12 months) may cancel any move that the ECB makes to lower rates. In this scenario, the EUR/USD, for example, would not trend as much and would begin to trade in a range. What to Watch: Be ready for the next European Central Bank interest rate decision, on October 2. Be aware that often the comments made by ECB President Jean-Claude Trichet are generally more influential than the actual decision itself. And then next decision of the US Federal Reserve, on October 29. US Dollar Scenario Number Three: The US Dollar Losses Does the US Government really have a "strong dollary policy?" The last scenario is that the US economy gets so bad, so fast, that the value of the US dollar declines regardless of any other news. Quoting the Wall Street Journal from Thursday, Septemer 18 again: "[a member of the US Congress] said recurring federal budget deficits already have raised alarms with foreign investors." In the past two years there has been talk that eventually the Euro could replace the US dollar as the world's reserve currency. We have heard that oil producing countries might start asking for payment in Euros, or that central banks in Asia will begin to diversify their holdings to reduce exposure to the US dollar (remember that China and Japan combined hold over $1.5 trillion in US dollar-denominated securities and investments). Summary for Scenario Number Three: If confidence in the US economy falters further, we could see another wave of dollar losses across the board, and in particular against the Euro, which is largely viewed to be the next most stable currency (whether it really is or not is a discussion for another time!). What to Watch: Pay attention to news about central banks diversifying their holdings. You'll hear things about diversification into "currency baskets." Also, you might want to follow any news related to oil, US budget deficits, or statements by central banks about their holdings of US dollars. Conclusion: Volatile Times Call for Responsible Traders More importantly than any of the above, it's time to remember that valid arguments, reasoned analysis, or historically successful trading systems all fail miserably when combined with poor risk management. If the recent failures of banks worldwide have proved anything, they have demonstrated that excessive risk leads eventually to excessive losses. If you trade currency, or anything else, realize that risk management isn't optional; it's critically important that you know how much you stand to lose on any given trade, and that you seek independent financial advice before you make your decisions. The problems on Wall Street today are really problems of leverage. It's the Great Margin Call of 2008, if you think about it: Bear Stearns, Lehman Brothers, and AIG all suffered the consequences of trading on leverage and then betting big. When the markets tumbled, they didn't have the capital to ride out the losses. These types of losses are the great equalizers of traders: retail traders like you and me and seasoned Wall Street traders both realize that "worst case scenarios" sometimes do happen, that excessive leverage can lead to total loss, and most of all, the markets are bigger than all of us. |
Monday, September 8, 2008
Company of the Week - September 8, 2008
The Company of the Week: Merit Medical System (ticker: MMSI)
The company makes and sells proprietary disposable devices used mainly in cardiology and radiology procedures. The doctors’ and patients’ needs are changing every year, so the company is keeping up their innovative flame. Merit’s main products include inflation devices used in procedures such as angioplasty, where a catheter-guided balloon is used to open a narrowed coronary artery; catheters for diagnosis and treatment; and guide wires used to place balloons angioplasty catheters within a patient’s coronary arteries. The company also offers basic items, like needles and trays. It takes suggestions from the hospital members working with its products in cardiology and radiology. Five new products will be introduced over the next few months. One new offering is Slip-Not, which will hit the market this month. The Slip-Not is a device for use in securing sutures and controlling bleeding after a variety of clinical procedures. Among the company’s key products are inflation devices, large, specialized syringes used in catheterization procedures.
Like its peers in the medical product space, Merit is reaping the benefits of an aging population. As baby boomers age, demand is rising for medical products and technologies to treat and diagnose cardiac problems and other ailments.
On the financial front, Merit is faring very well. For four straight quarters, earnings have grown by at least 25%. Earnings climbed 62% in the second quarter vs. a year ago to 21 cents per share. Sales rose 11% to $57.4 million. Catheter sales rose the most, 20%. Sales of stand-alone devices, such as fluid management products, grew 14%. Inflation device sales rose by 8%. Custom kit and tray sales increased 7%.
Gross margin was 47.7% of sales, up from 37.7% the previous year.
Analysts expect Merit to stay on fast track. Full year 2008 earnings are expected to rise 33% to 73 cents per share, then 19% in 2009. The company is also looking for acquisitions, having done seven buys in the past.
The company makes and sells proprietary disposable devices used mainly in cardiology and radiology procedures. The doctors’ and patients’ needs are changing every year, so the company is keeping up their innovative flame. Merit’s main products include inflation devices used in procedures such as angioplasty, where a catheter-guided balloon is used to open a narrowed coronary artery; catheters for diagnosis and treatment; and guide wires used to place balloons angioplasty catheters within a patient’s coronary arteries. The company also offers basic items, like needles and trays. It takes suggestions from the hospital members working with its products in cardiology and radiology. Five new products will be introduced over the next few months. One new offering is Slip-Not, which will hit the market this month. The Slip-Not is a device for use in securing sutures and controlling bleeding after a variety of clinical procedures. Among the company’s key products are inflation devices, large, specialized syringes used in catheterization procedures.
Like its peers in the medical product space, Merit is reaping the benefits of an aging population. As baby boomers age, demand is rising for medical products and technologies to treat and diagnose cardiac problems and other ailments.
On the financial front, Merit is faring very well. For four straight quarters, earnings have grown by at least 25%. Earnings climbed 62% in the second quarter vs. a year ago to 21 cents per share. Sales rose 11% to $57.4 million. Catheter sales rose the most, 20%. Sales of stand-alone devices, such as fluid management products, grew 14%. Inflation device sales rose by 8%. Custom kit and tray sales increased 7%.
Gross margin was 47.7% of sales, up from 37.7% the previous year.
Analysts expect Merit to stay on fast track. Full year 2008 earnings are expected to rise 33% to 73 cents per share, then 19% in 2009. The company is also looking for acquisitions, having done seven buys in the past.
Weekly Recap - September 8, 2008
September started in a sour note. After the holiday-curtailed week, the stocks have tested the July lows, but the bottom seems to hold for now. The economic news was mostly bad. U.S. August retail sales were lackluster. Friday the Labor Department said payrolls shrank by 84,000 last month, more than expected, and down for the eight straight month. The jobless rate rose to a 5-year high of 6.1% from 5.7%.
Dow Jones Industrials was down 2.8% for the week, to close at 11,220.96. There was a nearly 345-point drop on Thursday in anticipation of grim employment data.
The Standard & Poor’s 500-stock index was down 3.2% for the week, to close at 1,242.31.
The Nasdaq Composite Index was off 4.7% for the week, to close at 2,255.88. Tech stocks have been hit hard lately by expectations that the global economic slowdown will cut spending on new technology.
Monday could see a rebound following a Wall Street Journal report that the Treasury was close to concluding a plan to inject capital into troubled mortgage giants Fannie Mae (ticker: FNM) and Freddie Mac (ticker: FRE). U.S. federal regulators outlined their bailout for Fannie Mae and Freddie Mac, including a takeover of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock. The bailout also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.
What else?
- Oil dips as dollar climbs. Oil swung widely amid threats of hurricanes Gustav, Hanna, and Ike, rising as high as $118 and falling as low as $105 a barrel. It settled near the low-end of the range at $106.23, down 8% for the week. Natural gas futures slid 6%, their lowest weekly close since December. The dollar gained in 10 of the past 11 sessions, pushing the U.S. Dollar Index up 2%.
- Warnings hit Nokia, Ciena. Shares of No. 1 cell phone maker Nokia tumbled 7.6% to 20.62 after it warned that its Q3 market share will drop because it said it will not match rivals’ price cut. Network gear maker Ciena plunged 25% Thursday after it said its telecom customers are delaying orders. The report helped fuel fears of a broadening tech sector slump
- Mortgage woes increase. Home loan delinquencies in Q2 rose to a record 6.41% from Q1’s 6.35% and a year-earlier 5.12%. Subprime delinquencies actually fell, but higher-quality prime mortgages – especially those with adjustable rates – rose. The new foreclosure rate hit a new high of 1.19%.
- U.S. economy in neutral. ISM’s manufacturing index fell to 49.9 in August, just below July’s break-even 50. ISM’s service-sector gauge rose to 50.6 from 49.5. Export orders picked up on the factory side, but slowed for service firms. The Fed’s beige book report said economic activity has been “slow”.
Dow Jones Industrials was down 2.8% for the week, to close at 11,220.96. There was a nearly 345-point drop on Thursday in anticipation of grim employment data.
The Standard & Poor’s 500-stock index was down 3.2% for the week, to close at 1,242.31.
The Nasdaq Composite Index was off 4.7% for the week, to close at 2,255.88. Tech stocks have been hit hard lately by expectations that the global economic slowdown will cut spending on new technology.
Monday could see a rebound following a Wall Street Journal report that the Treasury was close to concluding a plan to inject capital into troubled mortgage giants Fannie Mae (ticker: FNM) and Freddie Mac (ticker: FRE). U.S. federal regulators outlined their bailout for Fannie Mae and Freddie Mac, including a takeover of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock. The bailout also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.
What else?
- Oil dips as dollar climbs. Oil swung widely amid threats of hurricanes Gustav, Hanna, and Ike, rising as high as $118 and falling as low as $105 a barrel. It settled near the low-end of the range at $106.23, down 8% for the week. Natural gas futures slid 6%, their lowest weekly close since December. The dollar gained in 10 of the past 11 sessions, pushing the U.S. Dollar Index up 2%.
- Warnings hit Nokia, Ciena. Shares of No. 1 cell phone maker Nokia tumbled 7.6% to 20.62 after it warned that its Q3 market share will drop because it said it will not match rivals’ price cut. Network gear maker Ciena plunged 25% Thursday after it said its telecom customers are delaying orders. The report helped fuel fears of a broadening tech sector slump
- Mortgage woes increase. Home loan delinquencies in Q2 rose to a record 6.41% from Q1’s 6.35% and a year-earlier 5.12%. Subprime delinquencies actually fell, but higher-quality prime mortgages – especially those with adjustable rates – rose. The new foreclosure rate hit a new high of 1.19%.
- U.S. economy in neutral. ISM’s manufacturing index fell to 49.9 in August, just below July’s break-even 50. ISM’s service-sector gauge rose to 50.6 from 49.5. Export orders picked up on the factory side, but slowed for service firms. The Fed’s beige book report said economic activity has been “slow”.
Saturday, August 30, 2008
Weekly Recap - August 24, 2008
The summer may be gone before the traditional summer lull arrives. We got a hint of it on Friday, when the volume during the rally was the lightest in months. Don’t just leave the markets unsupervised!
This week’s calendar is quite busy.
We have reports on:
- July Existing Home Sales on Monday
- August Consumer Confidence and July New Home Sales on Tuesday
- July Durable Goods on Wednesday
- Q2 GDP on Thursday
- July Personal Income, July Consumption, August Chicago PMI and August Michigan Sentiment, all on Friday
The major indexes have posted slight declines for the week. The Dow Jones Industrials has closed on Friday at 11,628, or -31.84 points for the week, a -0.27% decline. Nasdaq has closed at 2,414.71, or -37.81 points, a –1.54% decline and S&P 500 closed at 1,292.20, or -6 points, a -0.46% decline.The sectors finishing in black for the week are Oil & Gas (up 4.96%), Basic Materials (up 3.03%) and Utilities (up 2.03%). The rest of the sectors finished lower, with Financials posting the greatest loss, of -2.85%.
Shares of Freddie Mac and Fannie Mae tumbled on growing fears that the Treasury Department will have to bail out the mortgage giants, wiping out existing shareholders. Moody’s cut ratings on the firms’ preferred shares. Freddie fell 52% for the week, Fannie 37%.
Lehman has become a buyout target, after Korea Development Bank reported that would like to make an investment in the ailing U.S. investment bank. Other suitors may follow, prompting upgrades for Lehman. However, the shares fell 11% for the week.
The presidential race gets hotter, as McCain closed a once-sizable gap in the polls or even led, especially in key swing states. Read more about both candidates’ policies in the attached Barrons article.
The economic data is still weak. Housing starts dived in July to a 17-year low and producer prices spiked. Oil prices have reversed since them.
The CEO’s are gloomy on economy, with about 90% of top executives describing the U.S. economic conditions as fair or poor. The percentage of pessimistic CEO’s was only 16% a year ago.
This week’s calendar is quite busy.
We have reports on:
- July Existing Home Sales on Monday
- August Consumer Confidence and July New Home Sales on Tuesday
- July Durable Goods on Wednesday
- Q2 GDP on Thursday
- July Personal Income, July Consumption, August Chicago PMI and August Michigan Sentiment, all on Friday
The major indexes have posted slight declines for the week. The Dow Jones Industrials has closed on Friday at 11,628, or -31.84 points for the week, a -0.27% decline. Nasdaq has closed at 2,414.71, or -37.81 points, a –1.54% decline and S&P 500 closed at 1,292.20, or -6 points, a -0.46% decline.The sectors finishing in black for the week are Oil & Gas (up 4.96%), Basic Materials (up 3.03%) and Utilities (up 2.03%). The rest of the sectors finished lower, with Financials posting the greatest loss, of -2.85%.
Shares of Freddie Mac and Fannie Mae tumbled on growing fears that the Treasury Department will have to bail out the mortgage giants, wiping out existing shareholders. Moody’s cut ratings on the firms’ preferred shares. Freddie fell 52% for the week, Fannie 37%.
Lehman has become a buyout target, after Korea Development Bank reported that would like to make an investment in the ailing U.S. investment bank. Other suitors may follow, prompting upgrades for Lehman. However, the shares fell 11% for the week.
The presidential race gets hotter, as McCain closed a once-sizable gap in the polls or even led, especially in key swing states. Read more about both candidates’ policies in the attached Barrons article.
The economic data is still weak. Housing starts dived in July to a 17-year low and producer prices spiked. Oil prices have reversed since them.
The CEO’s are gloomy on economy, with about 90% of top executives describing the U.S. economic conditions as fair or poor. The percentage of pessimistic CEO’s was only 16% a year ago.
Sunday, August 17, 2008
Weekly Recap - August 17, 2008
Crude oil slipped again to reach its lowest level in nearly four months, and the dollar rallied for the fifth straight week to extend its surge against the euro to 9%. After failing to about 20%, the percentage of stocks climbing above their 200-day moving average remains near a benign – and hardly overbought – 35%. These merely support “the notion that the recovery off the July 15 lows has been much more a sector-rotation affair than the beginning of a broad, sustained advance,” says Miller Tabak’s chief technical market analyst, Philip Roth.
The Dow Jones Industrial Average ended the week down 74, or 0.6%, to 11,600, and is 17.7% off its October peak. The Standard & Poor’s 500 barely eked out its fourth gain in five weeks and added 2, or 0.1%, to 1298. The Nasdaq Composite Index strung together its fifth weekly gain and rose 38, or 1.6%, to 2453. It has risen 9.5% in five weeks – the longest weekly streak since last October. The Russell 2000 climbed for a sixth straight week and added 19, or 2.6%, to 753. It has rallied 13.2% during this stretch, its first six-week streak since late 2005.
Commodities Update: Speculators led the rush to sell commodities, spurred by a surging dollar and dimming economic prospects. Gold fell $72.70, or 8%. Silver tumbled 16% to a 9-month low. Oil fell $1.43 to $113.77 a barrel. By Friday, the dollar had appreciated for 11 straight days against the euro, and it has never strung together a 12-day run. The euro fell 3.28 cents for the week to $1.4688, its lowest since late February. The dollar’s years-long decline had lured many speculators to buy oil, metals and other commodities.
Global Economy Cooling: As expected, Japan and the euro zone said their economies shrank in Q2 amid sluggish exports and weak domestic demand. Meanwhile, there were cooling signs in red-hot China, including industrial output, auto sales and oil imports. The reports helped push a big dollar rally and commodities sell-off.
Retailers Rise On Results: Wal-Mart and Urban Outfitters both beat Q2 views for higher profits, with the discount giant offering value on staple goods and the apparel chain staying fashionable. J.C. Penney’s and Kohl’s earnings fell, but shares continued to rise off lows, as lower oil prices fueled spending hopes. Also, overall retail sales fell 0.1% in July, up 0.4% ex autos.
Solar Firms Shine On News: Chinese solar wafer firm LDK surged 28% for the week after blowout Q2 results and a solid outlook. Photovoltaic cell firm JA climbed 9%, helped by its Q2 results. SunPower shot up 18% Friday on a big contract from utility PG&E.
The Dow Jones Industrial Average ended the week down 74, or 0.6%, to 11,600, and is 17.7% off its October peak. The Standard & Poor’s 500 barely eked out its fourth gain in five weeks and added 2, or 0.1%, to 1298. The Nasdaq Composite Index strung together its fifth weekly gain and rose 38, or 1.6%, to 2453. It has risen 9.5% in five weeks – the longest weekly streak since last October. The Russell 2000 climbed for a sixth straight week and added 19, or 2.6%, to 753. It has rallied 13.2% during this stretch, its first six-week streak since late 2005.
Commodities Update: Speculators led the rush to sell commodities, spurred by a surging dollar and dimming economic prospects. Gold fell $72.70, or 8%. Silver tumbled 16% to a 9-month low. Oil fell $1.43 to $113.77 a barrel. By Friday, the dollar had appreciated for 11 straight days against the euro, and it has never strung together a 12-day run. The euro fell 3.28 cents for the week to $1.4688, its lowest since late February. The dollar’s years-long decline had lured many speculators to buy oil, metals and other commodities.
Global Economy Cooling: As expected, Japan and the euro zone said their economies shrank in Q2 amid sluggish exports and weak domestic demand. Meanwhile, there were cooling signs in red-hot China, including industrial output, auto sales and oil imports. The reports helped push a big dollar rally and commodities sell-off.
Retailers Rise On Results: Wal-Mart and Urban Outfitters both beat Q2 views for higher profits, with the discount giant offering value on staple goods and the apparel chain staying fashionable. J.C. Penney’s and Kohl’s earnings fell, but shares continued to rise off lows, as lower oil prices fueled spending hopes. Also, overall retail sales fell 0.1% in July, up 0.4% ex autos.
Solar Firms Shine On News: Chinese solar wafer firm LDK surged 28% for the week after blowout Q2 results and a solid outlook. Photovoltaic cell firm JA climbed 9%, helped by its Q2 results. SunPower shot up 18% Friday on a big contract from utility PG&E.
Monday, August 11, 2008
Update to the 2008 Outlook - Household / Credit Card
The consumer is getting really tired. Its piggy bank - the homeowner's equity - is empty, its credit cards are (almost) maxed out, and with the gasoline prices and food prices getting higher, the question is how long until we start seeing personal bankruptcies on the rise, along with the continuous string of foreclosures.
According to a report by Moody's, household credit quality has never been worse. Deliquencies and defaults are at or near record highs and rising accros all household liabilities. Household liabilities that are in deliquency and default totaled $775 billion at the end of June, according to data from Equifax. This is equal to 7.5% of all liabilities, and compared to 3% from just two years ago, is a huge leap.
Credit Cards
Deliquencies and defaults are not at record highs, but they too are rising quickly. So far the growth in borrowing keeps the deliquency rates low. Credit card receivables are rising at close to double-digit rate as homeowners, unable to borrow from their own home equity, are turning back to credit cards for cash. The states with the highest increase in credit card receivables are Nevada, with 30%, Florida, with 20% and California with 15%. The new wave of credit card deliquencies will keep us awake well into 2009.
According to a report by Moody's, household credit quality has never been worse. Deliquencies and defaults are at or near record highs and rising accros all household liabilities. Household liabilities that are in deliquency and default totaled $775 billion at the end of June, according to data from Equifax. This is equal to 7.5% of all liabilities, and compared to 3% from just two years ago, is a huge leap.
Credit Cards
Deliquencies and defaults are not at record highs, but they too are rising quickly. So far the growth in borrowing keeps the deliquency rates low. Credit card receivables are rising at close to double-digit rate as homeowners, unable to borrow from their own home equity, are turning back to credit cards for cash. The states with the highest increase in credit card receivables are Nevada, with 30%, Florida, with 20% and California with 15%. The new wave of credit card deliquencies will keep us awake well into 2009.
The Week That Was - August 9, 2008
Nice week, ey? Just about everything that was supposed to go right did:
• the dollar had its biggest one-day gain in six years against the euro and is up for the fourth straight week
• crude oil is at $115 a barrel, its lowest since May 1
• the Fed kept the interest rate at an unthreatening 2%
• pending home sales got a 5.3% bounce, sheepishly saying that the housing market slide has slowed down a bit
Don’t get your hopes up too soon. The economy is still in decline: we’ve had highest unemployment rate in six years, and retailers’ outlook from Wal-Mart and Whole Foods show the Americans tightening their belts across all income spectrum.
• the dollar had its biggest one-day gain in six years against the euro and is up for the fourth straight week
• crude oil is at $115 a barrel, its lowest since May 1
• the Fed kept the interest rate at an unthreatening 2%
• pending home sales got a 5.3% bounce, sheepishly saying that the housing market slide has slowed down a bit
Don’t get your hopes up too soon. The economy is still in decline: we’ve had highest unemployment rate in six years, and retailers’ outlook from Wal-Mart and Whole Foods show the Americans tightening their belts across all income spectrum.
Tuesday, August 5, 2008
Lasting Contribution
Use Recognition
You can recognize things that you can’t recall. For example, one Easter morning in Kennesaw, Georgia the water pump on my old car gave out. While I was waiting in the auto repair shop a man came in and said, “I stayed in a hotel last night, but I can’t remember the name. It had a big yellow sign with red letters.” The repair guys gave him a blank stare so I said, “Look in the phone book.” Speaking slowly and louder, he repeated, “I can’t remember the name.” I said, “Recognition is stronger than recall.” He looked in the phone book, looked surprised, thanked me, and went to his hotel.
Mix It Up
When studying a variety of subjects or working on a variety of projects, it is more difficult to do similar things right after each other than dissimilar things. Huh? For example, don’t study English then your foreign language then math then science. Instead, study English, then math, then the foreign language, then science. Don’t work on a report, then a presentation, then the budget, then taxes. Reorganize them so that the sequence goes: words, numbers, words, numbers so that you maximize the differences between topics each time you move to the next one.
I often organize my work into a stack such that I counterbalance words and numbers, computer and paper, reading and phone. Then I set a countdown timer for ten minutes and work my way through the stack, forcing myself to spend at least at least ten minutes working on the unpleasant tasks. Importantly, the time doesn’t have an alarm so that if I am enjoying the work, I am not distracted when time runs out and can keep working.
Appreciate Your Fallibility
Notice how often people distrust their memories, but not their judgment. Psychologists have developed thousands of experiments that demonstrate just how poor we are at making judgments, judgments of any kind – moral, business, even perceptual. You can get people to misjudge the length of a one-inch line by as much as six inches if other people in the room say the line is longer.
So? So several things. First, keep track of your judgments so you can determine the things you are good at judging and the things you aren’t. Second, when you make a decision include ways to get feedback to determine how well the decision worked out. Third, decide an issue early. Then give your decision a time to rest and approach the issue from another angle to see if you come to the same conclusion. Forth, know that you could be wrong and be open to information that will show your fallibility. Although it is not fun to be wrong, it is much worse to persist in being wrong.
Finally, appreciating your fallibility is an important way to cultivate your judgment. And a cultivated judgment is a rare and precious thing indeed.
Watch Your Metaphors
Make yourself aware of underlying metaphors in your communication. Metaphors can be very useful when you use them for elaboration of a topic. For example, we often speak about verbal arguments in terms of war metaphors. (Your claims are indefensible. He attacked every weak point in my argument. He shot down all of my arguments. If you use that strategy, he’ll wipe you out.) Metaphors structure much of our thinking and communication. But the metaphors we use can also limit us in subtle ways. If you always think of arguments in terms of war, you may miss out on the benefits of thinking of the situation differently, perhaps in terms of a game, or a dance.
You can also turn this metaphor-speak to your advantage. When trying to join a new group you can use the same metaphors they use to better “speak their language.”
Test, Retest
People often study as subject until they can get 100% right on a test of their understanding of the subject. While this is a sensible approach, it turns out that about 10% of the correct answers is composed of guesswork, short-term memory, and information not fully learned. The best approach is to study until you get 100%. Then wait a day or two and test again. The second test is a much better measure of your grasp of the material.
Testing is important in another important way, in the sense of getting feedback. This can be as simple as pulling on the door you just locked to make sure it is truly locked to far larger issues. For example, Peter Drucker says that quality isn’t what you put into a thing. Quality is what somebody else gets out of it. Therefore, you can’t answer the question of whether your service is any good. Only your customers can. You don’t get to say whether you are a good leader. Your employees answer that.
Even more generally, good intentions alone are not enough. Get feedback to determine whether you are getting the right results.
Build a Mistake Hierarchy
Magicians provide an excellent example of a ‘mistake hierarchy.’ A good card magician knows that many tricks depend on luck and that luck is a fickle friend. So, you tell the audience you’re going to do a trick. Without telling them what kind of trick, you go for the one-in-a-thousand effect, attempting the most difficult one first. It almost never works, of course, so you glide into a second try, for tricks that work one-in-a-hundred times. When that fails, as it almost always does, slide into the third-level trick, which only works about one time in ten. If all else fails you go for the failsafe effect, which won’t wow the crowd out of their socks, but at least it’s a trick that works.
It is common for people to wish for something big: “I’ll win the lottery. If that doesn’t work, I’ll get promoted at work. If that doesn’t work, I’ll go back to school.” The problem with this approach is that the different plans are not aligned. Your plans should be more like a staged defense: If they breach the wall, we’ll fall back to the keep.
Go for something big and have a backup plan right behind it in case it fails and one behind that and one behind that…
Talk to Yourself
Talking to yourself has several benefits. First, it forces you to process information in a different way. Perhaps you have a picture in your head of what you mean; putting it into words can draw your attention to details that you otherwise might overlook.
Second, talking to yourself helps you to remember things. A simple, “I’m putting the keys on the table near the door,” can help you remember where your keys are. I recently found myself in one city with an airplane ticket home from another city. I found a friendly airline agent who helped me change tickets at not cost. While I was waiting I said to myself, “Her surname is So and So, but she doesn’t look like one. And her first name is the same as that woman’s.” The next day when I was to leave the airline said they wouldn’t honor my ticket, since it was from another city. I explained that Ms. So and So said… It was clear that if I had just said, “Some agent said…” that they wouldn’t have honored the ticket, but because I new the agent’s name, which I had memorized by accident, they honored the ticket.
Third, research on problem solving shows that if you talk out loud when working on a problem, particularly a complex problem, then you solve the problem more quickly. Japanese math classrooms, for example, are very noisy. All of the kids talk out loud while working. In comparison with their American counterparts, these kids score on average 25% higher.
If you can’t remember, try it doing it anyway
You have probably had the experience of not being able to tell somebody a phone number until you dialed it. Or perhaps you have given poor directions to a place you can easily drive to. This happens because we are able to remember procedures and tasks better than specific step-by-step information. The other side of the coin is that you shouldn’t think somebody doesn’t know how to do something, just because she can’t tell you how to do it. For example, a colleague might not be able to explain to you how to do something on the computer. If you have reason to believe that she knows procedurally, you might ask her to show you how she does it.
This explaining-doing gap has large implications in the workplace and in schools. Too often we don’t look at what people can actually do. Instead, we listen to their talk about the subject. I’ve seen tests in schools that favor those who don’t actually know how to do a thing, but who can talk their way through it and I have seen mechanics tests that ask for the words about how to repair cars, but don’t measure actual car repair. If you are assessing others, look at what they can do. If you are being assessed, show people what you can do.
Use Stealth Health
The principle is simple enough: Eat a variety of healthy foods, eat less junk, and exercise more. The question isn’t the principle. The question is How? I use Weber’s Law, which states that you can’t detect a difference in stimuli that is less than 10%. Have somebody lift a 50 and a 51 pound weight and they will have a hard time telling them apart. I use something more like a 1% difference, but I do so with wicked persistence. I begin by eating one, just one, more leaf of lettuce and one, and only one, less spoonful of ice cream. I take just one flight of stairs. When I have grown completely accustomed to this level of change, then I take the next baby step. When if I go nuts and eat a pint of chocolate chip? These things happen, but I know the difference between a blip and a trend. The pint of chocolate chip is a blip. The general trend is toward greater health. This approach has an added benefit in that I haven’t told everybody I’m on a health kick so when they see me down the pint of chocolate chip, I don’t feel embarrassed. I say to myself, tomorrow is another day and I’ll get back on track.
Learn Key Concepts
Efficiency: Getting things done right.
Effectiveness: Getting the right things done.
Capital intensive: Requiring lots of money to accomplish.
Labor intensive: Requiring lots of work to accomplish.
Quality: Not what you put into a thing; what somebody else gets out of it.
Emergency: A time to break the rules, as when you speed to get somebody to the hospital before he dies.
Sunk cost: Money or effort spent. It is to be ignored so that you don’t risk sending good money after bad. Instead focus on opportunity cost.
Opportunity cost: The next best thing you could have done with your time or money. That which you gave up by choosing what you chose.
Marginal analysis: How a small change in one thing can have a large effect in another, as when the difference between winning and losing is only a 0.001 seconds and the difference in payout is $100,000.
Intelligence: Learning from your mistakes.
Wisdom: Learning from the mistakes of others.
Use Your Attitude to Your Advantage
• Believe that you can. When confronted with a seemingly nasty problem or an apparently complex mathematical formula, people often give up without even trying to work on it. Often, however, with just a little effort you can solve such problems. An author wouldn’t put an equation in a book if it were beyond most readers. A surprising number of problems are solvable with a little brainwork. Don’t immediately think that you can’t solve a problem. Set an alarm for 10 minutes and give it a try.
• Give yourself a few loopholes. Dieters, for example, will often say, “I can’t have any sweets.” Then when they have a doughnut for breakfast, they see themselves failures and give up on the diet. Without an occasional loophole, a single incident can destroy your entire program of commitment. This dieters’ wisdom is transferable to the workplace as well. It is important to make safety valves that exact a price for disobedience, but that also permit the occasional mistake. It is equally important to keep exceptions exceptional.
• Be wary of your own good intentions. Many people believe that if they have good intentions, that is enough. They are wrong. Results are what matter. Suppose your child is sick. Which would you rather have, a doctor with the best of intentions, who ends up killing the child, or a greedy jerk who just wants the insurance money, but who cures your child? Measure by results rather than by intentions. Get feedback on your actions. Was the result as good as you intended?
• Adapt a problem-solving orientation. An important step in successful problem-solving is simply to engage the problem as a problem. A somewhat extreme example that illustrates the point is that Nobel Prize winning physicist Richard Feynman used to go to bars, but could never pick up a woman. He said to himself: “This is a problem. Engage problem-solving mode.” So he interviewed ‘experts,’ men who seemed to have no problem meeting women in bars. He learned their secrets and had no problem picking up women in bars.
• Think, then react. A common cause of self-defeating behavior is for people to react to a situation before they fully understand it. The end up voting against things they would vote for, sabotaging their own self interest, and working against their own goals. Make sure you understand what you are reacting to before you react.
Treat the Symptom
There are a surprising number of problems that we can solve by not seeking the deeper cause, but by simply treating the symptom. Take procrastination, for example. In some sense you may be putting off doing something because of some Freudian conflict with your parents, but this can be made irrelevant. Figure out not why you procrastinate, but how. Keep a list: rearrange office supplies, clean the house, surf the internet, so on. Then when you catch yourself doing one of these activities stop and get back to work. That’s it.
Similarly, while you are working, if you find yourself distracted by other things you need to remember or do, write them down in a list. Often, writing them down will purge them temporarily and allow you to focus on what is at hand. Write it and forget it, at least for the moment.
Finally, while poet T.S. Eliot said that we are distracted from distraction by distraction, management guru Peter Drucker said that focus is the key to success. A simple trick to getting back on task once distracted is to take a moment to leave a marker. You are reading something. The phone rings. Place a sticky note next to where you were.
Ease the Load
While it is true that there are many tricks for improving memory, it is also true that there are many ways to avoid needing to rely on your memory.
• Leave written reminders for yourself in places that you pass throughout the day. A sticky note on your desk phone could help you remember to call your child’s doctor. A piece of tape on your watch with a note saying, “Mom” could help you remember to send Mother’s Day flowers. A large note on top of your briefcase could remind you to stop in the mailroom on your way out of work. Take advantage of your own established routines to leave yourself reminders.
• Use a timer with an alarm to remind you of the important things you need to do during the day, such as to make your conference call, finish the laundry, or leave the office in time to make a meeting across town. In the meantime, you will not be preoccupied with checking the clock every couple of minutes – you need only to wait for the alarm.
• When you have a good idea seize the moment and remind yourself. If you think of a good idea for work while watching a TV show at home over the weekend, call your extension and leave a message on your voice mail to help remind you of your insight. Or call your answering machine at home to leave reminders for yourself about things you need to do that evening. Don’t let your inspiration slip away. You will check your voicemail first thing in the morning anyway. Use available technology to remind yourself of brilliant ideas, your child’s soccer game, or just to take out the trash.
• A “memory pocket” is a specific place in your coat, bag, home or office in which ‘reminders to self’ are put. This is where bills that need to be paid, list of calls to make, or supplies to buy may be kept. Once you are accustomed to using this specified location as a place to put reminders, it will become habitual to check this place.
• Your greatest weapon in fighting absentmindedness is order. Create order in your life and reduce absentmindedness by using regular fixed places for all those things you waste time looking for. If you spend time needlessly looking for your car keys, decide once and for all on one place to rest them when you arrive home each day. Put them there consciously until it is just a reflex and you don’t have to think about it.
• Establish a productive work routine. I had a boring class in graduate school that had a huge reading load. I figured that I needed to read an article a day everyday or I’d not pass the class so I made a rule: No breakfast until I’ve read an article. I had some very late breakfasts, but I stuck to the rule and got an A in the class.
• The longer you wait to do something, the more likely you are to forget to do it so as much as possible, do a thing as soon as you think of it.
You can recognize things that you can’t recall. For example, one Easter morning in Kennesaw, Georgia the water pump on my old car gave out. While I was waiting in the auto repair shop a man came in and said, “I stayed in a hotel last night, but I can’t remember the name. It had a big yellow sign with red letters.” The repair guys gave him a blank stare so I said, “Look in the phone book.” Speaking slowly and louder, he repeated, “I can’t remember the name.” I said, “Recognition is stronger than recall.” He looked in the phone book, looked surprised, thanked me, and went to his hotel.
Mix It Up
When studying a variety of subjects or working on a variety of projects, it is more difficult to do similar things right after each other than dissimilar things. Huh? For example, don’t study English then your foreign language then math then science. Instead, study English, then math, then the foreign language, then science. Don’t work on a report, then a presentation, then the budget, then taxes. Reorganize them so that the sequence goes: words, numbers, words, numbers so that you maximize the differences between topics each time you move to the next one.
I often organize my work into a stack such that I counterbalance words and numbers, computer and paper, reading and phone. Then I set a countdown timer for ten minutes and work my way through the stack, forcing myself to spend at least at least ten minutes working on the unpleasant tasks. Importantly, the time doesn’t have an alarm so that if I am enjoying the work, I am not distracted when time runs out and can keep working.
Appreciate Your Fallibility
Notice how often people distrust their memories, but not their judgment. Psychologists have developed thousands of experiments that demonstrate just how poor we are at making judgments, judgments of any kind – moral, business, even perceptual. You can get people to misjudge the length of a one-inch line by as much as six inches if other people in the room say the line is longer.
So? So several things. First, keep track of your judgments so you can determine the things you are good at judging and the things you aren’t. Second, when you make a decision include ways to get feedback to determine how well the decision worked out. Third, decide an issue early. Then give your decision a time to rest and approach the issue from another angle to see if you come to the same conclusion. Forth, know that you could be wrong and be open to information that will show your fallibility. Although it is not fun to be wrong, it is much worse to persist in being wrong.
Finally, appreciating your fallibility is an important way to cultivate your judgment. And a cultivated judgment is a rare and precious thing indeed.
Watch Your Metaphors
Make yourself aware of underlying metaphors in your communication. Metaphors can be very useful when you use them for elaboration of a topic. For example, we often speak about verbal arguments in terms of war metaphors. (Your claims are indefensible. He attacked every weak point in my argument. He shot down all of my arguments. If you use that strategy, he’ll wipe you out.) Metaphors structure much of our thinking and communication. But the metaphors we use can also limit us in subtle ways. If you always think of arguments in terms of war, you may miss out on the benefits of thinking of the situation differently, perhaps in terms of a game, or a dance.
You can also turn this metaphor-speak to your advantage. When trying to join a new group you can use the same metaphors they use to better “speak their language.”
Test, Retest
People often study as subject until they can get 100% right on a test of their understanding of the subject. While this is a sensible approach, it turns out that about 10% of the correct answers is composed of guesswork, short-term memory, and information not fully learned. The best approach is to study until you get 100%. Then wait a day or two and test again. The second test is a much better measure of your grasp of the material.
Testing is important in another important way, in the sense of getting feedback. This can be as simple as pulling on the door you just locked to make sure it is truly locked to far larger issues. For example, Peter Drucker says that quality isn’t what you put into a thing. Quality is what somebody else gets out of it. Therefore, you can’t answer the question of whether your service is any good. Only your customers can. You don’t get to say whether you are a good leader. Your employees answer that.
Even more generally, good intentions alone are not enough. Get feedback to determine whether you are getting the right results.
Build a Mistake Hierarchy
Magicians provide an excellent example of a ‘mistake hierarchy.’ A good card magician knows that many tricks depend on luck and that luck is a fickle friend. So, you tell the audience you’re going to do a trick. Without telling them what kind of trick, you go for the one-in-a-thousand effect, attempting the most difficult one first. It almost never works, of course, so you glide into a second try, for tricks that work one-in-a-hundred times. When that fails, as it almost always does, slide into the third-level trick, which only works about one time in ten. If all else fails you go for the failsafe effect, which won’t wow the crowd out of their socks, but at least it’s a trick that works.
It is common for people to wish for something big: “I’ll win the lottery. If that doesn’t work, I’ll get promoted at work. If that doesn’t work, I’ll go back to school.” The problem with this approach is that the different plans are not aligned. Your plans should be more like a staged defense: If they breach the wall, we’ll fall back to the keep.
Go for something big and have a backup plan right behind it in case it fails and one behind that and one behind that…
Talk to Yourself
Talking to yourself has several benefits. First, it forces you to process information in a different way. Perhaps you have a picture in your head of what you mean; putting it into words can draw your attention to details that you otherwise might overlook.
Second, talking to yourself helps you to remember things. A simple, “I’m putting the keys on the table near the door,” can help you remember where your keys are. I recently found myself in one city with an airplane ticket home from another city. I found a friendly airline agent who helped me change tickets at not cost. While I was waiting I said to myself, “Her surname is So and So, but she doesn’t look like one. And her first name is the same as that woman’s.” The next day when I was to leave the airline said they wouldn’t honor my ticket, since it was from another city. I explained that Ms. So and So said… It was clear that if I had just said, “Some agent said…” that they wouldn’t have honored the ticket, but because I new the agent’s name, which I had memorized by accident, they honored the ticket.
Third, research on problem solving shows that if you talk out loud when working on a problem, particularly a complex problem, then you solve the problem more quickly. Japanese math classrooms, for example, are very noisy. All of the kids talk out loud while working. In comparison with their American counterparts, these kids score on average 25% higher.
If you can’t remember, try it doing it anyway
You have probably had the experience of not being able to tell somebody a phone number until you dialed it. Or perhaps you have given poor directions to a place you can easily drive to. This happens because we are able to remember procedures and tasks better than specific step-by-step information. The other side of the coin is that you shouldn’t think somebody doesn’t know how to do something, just because she can’t tell you how to do it. For example, a colleague might not be able to explain to you how to do something on the computer. If you have reason to believe that she knows procedurally, you might ask her to show you how she does it.
This explaining-doing gap has large implications in the workplace and in schools. Too often we don’t look at what people can actually do. Instead, we listen to their talk about the subject. I’ve seen tests in schools that favor those who don’t actually know how to do a thing, but who can talk their way through it and I have seen mechanics tests that ask for the words about how to repair cars, but don’t measure actual car repair. If you are assessing others, look at what they can do. If you are being assessed, show people what you can do.
Use Stealth Health
The principle is simple enough: Eat a variety of healthy foods, eat less junk, and exercise more. The question isn’t the principle. The question is How? I use Weber’s Law, which states that you can’t detect a difference in stimuli that is less than 10%. Have somebody lift a 50 and a 51 pound weight and they will have a hard time telling them apart. I use something more like a 1% difference, but I do so with wicked persistence. I begin by eating one, just one, more leaf of lettuce and one, and only one, less spoonful of ice cream. I take just one flight of stairs. When I have grown completely accustomed to this level of change, then I take the next baby step. When if I go nuts and eat a pint of chocolate chip? These things happen, but I know the difference between a blip and a trend. The pint of chocolate chip is a blip. The general trend is toward greater health. This approach has an added benefit in that I haven’t told everybody I’m on a health kick so when they see me down the pint of chocolate chip, I don’t feel embarrassed. I say to myself, tomorrow is another day and I’ll get back on track.
Learn Key Concepts
Efficiency: Getting things done right.
Effectiveness: Getting the right things done.
Capital intensive: Requiring lots of money to accomplish.
Labor intensive: Requiring lots of work to accomplish.
Quality: Not what you put into a thing; what somebody else gets out of it.
Emergency: A time to break the rules, as when you speed to get somebody to the hospital before he dies.
Sunk cost: Money or effort spent. It is to be ignored so that you don’t risk sending good money after bad. Instead focus on opportunity cost.
Opportunity cost: The next best thing you could have done with your time or money. That which you gave up by choosing what you chose.
Marginal analysis: How a small change in one thing can have a large effect in another, as when the difference between winning and losing is only a 0.001 seconds and the difference in payout is $100,000.
Intelligence: Learning from your mistakes.
Wisdom: Learning from the mistakes of others.
Use Your Attitude to Your Advantage
• Believe that you can. When confronted with a seemingly nasty problem or an apparently complex mathematical formula, people often give up without even trying to work on it. Often, however, with just a little effort you can solve such problems. An author wouldn’t put an equation in a book if it were beyond most readers. A surprising number of problems are solvable with a little brainwork. Don’t immediately think that you can’t solve a problem. Set an alarm for 10 minutes and give it a try.
• Give yourself a few loopholes. Dieters, for example, will often say, “I can’t have any sweets.” Then when they have a doughnut for breakfast, they see themselves failures and give up on the diet. Without an occasional loophole, a single incident can destroy your entire program of commitment. This dieters’ wisdom is transferable to the workplace as well. It is important to make safety valves that exact a price for disobedience, but that also permit the occasional mistake. It is equally important to keep exceptions exceptional.
• Be wary of your own good intentions. Many people believe that if they have good intentions, that is enough. They are wrong. Results are what matter. Suppose your child is sick. Which would you rather have, a doctor with the best of intentions, who ends up killing the child, or a greedy jerk who just wants the insurance money, but who cures your child? Measure by results rather than by intentions. Get feedback on your actions. Was the result as good as you intended?
• Adapt a problem-solving orientation. An important step in successful problem-solving is simply to engage the problem as a problem. A somewhat extreme example that illustrates the point is that Nobel Prize winning physicist Richard Feynman used to go to bars, but could never pick up a woman. He said to himself: “This is a problem. Engage problem-solving mode.” So he interviewed ‘experts,’ men who seemed to have no problem meeting women in bars. He learned their secrets and had no problem picking up women in bars.
• Think, then react. A common cause of self-defeating behavior is for people to react to a situation before they fully understand it. The end up voting against things they would vote for, sabotaging their own self interest, and working against their own goals. Make sure you understand what you are reacting to before you react.
Treat the Symptom
There are a surprising number of problems that we can solve by not seeking the deeper cause, but by simply treating the symptom. Take procrastination, for example. In some sense you may be putting off doing something because of some Freudian conflict with your parents, but this can be made irrelevant. Figure out not why you procrastinate, but how. Keep a list: rearrange office supplies, clean the house, surf the internet, so on. Then when you catch yourself doing one of these activities stop and get back to work. That’s it.
Similarly, while you are working, if you find yourself distracted by other things you need to remember or do, write them down in a list. Often, writing them down will purge them temporarily and allow you to focus on what is at hand. Write it and forget it, at least for the moment.
Finally, while poet T.S. Eliot said that we are distracted from distraction by distraction, management guru Peter Drucker said that focus is the key to success. A simple trick to getting back on task once distracted is to take a moment to leave a marker. You are reading something. The phone rings. Place a sticky note next to where you were.
Ease the Load
While it is true that there are many tricks for improving memory, it is also true that there are many ways to avoid needing to rely on your memory.
• Leave written reminders for yourself in places that you pass throughout the day. A sticky note on your desk phone could help you remember to call your child’s doctor. A piece of tape on your watch with a note saying, “Mom” could help you remember to send Mother’s Day flowers. A large note on top of your briefcase could remind you to stop in the mailroom on your way out of work. Take advantage of your own established routines to leave yourself reminders.
• Use a timer with an alarm to remind you of the important things you need to do during the day, such as to make your conference call, finish the laundry, or leave the office in time to make a meeting across town. In the meantime, you will not be preoccupied with checking the clock every couple of minutes – you need only to wait for the alarm.
• When you have a good idea seize the moment and remind yourself. If you think of a good idea for work while watching a TV show at home over the weekend, call your extension and leave a message on your voice mail to help remind you of your insight. Or call your answering machine at home to leave reminders for yourself about things you need to do that evening. Don’t let your inspiration slip away. You will check your voicemail first thing in the morning anyway. Use available technology to remind yourself of brilliant ideas, your child’s soccer game, or just to take out the trash.
• A “memory pocket” is a specific place in your coat, bag, home or office in which ‘reminders to self’ are put. This is where bills that need to be paid, list of calls to make, or supplies to buy may be kept. Once you are accustomed to using this specified location as a place to put reminders, it will become habitual to check this place.
• Your greatest weapon in fighting absentmindedness is order. Create order in your life and reduce absentmindedness by using regular fixed places for all those things you waste time looking for. If you spend time needlessly looking for your car keys, decide once and for all on one place to rest them when you arrive home each day. Put them there consciously until it is just a reflex and you don’t have to think about it.
• Establish a productive work routine. I had a boring class in graduate school that had a huge reading load. I figured that I needed to read an article a day everyday or I’d not pass the class so I made a rule: No breakfast until I’ve read an article. I had some very late breakfasts, but I stuck to the rule and got an A in the class.
• The longer you wait to do something, the more likely you are to forget to do it so as much as possible, do a thing as soon as you think of it.
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