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New
Idea At Hand |
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Those who jumped into BPTR
in the $.65 to $.75 range should keep their eyes on the inbox
for a new idea. I'm on the verge of latching on to another beautiful, undiscovered,
fundamentally strong idea in the same price range. I could be presenting
this new idea within the next week.
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Wall Street
and the Wall of Worry |
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Wall Street has a lot to worry
about these days. There's even fear that there isn't enough fear. The infamous
VIX (an index which theoretically measures level of fears in the market
buy measuring put buying vs call buying) is trading in a fairly low range,
leading many technicians to believe there isn't enough fear in the market
to provide the fuel to drive stock prices higher.
Most of CNBC's talking heads are
focused on the many reasons it will be a tough year for stocks. Their reasons
are more global in nature and have little to do with individual corporate
performance. Projected operating profits for the S&P 500 for the next
52 weeks stands at $76.12, a new all time high. Recent earnings
gains have come in the energy sector, which means the earnings growth is
rotating to a different sector. Nevertheless, the earnings are there to
fuel higher levels in stocks.
Here's a quick review of the toxic
fuel driving Wall Street's fears:
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North
Korea and Iran |
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There's lots of media chatter about
the nuclear threats from North Korea and Iran. Perhaps I'm making light
of the matter, but in reality North Korea does not appear to be the nuclear
threat the media would have us believe.
In fact, most of North Korea's soldiers
and many of its people are starving. The North Korean people are suffering
under an oppressive dictatorship, while their brethren to the South are
prospering under a western style democracy.
Their entire military could probably
be wiped out with 100 ballistic missiles.
Bush's recent European trip appears
to have galvanized the world against the Iranian nuclear threat. I don't
believe World War III is going to originate with either of these countries.
Call me an optimist.
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Is
the Dollar Going to Crash Even Farther? |
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Foreign Banks hold trillions of dollars
in US Currency. In order for the dollar to crash another 25%, foreign banks
would have to start selling those dollars.
If the dollar goes down, that means
Euros and Yen go up. If Euros and Yen go up, it means their goods are more
expensive to American consumers, and tourism in their countries is more
expensive to American travelers.
Another 25% drop in the dollar would
certainly lead to recession in Japan and Europe. I don't think either wants
the inevitable result. Look for central banks around the world to hold
their dollars and start buying at some point in the future. A little common
sense should prevail here.
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Is
$100 Per Barrel Oil Inevitable? |
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The supply/demand dynamics do suggest
higher oil prices. About 100,000 new cars are purchased in China everyday.
With over 1 billion people this number is not startling. However, consider
that the majority of sales are first purchases. These people have never
owned a car in their lives. Therefore, these drivers will become new consumers
of oil.
Against the increasing demand is
the specter of a dollar crash. The Saudi's trade their oil for dollars.
If the dollar goes down 25%, the Saudis get 25% less for their oil. The
Saudis and the rest of OPEC also know much higher oil prices will lead
to a world wide recession, which will lead to decreasing demand.
It doesn't seem like it's in OPEC's
best interests to force either a falling dollar or rising oil prices. Oil
should settle in at the $35 to $45 level for the next few years while we
await the development of new supplies.
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Is
the 10 Year Bond Going to Crash To 6%? |
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Have US homeowners over leveraged
their real estate? Will higher interest rates cause the real estate bubble
to burst as homeowners face much higher payments on their cheap variable
rate mortgages? If the 10 Year Bond crashes (when the price of bonds goes
lower, interest rates go up) most of these 5% variable mortgages will end
up in the 7% to 7 1/2% range. This scenario could create a 25% increase
in mortgage payments, which could cause a real estate crash.
Interest rates go down when bonds
go up. Consider the demand for US Treasuries. Japan is the world's largest
consumer of US Treasuries. Japan's population is aging rapidly. 20% of
their population is over 65. Their national savings rate exceeds 30% and
is growing everyday.
The Japanese have a massive appetite
for very safe returns to fund retirement plans for an aging population.
US Treasuries are still the safest investment on Planet Earth. I don't
think they, nor many others around the world, will be selling the Treasuries
any time soon. International demand for safe returns should keep interest
rates in check for the foreseeable future.
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Is
the US Economy Slowing? |
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Is Globalization killing our economy?
Are we losing too many jobs to cheap labor overseas? What ever happened
to faith in good old American ingenuity?
Globalization is here to stay, and
we can't legislate our way out of it. However, the greatness of the American
economy is predicated on our flexibility and adaptability. The low paying
jobs we are losing now will be replaced with different jobs in the future.
Our companies and industries are historically the most efficient users
of capital.
Yesterday's jobs will not be tomorrow's,
but there will be jobs and our role in the world economy will change and
expand. As it does, the global profits will find their way into American
pockets and into the American economy.
Don't lose faith in good old American
ingenuity. We have survived and prospered through every economic evolution,
and there is no reason to believe history will not repeat itself.
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Where
Does the Market Go in 2005? |
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Warren Buffet is right. Buffet believes
the entire first decade of the 21st Century will be characterized by moderate
growth. Stock market investors in large cap stocks will have to get used
to 5% annual returns plus their dividends.
Avoid large cap technology stocks.
Many, like IBM, Oracle, Sun, and Cisco are priced like growth stocks, but
have really become glacial blue chips. These titans of the technology boom
of the 90's are not the fast growers of the first decade of the 21st Century.
If you're going to own blue chips, get a dividend.
There will still be plenty of fast
growing, agile, light on their feet, revolutionary growth companies to
invest in. It will be a stock pickers market. All stocks will not rise
with the tide, just the good ones.
Mergers and acquisitions will also
headline the markets this year. Corporate balance sheets are loaded with
cash, and market demand is not strong enough to justify massive investment.
Therefore, look for more mega mergers as competing companies pair up to
lower overhead by reducing duplicate costs.
Here's my most important thought
for this edition:
Look for seasonality to be magnified
in 2005. Barring any cataclysmic events, I see a tough summer ahead and
another great 4th quarter. Try to have 1/2 your stock market dollars in
cash by the end of May, and look to go bargain hunting in mid August. We'll
make a killing in the 4th quarter.
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