The Tycoon Report

From the Editor: Party Poopers 'R Us?

Monday, July 16, 2007 | Ben Schott

Do a quick scan of the headlines after last week, and you’ll swear you can smell the profits in the air ...

Record Streak Continues on Wall Street

Consumer Sentiment Soars to 6-Month High

Stocks Extend Gains, Dow Nears 14,000

Stocks Soar to All-Time High

... But don’t start transferring balances from your savings to your brokerage accounts just yet.

If you read between the lines – or, quite literally in some cases, read the second half of the very same headline – you can see just how precarious these new highs have become:

... Despite Biggest Retail Sales Plunge in Two Years

... Amid Soaring Foreclosures

... With Dollar Hitting New Lows

Stocks Ignore Bernanke Speech, Break Highs

Look at that last one again. And tell me the markets don’t seem to be “willing away” the existence of bad news.

Tell me it doesn’t remind you of a kid who doesn’t want to hear what his parents are telling him, stomping around with his fingers in his ears shouting “LA LA LA LA LA, I can’t hear you!”


Party Poopers ‘R Us?

Maybe I’m just nervous because, as this rally keeps on keepin’ on, the experts who I personally trust most have been dropping some subtle (and some not-so-subtle) hints about some potential cracks in its foundation.

Take the article that Chris wrote for you last Thursday, Why You Should Avoid NASDAQ Stocks Right Now. On the same day that the DOW soared by over 275 points and the NASDAQ climbed by around 50 points, Chris issued the following warning:

Market internals (breadth) have been weakening for some time now, especially for the NASDAQ. (Major indices tend to follow what happens internally.) While small and mid-cap stocks had been outperforming large caps for years, that trend ran into a wall, showing fewer bets being placed on higher risk stocks (and the NASDAQ is considered to hold higher risk and reward).

... July comes in second to September as the worst performing month of the year for the NASDAQ (on average, down 0.09% since 1987). Typically, we see a strong start, followed by a sharp sell-off in the NASDAQ in mid-July, with a recovery toward the end (but obviously not a huge recovery since July is the second worst performer).

Also, July is the start of the "worst four months" for the NASDAQ. It's basically the NASDAQ's version of the old saying, "Sell in May, go away."

And then look at Teeka’s article from Friday, My Rules for Options Trading:

The Dow is making new highs! WHOO HOO, break out the champagne baby!

Er, not! Thirty stocks do not a market make.

... It ain’t easy to buck mass psychology, but it’s very profitable. To maximize your gains, you want to buy when stocks are hated, and sell when stocks are adored. You will not catch the bottom, and you will not catch the top, BUT you will catch a whole lot of meat in the middle. Just as important, you will be taking a fraction of the risk of the typical investor.

The broad market, as measured by my internal indicators, is sick. Events like yesterday's rally are excellent opportunities to short stocks. Yes, there will be pockets of strength in any market, and that strength is skewing the indexes right now. But the broader market is actually getting weaker, not stronger.

At the risk of being a party pooper to the euphoric mood we’re seeing in the markets, I’ve found that it never hurts to hear the other side of the story.

And sometimes, yes, the smartest time to zig is when everyone else zags.

Speaking of ...


Fine Tune Your B.S. Filter – It’s the Best Investment You’ll Ever Make

Have you read Wayne Mulligan’s article from last Monday? In this piece, More Trouble on Wall Street, Wayne pointed out a few problems with some of the most popular sources for investment news information on the Web.

His article got me thinking about the main challenge that’s always faced individual investors: There is a profound lack of good research available for people like you and me.

And I came to a realization. I think I understand part of the “why.”

Ask yourself this: How do the financial websites and newspapers make money?

Need a hint? They certainly don’t get paid according to how much money they help you make.

Give up?

Advertising, silly.

Newspapers like The Wall Street Journal or Investor’s Business Daily don’t get paid based on your investment returns, or even by the revenue generated from subscriptions. They get paid by selling advertising.

Websites like Yahoo! Finance, TheStreet.com, and MarketWatch don’t get paid based on your returns either. Again, it’s advertising revenue that accounts for the lion’s share of their intake.

Certainly the 24-hour news networks, CNBC included, don’t get paid based on your investing success. (Side Note: you ever wonder why behemoths like Boeing or BP advertise so much on these networks? Do you ever watch one of their ads and think to yourself “Yeah, now that you mention it, I think I will go out and get me a 767” or “BP really does care. I won’t buy my gas anywhere else ever again!” But that’s another article.)

The bottom line is that the vast majority of your sources for financial news and advice are incentivized to keep you excited and optimistic. The more attuned you are to the market (and what do you think happens to interest in investing news when things are going great?) the more eyeballs they have, and the more advertising they can sell.

At the end of the day, you’ll do well to recognize that their interests are less aligned with yours than with the marketing departments and PR firms of big industry.


Great Reader Feedback!

Going through the comments on Wayne’s article, I couldn’t help but notice that a couple of you felt you had to “stand up” for the mainstream financial media ... for guys like Crazy Jim.

I have no problem with that – in fact, we all welcome the debate – but we don’t write these things to disparage any one news source or any one personality. We bring these things up to MAKE YOU THINK.

If you come away from your relationship with The Tycoon Report more apt than before to question what’s being fed to you, we’ve succeeded. If we can help you hone your B.S. filter, we’ve done something we can be proud of.

The last thing I want to address on this subject is one of the comments that Wayne received.  This one was submitted by Tycoon Report reader Ethan Roberts:

What a terrible article! A true professional does not need to bash the competition, he just lets his own record speak for itself. Shame on you, Mr. Mulligan, for feeling that you had to put those other sites down.

Ethan, I won’t pretend to speak for Wayne, but I will speak for Tycoon, a firm that was started with nothing but your best interests in mind.

We visit those websites and read their articles ourselves. We watch CNBC, and even Cramer. What we’re trying to impress upon you is not the idea that these sources of information and entertainment are worthless, but rather that you should get in the habit of questioning the motivations behind them.

I think that’s what Wayne was going for when he pointed out the disparity on those sites between the amount of advertising (large) and information (small), and I personally think that’s a very valid point.

My suggestion to you, Ethan: don’t worry about Jim Cramer’s feelings. He’ll be just fine and can stand up to some good natured ribbing. But please, please, please continue to demand results of your advice sources, just as you did with us!

You mentioned that we ought to stand on our own track record, and that’s a terrific approach on your part.  You’re absolutely right.

And you know what?  We have no other option.  Where do you think we make our money?  It ain’t advertising my friend.  We make money when people read The Tycoon Report, get good advice, and decide to take their relationship with us to the next level by joining one of our paid services or purchasing one of our educational products.

So Ethan, if our track record goes downhill, so does our business.  If we don’t help people make money, they won’t stick around.

Turn that B.S. filter on and ask yourself who’s going to work harder to give you the best information: someone who gets paid based on how much buzz they can create around their advertising, or someone who gets paid when you personally make money?

Life, economics, investing ... it always pays to analyze the incentives.


Tycoon Spotlight: Dylan Jovine

Last week I introduced a new feature to our Monday Tycoon Report edition: A short, weekly interview with one of our writers or contributors. Last time it was Teeka Tiwari, and this week the spotlight falls on none other than Tycoon co-founder and CEO Dylan Jovine.

Editor: First off, congratulations on Hilton. Is the stock still a recommended holding for Fallen Angel Stocks members, or are you advising that they take their profit and run?

Dylan: Hilton shares have risen 42% from the price where I recommended the stock, on the heels of a takeover offer from the Blackstone Group. Last week I sent a communication to members of Fallen Angel Stocks advising that they hold onto their Hilton shares for the time being. I made that call for two reasons. The first is that the Blackstone bid is a very strong one: By making an all-cash offer they eliminate the risk that comes with having to finance the deal with bonds. As you know, the debt markets are drying up a bit, putting several deals such as the Chrysler acquisition in jeopardy. In addition, there shouldn’t be any anti-trust concerns because of market dominance, which will help the deal get done also.

The second reason I’ve decided to hold on for the time being is the off chance that another buyer could try and step in. Ever since I was involved in the Paramount Pictures bidding war in the early 1990’s, I never back out early when a hot property is in the midst of changing hands. And that philosophy served me very well during the banking, insurance and telecommunications merger waves during the 1990’s. I must have owned 20 stocks that were acquired during a five year period alone – many of them after intense bidding wars!

Editor: You’ve been getting quite a bit of press in recent months (like your AOL Finance interviews on Hilton and Radio Shack). For someone who might have read those interviews but hasn’t followed your work in The Tycoon Report, to what would you attribute the success of your investing approach?

Dylan: Yeah, it’s a bit strange to read about yourself in the press. Not quite sure I’ll ever get used to it, frankly. As far as my investing approach is concerned, I would say that it can be described as “boring with a shot of espresso thrown in on occasion.” Essentially what I do for a living is try to find stocks that are selling for at least half of what I think they’re worth. What I’ve realized after almost two decades of doing this is that it’s ultimately a game of patience: you have to sit around and wait for great investment opportunities to cross your plate.

Editor: Most Tycoon Report readers know your story – how you left the world of Wall Street and chose to devote your career to educating individual investors by starting Tycoon. How would you rate the progress of Tycoon so far in giving “the little guy” investor a fair shake at success?

Dylan: We’ve done some great in which individual investors have access to the same high-quality objective research that professional investors have. That’s why we brought Teeka on board, and why we launched a product for Chris. I’ll tell you, though: the biggest challenge so far that I’ve seen is in actually “unwinding” the investing programming that most people have been brainwashed with. I know that might come off as a little harsh, but it’s true: every business school and Wall Street firm in this country goes out of their way to teach you how NOT to invest.

It starts with the teaching of patience, which is the single most underrated investing skill you need to possess to make money in the markets.

Going forward, we want to help investors make money on their own, instead of by providing financial advice. From where I’m standing, we’re in a global economy, and if you’re going to be a “knowledge-worker” investing for a living sure beats making software.

Editor: Back to Fallen Angel Stocks: Without giving away anything that’s for members only, what advice can you give our readers concerning the current investment opportunities in the railroad industry?

Dylan: My advice concerning the railroad industry is the same advice I would give anywhere. Don’t forget the two rules of investing. Rule #1: don’t lose money. Rule #2: don’t ever forget rule #1. Once an investor reaches that point of his or her development, the entire world changes. You stop swinging at pitches in the dirt and focus only on high probability events. From a quantitative perspective, I know I won’t invest a single penny unless there is over a 90% chance that I’ll make money.

When I studied the railroad industry I realized that several trades gave us that 90% chance to make money. Thus, I recommended four trades: ARII, which is up roughly 40% from my recommended price, and IYT September 85 Call Options, which are up about 33% from the price we recommended it. The other two are still in my buying range so I can’t reveal their symbols (it really wouldn’t be fair to FAS members) but I would say that there is opportunity there in select spots.

Editor: You’ve been very successful so far with Fallen Angel Stocks, but I’m curious ... what does the future look like for FAS?

Dylan: Interesting question ... I’ve been asking myself the same thing for some time here. I’m not sure yet, but I can say for certain that it will involve the feedback I’ve heard from my customers when I asked them the same question last month.

Editor: Completely off-topic: What do you think will be your most lasting memory from your recent honeymoon in Italy?

Dylan: Standing in the Roman Forum and realizing how fragile even the greatest empires in history have been.

One Up-ing Chris Rowe ...

One last thing.

Chris, I loved the picture of Maya in the Tycoon Report hat last week.

Pretty cute. 

But my girl has been published in The Tycoon Report, and I think the two of them together is even cuter:
 




That's all I've got for this week. I look forward to hearing your thoughts about today's article!

To your continued success,






Ben Schott
Editor in Chief
The Tycoon Report


Mark Your Economic Calendar: What's ahead for the week of July 16, 2007

Tuesday, July 17

8:30 - PPI (for June): Consensus 0.1%, Core PPI (for June): Consensus 0.2%

Big Picture: September 2005 PPI growth of 6.9% yoy stood at a 15-year high and has fallen off to 4.1% yoy currently.  The core stands at just 1.6% yoy from July 2005's decade high of 2.8%.  The stronger pipeline pressures of the last year are not providing much lift to finished goods, as energy prices and now food prices provide the lift and volatility.  The directional trends for goods-based producer prices have turned toward lower yoy growth and hardly contribute to the service-based pressures in consumer prices.

Implications: The Producer Price Index measures prices of goods at the wholesale level.  There are three broad subcategories within PPI: crude, intermediate, and finished.  The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user.  Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indexes such as the CRB (Commodity Research Bureau).  At all stages of production, the market places more emphasis on the index excluding food and energy, referred to as the core rate.  Food and energy prices tend to be quite volatile and obscure trends in the underlying inflation rate.  Though the market reaction is determined by the month/month changes, year/year changes are also noted by analysts.

9:15 - Industrial Production (for June): Consensus 0.3%, Capacity Utilization (for June): Consensus 81.5%

Big Picture: Industrial production is showing significant lift after the weakening in late 2006.  Strong December and March gains in manufacturing output fight off the declines to leave 6-month growth back in the black after declines in early 2007.  Factory orders are back on the rise as well.  The stall from autos, construction and business investment is returning back to positive growth.  Capacity use stands at 81.3% -- below the level historically consistent with inflationary pressures -- as manufacturing shows a growing amount of excess capacity at 79.9%.

Implications: The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities.  Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report.  One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather.  Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.  In addition to production, this monthly report also provides a measure of capacity utilization.  Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure.


Wednesday, July 18

8:30 - CPI (for June): Consensus 0.1%, Core CPI (for June): Consensus 0.2%

Big Picture: The core rate of consumer inflation reached a decade high of 2.9% yoy in September and has eased off to 2.2% yoy in April -- in line with the Fed's 'comfort zone'.  The sticky prices for shelter, medicine and tuition will continue to hold firm as yoy core commodity prices have fallen from a year ago.  Energy prices provide the swing, a drop in late 2006 and now an upturn.  In the big picture, it's aggregate demand which provides the price direction as sub-potential (near 3%) growth is easing the core inflation pressures over time.  The Fed more closely watches core PCE prices as an inflation guide, which stands at 1.9% yoy.  Overall CPI reached a 14 year high of 4.7% yoy in Sept '05 given the push from energy prices, and now stand at 2.7% yoy.

Implications: The Consumer Price Index is a measure of the price level of a fixed market basket of goods and services purchased by consumers.  CPI is the most widely cited inflation indicator, and it is used to calculate cost of living adjustments for government programs, and it is the basis of COLAs for many private labor agreements as well.  It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods, which are often declining in price.  Despite these criticisms, it remains the benchmark inflation index.  CPI can be greatly influenced in any given month by a movement in volatile food and energy prices.  Therefore, it is important to look at CPI excluding food and energy, commonly called the "core rate" of inflation.  Within the core rate, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new cars.

8:30 - Housing Starts (for June): Consensus 1450K, Building Permits (for June): Consensus 1490K

Big Picture: Housing starts reached a nine-year low in January 2007 after hitting a 33-year high a year earlier.  The plunge has been a significant drag on growth, as further risk surrounds the defaults coming from sub-prime borrowers.  Higher interest rates affect the marginal buyers as the downturn has turned more toward a flat line since February.  Q2 starts should be larger than Q1 but the National Association of Realtors expects the bottom in Q4.  The correction for the inflated housing market was expected (and needed) but with a more gradual decline.  Stability will have to wait for new home sales to begin to tick higher given the large supply of unsold inventory.

Implications: Housing Starts are a measure of the number of residential units on which construction is begun each month.  A start in construction is defined as the beginning of excavation of the foundation for the building, and is comprised primarily of residential housing.  Building permits are permits taken out in order to allow excavation.  An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates.  Permits lead starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.


Thursday, July 19

8:30 - Initial Claims (for 7/14): Consensus NA

Big Picture: Initial claims can be somewhat volatile, but the 4-week average has remained in a lower 300K to 320K range for ten weeks after topping 330K in mid April.  Aberrations are watched for clues on the labor market and economy, as the recent levels reflect an even tighter labor market.  Continued claims are also falling off their March highs as the 4-week average stands 110K above the six-year low of May 2006.  Claims provide a nearly real time read on layoffs and the labor market, as the low 4.5% unemployment rate reflects the broader read of layoffs and hiring.

Implications: Initial jobless claims measure the number of filings for state jobless benefits.  This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth.  On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four-week moving average to get a better sense of the underlying trend.  It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

10:00 - Leading Indicators (for June): Consensus 0.1%

Big Picture: Six monthly declines in 2006 reflect the weaker economy in late 2006, as declines were shown in 3 of the first 5 months of 2007.  The 6-month growth fell to a -0.8% low in July but has firmed above 0 since.  Over the last 17 years, the index correctly signaled the 1990 and 2001 recesssions while providing a false signal during the 1995 soft-landing.  The recession alarms go off when the cumulative 6-month decline exceeds -1% amid a string of three or more consecutive monthly declines.  No recession warning bells yet and none expected.

Implications: The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices.  Therefore, the report is extremely predictable and of very little interest to the market.  Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.

12:00 - Philadelphia Fed (for July): Consensus 13.0

Big Picture: The regional manufacturing index is volatile, but tracks the direction of national orders and production.  The gains in orders follow the weakness tied to auto, housing and business investment and are rebuilding strong positive momentum.  ISM's 2007 estimates argue that the stall is just that, with stronger demand ahead which has been seen in recent months.  The Philly index is independent of its components, so can provide a misleading read and is especially volatile given the small region covered (mid and east PA, southern NJ and Delaware).  The manufacturing sector moves in mini-cycles compared to the overall economy and the regional measures move in even shorter cycles, with far more month to month volatility.

Implications: There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region.  The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting.  Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month.  A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value.  The purchasing managers' reports are measured like the national NAPM -- 50% marks the breakeven line between an expanding and contracting manufacturing sector.  For the Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark.  These surveys can be of some help in forecasting the national NAPM -- particularly the Philadelphia and Chicago surveys, which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.



Source:  www.Briefing.com