Daily Posts Archive
For a long time, I’ve had a note to myself saying I should write about witch-hunts. And now, as the clock ticks toward Halloween, is the perfect time to do so. My status as a native and lifelong resident of Salem, Massachusetts means I know a fair amount about the historical kind, and my decades observing and analyzing the behavior of investors, who can act rational as individuals but who combine to form irrational crowds, means I’ve experienced many of the modern kind.
Here’s the funny thing: I’m not describing 2007. I’m talking about 1998, a year that’s paralleling this one so closely I believe it’s prudent to look back before looking ahead.
Of course, six months is far too short a period in which to judge a value-oriented investment. More important, Warren Buffett, as far as we know, never paid more than 82 for his shares. Those folks who deluded themselves into thinking they were following the master when they were buying above 90 were only getting half the equation right. They forgot the importance of price.
There is a doom-and-gloom quality to much of the talk about the subprime crisis. The reasoning is that this wad of bad debt is hanging like an enormous boulder over the stock market highway, and that when it falls, the world as we know it will essentially end. In this regard, it’s a lot like assertions that the U.S. national debt (or current account balance or poor educational system or declining manufacturing base, etc.) will ruin everything forever.
First, Baidu (BIDU) is the Chinese equivalent of Google. Both companies get 99% of their revenue by presenting ads to Internet users. But Baidu is just 1% of the size of Google, as measured by revenues, and 5% the size as measured by market capitalization. And it’s growing twice as fast as Google. Furthermore, Baidu’s market penetration is far less than Google’s and it’s addressing a far larger population, so its growth prospects are substantially greater.
So on to the stock. To refresh your memory, Force Protection is a South Carolina company with $340 million in annual sales that makes trucks for the military ... trucks that resist the force of various explosive devices. The majority of these vehicles are bought by the U.S. government, and they’ve proven quite valuable in Iraq. Some have been sold to Canada. And last Monday the British government, which has already bought 100, ordered 140 more.
I think one such stock is VeriFone Holdings (PAY), which is benefiting from the same mega-trend as MasterCard (MA) - more people are paying with plastic instead of cash, especially in developing countries. Here’s what I wrote about the firm in Cabot Top Ten Report, where it earned a spot due to the stock’s powerful breakout…
Trends are up, but overextended, suggesting that a normal correction is likely. Our Hi-Lo Alert, which measures the number of Dow stocks above their medium-term moving averages, is at its highest point since May, just two weeks before the market got very rocky and embarked on the course that took it down to the August low.
In general, I like this trend and I think it has a long way to go … but there are two risks to be aware of today. The first is market risk. While the rebound over the past six weeks has been awesomely profitable for leading stocks - the ones being driven by institutional buying - the breadth of the market is not quite good enough to allow me to relax. I still fear that a “re-test” of that August low may still be possible.
Which brings me to the state of the stock market today. My strongest thought today is that while the headlines are absolutely glum, forecasting recession, lamenting the prospect of $100 per barrel oil, and worrying that the Chinese, the Mexicans and the Arabs (to name just three) threaten our American way of life …the market is very strong!