As you probably know, Google Checkout debuted on Wednesday. What does this mean to other leading online payment services, particularly our very-primed-for-profit holding? Also, why can’t Microsoft get its act together? The stock is flat over the past four years. Perhaps it needs to buy one of the internet’s most famous companies, one that you know and use everyday. I have more information on the possibility and details of that.
I have those two reports for you, and more.
Below is my recap for the week, which you’re welcome to read for free. What I’d like you to do, though, is try my letter for one month. It’s just a penny for the month, and you’re free to cancel at any time during the month. Signing up (with just your name and email address, by the way) gives you full access to all of my research reports for this year, all of my market commentary, and all of my trades. In short, everything I’ve sent to subscribers this year, right up to now. That includes the latest two reports mentioned above.
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And now, onto my market recap…
This week, the Fed finally signaled that the economy might be slowing enough to pause rate increases, and the market rejoiced.
For the week:
Dow +1.5%Nasdaq +2.4%S&P; 500 +2.1%S&P; Midcap 400 +3.2%S&P; Smallcap 600 +3.9%
June ended basically flat:
Dow -0.2%Nasdaq -0.3%S&P; 500 0.0%S&P; Midcap 400 -0.1%S&P; Smallcap 600 0.0%
The second quarter was a downer:
Dow +0.4%Nasdaq -7.2%S&P; 500 -1.9%S&P; Midcap 400 -3.4%S&P; Smallcap 600 -4.8%
Monday saw new home sales for May come in surprisingly strong on the tails of April’s strong report. Most economists see a slowdown in housing and expect it to decelerate even more as higher interest rates trickle down and make mortgage borrowing expensive. Other measures have shown precisely that happening, but new home buyers have yet to pick up the clue.
Strong corporate balance sheets became a positive catalyst, though. Johnson and Johnson (JNJ) made a $16.6 billion all-cash bid for Pfizer’s (PFE) consumer unit, which includes well-known brands like Listerine, Nicorette, and Sudafed. Bold moves like that assure the market that companies are confident in the future, making plans, putting resources to work or streamlining operations. That sent the major indices up half a percent.
The Fed released its annual report covering the economy last year and early this year. It scored the economy healthy, but flagged housing as weakening. It also commented on inflation: “Core inflation is likely to remain under some upward pressure in the near term from rising costs as the pass through of higher energy prices runs its course. But those cost pressures should wane as the year progresses. Moreover, strength in labor productivity should continue to damp business costs more generally.” It mentioned that the December increase of rates to 4.25% was no longer accommodative, confirming that we are now in a restrictive monetary mode.
The recent up, down, up, down pattern of the market continued. Monday was up, so Tuesday was down. Attention turned again to the Fed. The nervousness this time was not about whether the rate would rise or not — that was almost universally expected to happen — but rather on whether we’d get any sense of future action.
The Nasdaq paced the way lower with a 1.6% loss, although the Dow’s 1.1% loss was its worst one-day performance in over three weeks. Particularly hard-hit was the already-semiconscious semiconductor sector. Marvell Technology Group (MRVL) said it would buy Intel’s (INTC) handheld device processor division for $600 million. Unlike Monday’s J&J; purchase announcement, this one turned investors off. Marvell dropped 15% because the acquisition will dilute earnings. That means the company is paying more for the division than it expects to add to its earnings. Intel also fell, but by just 1.3%, which was in-line with the general malaise of the market that day.
True to form, the next day in the pattern was up again. Pondering Thursday’s Fed announcement was about all there was to guide activity. A small sense of relief could already be felt in the air. No matter what happens tomorrow, it hinted, at least we’ll finally know. While not the greatest news, it was slightly better than neutral and got another nudge higher when Wells Fargo (WFC) trumpeted a dividend increase, a 2-for-1 stock split, and a stock buyback. The major indices tacked on half a percent.
Intel roared ahead 3.4% as investors decided that getting rid of the non-performing handheld division would enable the chip leader to focus on its main PC business, which is ramping up nicely. The Kelly Letter bought more shares of Intel at $17 two weeks ago. The company’s future looks dandy to me.
Federal Thursday arrived at last.
As expected, the Fed raised rates 0.25% to 5.25%. It was the seventeenth consecutive increase since June 2004.
The good news that brought relief to the market came in the accompanying policy statement. It read that economic growth is easing, inflation expectations are contained, and that slowing demand will help limit upward price pressures over time. That was a soothing salve on the still-burning wounds left by the Fed’s anti-inflation speech campaign begun on May 10.
The CBOE Volatility Index, known as the VIX, fell to its lowest level in six weeks. Investors call the VIX the fear gauge. When it’s high, investors are scared. When it’s low, they’re not. Its dramatic 18% drop on Thursday revealed investors buying call options on the belief that the market had hit bottom.
The Dow gained 2%, the Nasdaq 3%, and Intel added another 3.5%.
Friday delivered good news by not delivering bad news. If Thursday’s upward surge had been followed by an immediate plunge, it would have invalidated the idea that a bottom had been reached. The plunge didn’t come. Instead, the market went almost nowhere, which is positive.
The core-PCE deflator, an inflation gauge watched by the Fed, came in with a 0.2% increase for May exactly as expected. That lead to high-fives all around and a sense that it was time to start enjoying the weekend ahead of next week’s 4th of July celebrations.
The market will close at 1:00 p.m. on Monday in observance of the 4th of July. It will open again for business on Wednesday, July 5.
Overall, I’m pleased with how our holdings are performing in this topsy-turvy environment. We’ve taken advantage of lower prices in our technology stocks to add to our positions, thereby lowering our average cost per share. This week showed the coiled-spring potential in technology. When the clouds lift, the sector will really take off and it feels good to have our portfolio ready for that launch.
The markets had a rough second quarter, with the Nasdaq dropping 7% and smallcaps dropping 5%. Even so, our permanent portfolios are all still in the green for the year so far:
Dow 1: +0.6%Double The Dow: +6%Maximum Midcap: +4%
Naturally, they’ve lost a lot of ground since March, but they’re designed to be more volatile than the overall market and to come out ahead in the end because the market rises more often than it falls. The volatility works in the long-term investor’s favor by providing even cheaper prices than the market during down periods and better appreciation than the market
in up periods. By buying every month, we lock onto that pattern automatically and the results are impressive.
Although I think medium-term outperformance is changing from smallcap and midcap companies to largecap, the long-term record clearly favors midcaps as the sweet spot in the market. Since I discovered the midcap strategy and put it to work three and a half years ago, it has returned more than 150%. During that same time, here’s how it compared to the major indices and some select stocks (not counting dividends):
Maximum Midcap: +154%
Dow +34%Nasdaq +63%S&P; 500 +44%S&P; Midcap 400 +78%S&P; Smallcap 600 +91%
Exxon Mobil (XOM): +91%General Motors (GM): -3%Intel (INTC): +26%Microsoft (MSFT: +4%Newmont Mining (NEM): +87%Schlumberger (SLB): +222%
I’ve deliberately chosen two energy companies, a gold company, and two tech majors for comparison. Energy investing has been a dominant investment theme in the past few years, as has been the rise of commodity prices, particularly gold.
Even so, the only selection on the list above to have outperformed our simple Maximum Midcap strategy is Schlumberger, an oilfield service company. Even that is not compelling, however, because we’re looking at a time period that had the oil business in the limelight. Conditions don’t get any better for oil companies than they’ve been in the past three and half years. Prior to this time period, SLB wasn’t such a hot investment. From 1998 to the beginning of its dramatic recovery in 2003, SLB lost more than 50%. From 1982 to 1995, the stock was nearly flat. Thus, while SLB was impressive in the past few years, it comes nowhere near to qualifying as a permanent strategy.
Maximum Midcap certainly does. My index doubling approach has some critics shaking their heads because of the volatility. I acknowledge that at times it’s painful to watch our money going down twice as fast as the market. However, if we can keep cool heads during such times and add to the position instead of bailing out, history suggests that we’ll be rewarded for doing so. I’m pleased to continue highlighting these simple, effective long-term approaches to the market.
Why, you may ask, don’t I double the smallcap index. I spent a lot of time studying and comparing the midcap and smallcap indices. Both are excellent, and better choices over the long haul than the Dow. However, the smallcap index hits occasional rough patches that really set investors back. More dangerous than the impact to the portfolio, however, is the psychological risk that the investor will not be able to take the pain any longer and will get out at precisely the wrong time.
Besides, the occasional smallcap tailspins are serious enough to put its long-term performance slightly below midcap’s. In general, the pattern is for smalls to do very well, do very badly, then do very well again. The mids do pretty well all the time. For most people, the latter is much easier on the stomach, plus it ends up with more profit when all the shouting’s done.
Thus, I remain a midcapper. I’d like to make you one, too, so you can appreciate the power of this approach. For all the time we spend analyzing, reporting, deliberating, charting, and trying to get the timing on trades right, just buying Max Midcap every month is an appealing way to do an acceptable job with almost no work. That’s why it’s one of my permanent portfolios, while I spend time trying to goose performance on the margin with individual holdings.
Hop on board with me and put the power of the midcaps in your portfolio. You can read more about my service here.
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