A Two-Penny Miss

My limit order to buy Sun Microsystems at $3.40 never executed. The stock got down to $3.42 on April 28, then shot up the next day to $3.98 on news of a buyout. Since then, it has been trading in a range between about $3.80 and $4.00.

While missing such an opportunity is never fun, it’s how the market works when you approach it the way I do. I hate losing money. That’s why I set my buy prices unreasonably low. True, a limit at $3.45 would have been almost as low and would have executed, giving us a profit of 14% as of Friday’s close. However, the stock could have easily slipped to $3.35 or lower and I can see myself writing about how I underestimated how low prices could go in the current depressed climate. Overall, I’ve been well served by placing very low limit orders to buy in the full knowledge that most of them will never execute. This most recent is just another example.

Now, I have some good news. First, many readers informed me that they did not have my patience and decided to buy at prices between $3.45 and $3.60. To those of you in that camp, congratulations. I’m always happy to provide a beacon, even when it fails to reflect back on my own ship.

Second, I think we’ll see another opportunity to buy Sun below $3.50 over the summer. My usual cycle, and I expect it to repeat here, is to get Sun at the end of summer and ride it up some 65% by February or March of the following year. This trade was not supposed to be that six-month large gain. It was just supposed to be a quick 20% gain or so from $3.40 to about $4.10. So far, $4 has proven to be pretty stiff resistance and we’re heading into the weak season.

Third, the suddenly cheery tech sector has benefited one of our other holdings, Ultra Semiconductor. We’re back in positive territory for the first time since early March, and that feels great. Dell reported a good quarter, Intel sees capital spending continuing, and Microsoft is looking robust. Have you seen Microsoft’s new Xbox 360? With three dual-core, 3.2-gigahertz processors, it has more computing power than most high-end workstations. It’s clearly aiming at something beyond the next generation of shoot-em-up teen fixations. Microsoft has needed a new growth market for the past several years, even as its wildly successful installed software base continues to pump cash back to headquarters to the tune of a billion dollars a month. When it announced plans to go head-to-head with Sony in the game realm, critics scoffed. Sony has so far prevailed, but Microsoft can outlast Sony in the gaming arena because of its endless cash spigot. Meanwhile, what Microsoft really wants is a beachhead in your living room from which it can launch forays into household computing beyond the PC sitting on your desk. It already owns that. It needs more, and I think it’s going to get it. From SmartMoney:

The gaming industry is no longer simply all about wicked graphics. In terms of Xbox 360, amazing graphics capability is there — in spades. But this new console is more about a complete entertainment experience than its predecessor. It’s about wide-screen game play on high-definition televisions and enhanced online capabilities. It’s also about playing DVDs, CDs and streaming pictures, music and video from PCs, digital cameras and MP3 players. [full article]

That sounds promising to me, and something I’d like to be a part of. Hence I continue to hold Microsoft despite its sideways inaction for the past two years.

Of course, Microsoft is also part of the Dow, so investing there will give you some exposure to this phenomenon. Speaking of the Dow, it remains a pretty good time to invest in it. Double The Dow is down some 12% so far this year and that could give you some nice recovery profits come about Christmas time. I think we’ll probably go lower over the summer, but it’s still a good time to start a dollar-cost-averaging program now and then still manage to benefit from even lower prices in August. As always, you can track the Dow portfolios on my Strategies page.

From my dodged bullet department comes a review of our old holding, UTStarcom. A quick history: I bought it in November at $16.59 and sold it in February at $15.10 for a 9% loss. It closed Friday at $7.09. That’s a 53% loss from my February sell. Even if you’ve had a crummy week, think about dodging that and you’ll enjoy the weekend.

From here, I continue in my patient, cash-rich ways. My buy order on Sun at $3.40 remains open. It’s a tricky time. We took profits on gains from positions opened at the end of last summer. Then we had a sell-off and I tried getting into Sun at the very bottom of it. Now the sell-off’s bottom appears to be behind us, but we don’t seem to have arrived at a new bull phase. We’re treading water and we’re doing so just upstream of the annual waterfall known as summer. If we get some super cheap prices we should grab them. But we must insist on super cheap because there is peril ahead. From Dick Green’s Friday morning column at Briefing.com:

The market has been on an incredible daily pattern of reversing direction. After Friday’s down day last week, Monday was up. Then Tuesday was down. Wednesday was then up. Thursday was down. And now maybe Friday will be up. The market has posted very few two-day moves the past month. It makes for a very dangerous environment for trading. Even major hedge funds have been getting burned lately. It is a time when extrapolating from the mood of the moment can be very dangerous.

Right, and then there is the issue of the global downturn. What’s that? You hadn’t noticed a global downturn? You can be forgiven that. The press seems to report just one theme and that’s a rising China. The oft-cited country of 1.3 billion people in need of phones, cars, refrigerators, and new sports centers for the 2008 Olympics is expected to buy everything on Earth. Commodities investors see nothing but rising charts as China secures oil, China buys aluminum, and China uses ten times the concrete that America uses. Isn’t all the world ringing the cash register for its Chinese customers?

Perhaps not. Or, at least, perhaps not as much as has been reported. Things were definitely on an upstreak for a couple of years there, after which the rosy articles began appearing. That’s a sure sign of the end. Just as I bet on dropping materials prices, they did indeed reverse course and we profited. Our profits, however, meant a reversal of fortune at materials companies. Their growth rates have slowed considerably. They’re only a small part of the global picture of slowing growth, captured well in this excerpt from Economist.com:

The evidence is mounting that global growth has slowed. In America, output grew by an annualised 3.1% in the first three months of 2005, the slowest pace for two years. More recent figures, from weak retail sales to soggy consumer confidence, suggest this “soft patch” may be getting softer by the day. In Britain, the latest numbers — in retail sales and manufacturing — point to weaker growth. And in the euro zone, sluggish economies are looking ever more lethargic. [full article]

Yes, it looks like a great time to take a walk among spring flowers and forget about the markets for a while. They won’t go anywhere. They’ll still be here when you get back. And I have a hunch they’ll be sporting cheaper prices.

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