Laszlo Birinyi Jr.

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Visit his home page at http://www.forbes.com/birinyi
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Kirk's Newsletter performance vs the S&P500

  Date       Kirk    S&P500   Delta
2003 YTD    +16.8%    7.3%     9.5%  as of 5/17/2003
 
                                   Kirk   S&P500+   NASDAQ 
4+ Yrs 12/31/98 through 05/17/03   79.1%  (18.9%)  (29.8%)
+with dividends reinvested.

Click for a free issue ofmy newsletter .

-- posted by Kirk

» Kirk - Recovery Under Way

Thu May 22, 6:35 PM ET
By Laszlo Birinyi Jr.
http://news.yahoo.com/news?tmpl=story2&c...

Has the economy turned around? Has the market bottomed? Can we quit worrying so much? As an investment professional, I hear these questions a lot lately. My answers are yes, yes and yes. The economy has seen its low. The strength in the junk bond market is telling us so. This year an index of low-quality bonds that we track is up 13%, not including the additional income from the 10% yield. The strength in the junk bond market is to the economy what robins are to spring. It means that investors' fears about the economy are abating.

The market may not be at a classic bottom--if there is such a thing--but in reality it hit a low last Oct. 9, when the Dow Jones industrial average tumbled to 7286, rallied, corrected and then moved higher beginning Mar. 10. In mid-May we were at 8647.

Here's another sign of budding optimism: The trend these days is bigger upsides and lower downsides. That's a switch from a year ago. If you take the market's reaction to good news versus its reaction to disappointing news, you find it nets to a plus 221 Dow points: In 2003, on the 14 days when the economic reports were positive, the market gained a combined 1,136 points. On 16 bad-news days, the combined loss was 915.

But I am most encouraged by the market's reaction to specific companies. For example, Tyco (NYSE:TYC - News) on Apr. 30 announced it would take a $1.1 billion charge for still more accounting problems. Tyco stock promptly slumped 15%, but by the day's close it was up 1.5% from Apr. 29.

In another case, Wal-Mart Stores (NYSE:WMT - News)' sales figures for April were disappointing. No matter. The next trading day, May 8, the stock dipped just 7 cents and the following day was up 79 cents. In its Apr. 14 issue Barron's warned that key Internet issues such as Ebay (NasdaqNM:EBAY - News) were overvalued. The result was a wave of buying, continuing Ebay's upward march (the stock has gained 50% since November). The buying behavior is faintly reminiscent of--dare I say?--the late, great 1990s bubble.

Such euphoria stems partly from the quick victory in Iraq (news - web sites) and an unleashing of investors' pent-up desire to at long last make some money. The largest catalyst, however, has been a rash of unexpectedly good corporate earnings.

True, no full-scale earnings boom has developed yet. And many of those lauded for their earnings performance have only met Wall Street's (often lowered) expectations. But the feeling is that if, say, one oil company is doing better, then the other oils will follow.

One example is General Electric (NYSE:GE - News). When it met analysts' earnings consensus of 32 cents a share for the first quarter, the stock took off--even though those earnings were down from the year before. In the market, there was a big spillover effect to Honeywell (NYSE:HON - News) and United Technologies (NYSE:UTX - News), whose rises this spring have paralleled GE's. By itself GE has accounted for 5% of the S&P 500's gain since mid-March. Performing the same service for tech stocks, Microsoft (NasdaqNM:MSFT - News) has added nearly another 5% or so of the overall S&P gain.

Now the warning. While the worst is behind us and the outlook more positive, you can't expect that all will be well. For individual investors, the market has become treacherous. Not because of the economy or terrorism, but because of the market's short-term orientation, fed by instant electronic information and rule changes like 2001's decimalization, which narrowed bid/ask spreads. This change allowed sharp Wall Street traders to step in front of individual investors. On in-and-out trading the edge now is with the pros.

In his classic The Money Game Adam Smith listed two great inflection points: the 1975 Erisa, the law bringing regulation to pension investing, and May Day 1975, when fixed brokerage commissions ended. To those I would add decimalization and regulation fair disclosure.

Today's hedge funds illustrate the shift to a trading mentality. George Soros in his heyday made large macro bets on economies and currencies. Nowadays hedge funds would rather cadge pennies from market pricing anomalies. Some Big Board specialists have been criticized lately for front-running, which, if true, is an abuse of their positions. I suspect this game is far more widespread among Nasdaq traders.

The best way to immunize yourself against transaction costs imposed by the system is to avoid in-and-out trading. Follow Warren Buffett (news - web sites)'s example and hold good names for the long term. In technology I like Lexmark (NYSE:LXK - News) (73) and Dell (NasdaqNM:DELL - News) (32). I would consider drug company Bristol-Myers (NYSE:BMY - News) (26), insurer Cigna (NYSE:CI - News) (51), retailer Gap Inc. (NYSE:GPS - News) (17) and commercial/investment bank J.P. Morgan Chase (NYSE:JPM - News) (31).

From Today
<img src=http://cbs.marketwatch.com/charts/int-ad... width=452 height=366>

+/- 1 Yr
<img src=http://cbs.marketwatch.com/charts/int-ad... width=452 height=366>

-- posted by Kirk

» Kirk - Stocks for a Weak Market

We don't have the catalyst for a big rally. But we do have stocks to buy that can offer an investor growth or yield or both.

The stock market today would be familiar to Macbeth: full of sound and fury, signifying nothing. The bulls have fought the bears to a standoff. The S&P 500 has inched up 2% this year. Commentators suggest that the market's torpor reflects higher oil prices or a slowing of the economy's growth.

While these factors are real, others have a longer-lasting impact and will limit stock gains to a single-digit annual average for the rest of the decade. I'm not being unduly negative here. There will be good years. You might even see a great year, but that will occur only if we have a very bad year first.

Bull markets need a catalyst to get going, as shown in my firm's recently completed 2,500-page study of financial cycles going back to 1962. Unfortunately, looking ahead, I see no such catalyst. What's missing:

No low valuations. Historically, these are needed at the start of a bull run. The 1960s bull market began in 1962, when the S&P was trading at 16 times earnings, and the 1982-2000 surge commenced when that ratio was 8 times. By contrast, the rally we briefly enjoyed last year started at 28 times in October 2002.

That said, unlike the doomsayers, I am not worried that the current price/earnings ratio of 20 is too high and thus portends a collapse. The market is dynamic, and its parameters change. Technology and financial services trade at higher multiples than do steels and railroads. So a market dominated by technology and financial issues should trade at a higher level than the markets of 50 and 100 years ago, when U.S. Steel and DuPont were like the Microsofts and Citigroups of today.

No financial crisis. Perversely, an economic catastrophe sometimes is needed to burn away excesses and fuel a powerful rebound. The 1987 market crash, the 1994 Mexican debt crisis and the 1997 Russian loan default all set the table for good rallies. Maybe we'll be "lucky" enough to endure a new jolt, but I don't find one taking shape.

No structural innovations. Other rallies were stimulated by new financial products--traded options in the post-1974 era, 401(k)s after 1982. There isn't a financial novelty driv-ing demand now. The closest we have gotten is the exchange-traded fund, which people use to buy broad swaths of the market. But ETFs divert investors' attention from individual stocks. And it's the trading of individual issues that fuels rallies; index buying doesn't. Other novelties of late, like decimalization (shrinking bid/ask spreads to a mere penny) and afterhours trading, benefit professional sharpies to the detriment of regular investors.

Meanwhile, we've seen trends arise that undermine a bull market by making life difficult for the average investor, who is needed to get things moving. Consider brokers' shrinking spreads, which sap their income and lead them to save money by skimping on research available to clients. This research made for better-informed investors. At the same time brokers are pushing clients into frequent trading--ads offer the first ten trades free, or flat fees for 1,000-share trades. Result: temporary bursts of mindless trading that peter out when returns don't materialize.

A good indicator of how little Wall Street cares about retail customers is that the larger brokers are making an increasing portion of their money by trading for their own accounts.

Another bad development is the New York Stock Ex-change's knuckling under to institutions that want speedy trades at the expense of the best price. One of the first adages I learned in the investing business: Invest in haste, repent at leisure. In a flat market, what's the rush? In a down market, why not wait for prices to fall before buying?

While accepting the reality that returns in this decade won't be anything like the returns in the previous one, you should identify good stocks and buy them. Here are four.

Alliance Capital (35, AC) is a beleaguered mutual fund vendor whose stock I just bought. Its problems are over. For its part in allowing hedge funds to make improper trades, Alliance coughed up $250 million in rebates and shrank fees. Alliance pays a 6% dividend. Tyco International (31, TYC) , another scandal-scarred name, is growing and under new management.

If you think, as I do, that energy prices will stay high, buy some San Juan Basin Royalty Trust (30, SJT) , an oil-and-gas outfit. San Juan is up 30% this year but still has a below-market P/E of 16. The trust's payout, made monthly, is 9% per year.

For longer-term investors Amazon (40, AMZN) is a good bet. The stock, $54 in June, has not recovered from its second-quarter results: While logging $76 million in earnings versus a loss in the year-before period, the online retailer nevertheless committed the mortal sin of missing the consensus number by a penny.

Laszlo Birinyi Jr. is president of Birinyi Associates, a Westport, Conn.-based financial consulting firm. Visit his home page at www.forbes.com/birinyi.
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<img width=452 height=366 src=http://cbs.marketwatch.com/charts/int-ad... >

As of 10/28/04, the Total Return for Kirk's Newsletter since 12/31/98 is 146%. Here are some more periods and comparative benchmarks:

 
              Kirk   S&P500  NASDAQ 
12/31/2002    +60%    +32%    +48%
12/31/2000    +28%    -10%    -20%
12/31/1998   +146%     -1%    -10%

-- posted by Kirk