Monday morning Quarterbacking & Bragging

Any investor who does do some Monday morning quarterbacking periodically is a loser. I had not taken stock since the middle of last year. In my post concerning strategy, I enumerated the new strategy for the new half of the year and set a pro-growth target. The summation of that post was a strategy to preserve cash and grow rapidly. In the end, I would say it was largely successful in the virtual portfolio- It was Up 20% since June. Comparative analysis to other fund managers reveals that my BMF portfolio outperformed 84.1% of funds in the month of December, 63.3% from September and 67.5% of funds counting from the month of June. The fund is up handsomely this year (by 3.5% compared to S&P Index 0.5% good enough gains). The basic materials, financial services (especially publicly traded stock exchanges) and some good positioning and sectoral circling proved very profitable for the fund.

Going forward, most gains will accrue from Private Equity acquisition as we can see already with the feverish pace of acquisition going on in recent weeks. I envisage consolidation in the basic materials sector and one has already happened to a stock I picked up late last year: FRK. Companies that are likely to benefit from the cheap money in the hand of these corporate raiders will usually be in the 2 to 10 billion dollar range in Enterprise value i.e. debt plus capitalization; it would be foolhardy to count on the size of TXU acquisition or the type supposedly being broached for DOW chemicals.

In any case, both of the acquisition mentioned shows that the sector most likely to benefit from this consolidation will be Energy, Basic Materials, Utilities and Industrials. Anything dirty in short -the principles driving these acquisitions are as political as economical. Most of these companies produce the filthy stuff and seeing that the Communists (sorry the Democrats) are now in charge of Congress and are more likely to win the presidency next year they rather go private and not be subjected to the same level of scrutiny they face now. Add this to the supply side argument that due to more creative financing options out there and derivatives Private Equity have more access to cheap money and the demand sided argument that companies are now risk averse and more profitable.

All in all, this is a good time to be invested in Mid-Caps and even if you don’t like stocks, pick up a couple of Mid-Cap ETFs as that group will most definitely benefit from the inrush of Private Equity fund guys in the coming months. The Blackstone IPO should also be a good money maker- if you have a need for common stock in your retirement portfolio this will be a very good addition.

Financial services should continue to experience tremendous growth upsides courtesy of accelerated profit margins in the corporate World- but watch out for a possible leveling off not fall off of these profits. This will not likely be reflected until first quarter 2008 and so it should not matter a lot this year. Real Estate will continue to experience great pains but Investor Optimism should make it a reasonable cash cow for patient souls who can handle great pain. As usual, if you are not playing with the House's money- stay off the airlines and automotive sectors: they are for the brave and rash.

P.S: A 401-k series for the Class of 2007 will begin in the next updates

Correction and Psychology of the Market

The Large drop off on Tuesday, 27th February should not make you panic. In fact, the drop was logical and effectual. Check out Jim Jubak’s Article and Cramer’s Take on why it happened. A combination of China, Technology and natural market tendencies to correct an upswing led to the DOW losing more than 400 points (and about 500 points intra-day). This should not make you panic, rather it should lead to an evolution of a new strategy. Basically, what will happen is that big money (institutional investors) will not abandon the market they simply will rotate into new areas. The new areas that will work is Consumer Product. Hence these dividend rich cash king like Procter, Altria and Pepsi will always work when the economy is expected to go down in flame. As you realize, I did not say we are entering a recession like godfather Greenspan (the harbinger of evil) said on Monday preceding this downturn, I rather said the expectation of recession.

Market trends are about psychology than reality. Generally speaking the market does poorly entering summer time because optimism is largely lacking- and this summer is going to be gruesome and it started early already. With the Christmas behind us and Valentines Day gone past- there is little to cheer consumers or investors so expect a crummy market at least up until July when the patient will be richly rewarded. I still expect the market to swing back in favor and this gloom is just your opportunity to get in cheap to what you always liked- just make sure you spot the bottom right.

Hence, the fear of China will punish any sector levered to the Chinese these are: oil/gas producers (refiners should still do well- as we enter the driving season), miners and basic materials sector, and commodities exchanges. The commodities exchanges should fare badly for a short time and then they will bounce back. The miners will get punished the most and should not return until the mid-summer time while the oil/gas producers will trend towards flat than down. Hence, circulate out of these sectors or at best be underweight in them. An unlikely beneficiary of a bearish psychology will be the brokers and non-commodities exchange. Greater trading due to sector circulation/reallocation and/or just sheer panic will allow these folks bring more money into the house since they make more money when you trade and/or panic. The big five brokers should continue to do well: LEH, MER and GS are my favorites.

The greatest mistake however, will be not taking advantage of this sell off to establish position in very good companies. Timing the bottom will be as crucial in this game as staying off the way of a roaring bear. The strategy is yours to fashion.

Must Own: JNJ, PG, PEP, MO, ATT, NYX, LM, LEH