It was a news-heavy week for the markets. The Federal Reserve's much-anticipated pause was met by selling, but stocks rallied strongly after the arrest in Great Britain of suspects alleged to be involved in a plot to attack transatlantic airliners. Once again, RealMoney's bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the TheStreet.com. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Let's take a look at
Jim Cramer on Varian Medical Systems,
Rev Shark on the Fed's pause,
Cody Willard's debate with Doug Kass on the market and economy,
Steve Smith on keeping it simple and
Tony Crescenzi on what makes Bernanke tick.
Click here for information on
RealMoney.com, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: Varian Makes Perfect Sense for Philips
Originally published on 8/9/2006 at 10:52 a.m.
You want obvious?
Philips Electronics(PHG Quote - Cramer on PHG - Stock Picks) will buy
Varian Medical Systems(VAR Quote - Cramer on VAR - Stock Picks) within the next year.
There, I said it.
I realized after I interviewed Varian CEO Tim Guertin on my
"Mad Money" show that this company would fit in so perfectly with the string of acquisitions that Philips has been making, all of which have been in the medical-imaging and wellness businesses.
Having just gotten rid of 80% of its semiconductor division, the company is flush with capital. And Varian is the dominant radiation play against cancer and is having a fabulous year with great growth. (Hence, it fits my parameters for successful takeover investing because the fundamentals are excellent.) That's precisely Philips' sweet spot.
Meanwhile, Philips could pay for the whole acquisition by selling Varian's fantastic domestic security and screening business, which develops technology to detect explosives.
L-3 Communications(LLL Quote - Cramer on LLL - Stock Picks) would buy it, although it's trying to sort through the post-Lanza world, or
GE(GE Quote - Cramer on GE - Stock Picks) would be a natural.
I mention all of this for one reason: the stock is so cheap and the market so much wants these steady growers right now that a Philips bid would simply be a kicker or a backstop if the market changes its mind for this stuff. Put this one on your radar screen; it's right.
At the time of publication, Cramer had no positions in stocks mentioned.
General Electric owns CNBC, for which Cramer is a featured commentator.
Rev Shark's Blog: Good News: Fed Pause. Bad News: Same
Originally published on 8/9/2006 at 8:57 a.m.
"If you find a good solution and become attached to it, the solution may become your next problem."
-- Dr. Robert Anderson
Yesterday the market saw at least a temporary resolution to one of the biggest stumbling blocks it has faced in a couple years: persistent interest rate hikes. We finally have a pause but the reason for the pause is now our next problem.
The economy has now slowed enough that the Fed feels pricing pressure will ease even without more rate hikes. Although a slowing economy is a good solution to the inflation issue, it presents a whole new problem for the stock market if companies start to see earnings growth slow along with the economy.
The good thing about dealing with the problem of a slowing economy rather than inflationary pressures is that even in a slow economy there will be companies that perform well, and good stock picking will be rewarded. Stocks that buck the trend and produce good earnings and growth will attract attention, which will produce pockets of momentum. In an inflationary environment the pressure on stocks tends to be more general and all stocks tend to be affected.
Nonetheless a slowing economy is going to present plenty of obstacles for stocks, and it will be particularly important to focus on sectors. Those that are less susceptible to the economy are going to attract more attention, and the highly cyclical industries are going to struggle.
Our job now is to watch how the Fed pause changes the character of the market. If investor concern starts to shift away from inflation and to new issues, that will produce a new crop of winners and losers.
After the "sell the news" reaction to the Fed yesterday, I'm looking for some bargain hunters to help support us a bit today. A good report and strong guidance from
Cisco (CSCO Quote - Cramer on CSCO - Stock Picks) is helping matters. It will be particularly instructive to watch how well it holds as the day progresses.
Overseas markets were strong and we have a solid open on the way. Sellers will probably hit it again but this time I'm looking for buyers to surface fairly fast.
At the time of publication, De Porre had positions in stocks mentioned, although holdings can change at any time.
Cody Willard's Blog: A Bull/Bear Debate
Originally published on 8/7/2006 at 2:15 p.m.
One of the most thrilling things about writing for
TheStreet.com over the years has been the interactions I've had with big Wall Street names.
Doug Kass and I were just trading instant messages discussing the state of
the economy and the market, as we sometimes do. Aside from being pretty
exciting for me, I got a lot out of the discussion and thought I'd share.
He started off by asking if, perhaps, over the balance of the
year, the market will go range-bound, as that might perhaps be the action
that would frustrate and hurt the most participants. I countered that I
questioned whether the bears are short enough to really benefit from a
declining market and that perhaps a swift downturn would be the most painful
action for the most participants. Doug suggested I might be
overstating the influence of short sellers, as the dedicated
short community is less than $7 billion or so, about 4%
the size of the Magellan Fund. Great point.
That said, as I wrote
here, and as Doug has written on a few times
and really hit on
this morning, I think there's so much leveraged and optioned money run by hedge funds,
and that a great many of those guys talk up their short approach, but that
they're in cash, cyclicals and perhaps even trying to schnitzel a rally by
being long. Meanwhile, of course, the long-only hedge fund managers have
been hurt, but few if any have capitulated and raised cash. Most are
probably hurting, but feel that they've not done so bad this year and are
flat to down about 5%. I do hear stories of retailers capitulating, but not
as many as I would expect given the trashing of so many stocks in the last
three months.
I told Doug that, gun to head, I could see 5%-10% more downside in the
markets, and that the Fed would then reinflate, which would likely lead the
market to take back off. He noted that the Fed might not be able to stop
inflation (or growth) unless they crank rates up high enough to produce a
sustained period of excess capacity -- which would take higher rates than
the current federal funds rate. And that the market's not ready for that.
And that takes me to my potential "tech echo bubble" and why I continue to
see it as a possibility. If the market were to tank another 5%-10% in the
midst of a cooling economy, the Fed would be likely to capitulate to the
market and the political pressures of a bad market in election times, which
would lead them to reinflate and get our economy and markets juiced
again.
Of course, that would likely mean there would be a bigger price to pay.
They'd have to remove that liquidity eventually again, which would mean
that there'd be big problems three, five or maybe 10 years down the road. Of
course, the Internet could accelerate the timing of all of that.
Finally, we also discussed corporate profit margins, which have been far
above their historical mean for the last few years (and decades, too). My
stance on that continues to be that the changing nature of our economy
(chips, software and services) means there are much higher profit margins in store for the S&P 500 over the next 10, 30 and 50 years and that our concept of a "mean" of profit margins is skewed by a limited history of keeping such records and from a time when we move from industrial to intellectual. Doug noted how difficult it is to quantify such a statement. Can't argue with that.
A lot of crosscurrents to ponder, and I think this discussion helps
underscore why I remain so patient, despite my expectation for another big
leg higher in the economy, tech and society in the next few years.
Steven Smith's Blog: Anatomy of an Unnecessarily Complicated Trade
Originally published on 8/10/2006 at 1:43 p.m.
When an "event" occurs, the tendency is to think in terms of "I should be doing something," lest I miss an opportunity. But I'm finding it hard to suss out real short-term trades right here. It's not that all my positions are so perfect, or even profitable, at the moment, but I'm trying to remind myself not to lose sight of the forest through the trees.
The other key is to keep a discipline of entrance and exit strategies. For example, the Option Alert model portfolio has a position in
Bear Stearns(BSC Quote - Cramer on BSC - Stock Picks) and yesterday I may or may not have committed a mistake -- the next five days will tell -- by making an adjustment against the original position.
What started as a straight-forward bearish play, by selling a credit call spread -- the August $145/$150, when the stock was above $145 -- has now been turned into an iron condor, by selling the $140/$135 put spread in an attempt to shift toward a straight time-decay play. And thanks to legging into the position, which has a relatively attractive risk/reward of $1.80 to $3.20, I'm now stuck watching the clock instead of trading the stock, hoping it doesn't go up or down "too" much.
The trade may work out, but it's a reminder how options, while a great tool, can lure one into an unnecessarily complicated trade. It also reminds one not to turn a "trade" into a "position" in hopes of getting some marginally better return, whether it be on a winner or loser.
In that vein, over the next days, especially as August options expire next Friday, I'll be shifting my focus to October, December and even some January expirations in hopes of building some positions with a longer time frame, which will allow me to react to short-term moves by selling front-month premium or low-cost-creating calendar spreads.
At least that's the theory, or forest, I'm looking at. Now I need to find the names, or "trees," to plant.
Tony Crescenzi's Blog: New Bernanke Gaffe?
Originally published on 8/8/2006 at 3:06 p.m.
The statement accompanying the Fed's decision on interest rates can be
described as one that is largely as expected; the Fed paused and indicated
that inflation pressures remain high enough to possibly warrant further
increases in interest rates.
To some, the main surprise will probably be the dissent by Richmond Fed
President Lacker, who favored an immediate hike in interest rates. To me,
in the absence of surprises, the most interesting element of the statement
is what it says about Fed Chairman Ben Bernanke. Specifically, it is
notable that the chairman decided to drop the refrain citing the gains in
productivity as a factor likely to keep inflation pressures contained.
In my opinion, it seems the chairman dropped the reference because of the productivity data released earlier today. Recall that it showed labor costs having increased at their most in about six years owing to slowing in productivity growth.
It appears the chairman decided that investors would not be able to overlook the day's data as an outlier in a decade-old trend that appears likely to continue. I hate to say it, but I feel that Alan Greenspan would have shown more conviction on the productivity issue rather than back away from it simply because of short-term trends.
None of this takes away from the actions chosen; rather, I want to focus on what makes Bernanke tick.
David Morrow
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