Skip to main content
Publish date:

RealMoney's Best Blogs

The highlights from our bloggers: Cramer, Rev Shark, Willard, Smith, Crescenzi and TheStreet Research Team.

Another week, another record high on the

Dow

. Earnings season got off to a strong start, tech stocks took off, with

Google's

(GOOG) - Get Alphabet Inc. Class C Report

deal for YouTube providing plenty of buzz early on, and bonds stumbled, as the Federal Reserve signaled that rate cuts are unlikely anytime soon.

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 why housing stocks are bottoming, no matter how lousy fundamentals are now for the industry,

Rev Shark

on the attractiveness of small-caps,

TheStreet Recommends

Cody Willard

on the psychology of the bulls and bears,

Steve Smith

on how to gain downside protection,

Tony Crescenzi

on the data to look for next week, and

The Street Research Team

on one stock to buy if you're bullish on the market.

Click here for information on

RealMoney.com

, where you can see all the blogs -- and reader's comments -- in real time.

Cramer's Blog: Listen to the Housing Stocks

Originally published on 10/12/2006 at 10:06 a.m.

Housing, the industry, hasn't bottomed at all. Housing, the industry, according to Bob Toll of

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

last night on "Mad Money," is still trying to find its footing.

But the housing stocks have spoken. What they're saying is that the industry will bottom and turn up, because the inventories will peak and go down, if they haven't already. They aren't building the houses in the quantities that they were, and the country, which added 30 million people in the last 16 years, is still growing like a weed.

Still, though, I'm getting intense feedback that I am dead wrong, typically from hedge fund managers who remain short the group.

In the interest of presenting the other side, let me give you the color of the bears from a representative email I've received:

Jim, I heard your piece on TV. In all due respect, you're missing the board. Lennar (LEN) - Get Lennar Corporation Class A Report is dumping inventory in order to monetize land. They are not alone. And the leapfrog game continues to the point they are negative at the margins. We must see profits this quarter, but we will see losses next quarter. Guaranteed. I don't care what Bob Toll or Stuart Miller tell you. I can show you ground zero. Send down one of your research assistants and let me take them on a tour of Florida, Virginia, Arizona, Nevada and California. It is far worse than the National Association of Realtors, the builders or the government numbers reveal. ... I am at ground zero. I am on the front line and I am not some knucklehead who does this part-time.

Let's forget about the inventory issues and negative margins. The next shoe to drop is financing. What we we're seeing now is the failure of buyers to get financing. Even at companies like Centex (CTX) and Lennar, with their own mortgage companies, buyers cannot get mortgages even if they want to close on overpriced units they plunked down deposits on more than a year ago.

This writer suggests that the industry execs are drinking the Kool-Aid even as they are trying to move overpriced inventory that they can't, despite 40% declines in prices.

So what do I think? I think it's even worse out there than this emailer thinks. I think this emailer is understating the problem. I think there's far more inventory all over.

And you know what? I'm not in the real estate business. I am in the stock business. I know that stocks bottom ahead of when the

Fed

cuts, ahead of when the fundamentals bottom. Sometimes well ahead. I know that the stocks top well ahead of the fundamentals; witness the crushing of

Halliburton

(HAL) - Get Halliburton Company Report

, even as oil was zooming up to the $70s.

I am saying that the same thing is happening here, that the stocks, when they bottomed in July, reflected this reader's view.

I am not saying that these stocks couldn't come back and test those lows. I am saying that those lows will stand because rates will come down, because inventory

always

gets worked off and because the builders knew that they had to stop building, which they have.

Sorry, bears. But I have seen it all before. The fundamentals on the ground will never tell you what the stocks are saying is in the air.

They never do.

There is never a bell that goes off. Ever.

That's the genius of the market. You can defeat it over a week or two. You can't defeat it over a quarter or two. It's just too good at its job, no matter how good an analyst or consultant may be at "ground zero."

Random musings:

Now

Deere

(DE) - Get Deere & Company Report

is up huge from when

Agco

(AG) - Get First Majestic Silver Corp. Report

blew up. The judgment: Agco stinks, Deere is crushing it.

At the time of publication, Cramer was long Halliburton.

Rev Shark's Blog: Small-Caps Will Outrun the Big Dogs

Originally published on 10/13/2006 at 10:54 a.m.

As we enter the lunch hour, the indices are holding steady, with semiconductors driving some outperformance in the

Nasdaq

. Gold, oil and a variety of commodities are quite strong, and it certainly looks like the bottom-fishers are becoming more aggressive in those groups. I took some oil-related stakes for client accounts yesterday and will look to add.

In my prior posts I highlighted a bit the two-tier nature of the recent market. There obviously has been some sort of revaluation of big-cap stocks recently. They are for some reason being given higher P/Es now, even though growth has not picked up to any great degree.

A lot of folks have asked me why I don't play the big-cap game. After all, if they are outperforming, why not put some money there? I have two responses

First, even in a market where big-caps are outperforming, the best small-caps will still produce far better returns. For every

Microsoft

(MSFT) - Get Microsoft Corporation Report

or

Cisco

(CSCO) - Get Cisco Systems, Inc. Report

that is up 30% over the last couple months, there are dozens of small-caps that have made even better moves.

Their ranks might be a bit thinner as big-caps as a group outperform, but in any market environment at any time, good small-caps will always beat out good big-caps. The key word here is "good." Small-caps as a group may lag, but the best ones will outperform everything else.

Second, the big-cap rotation strikes me as something that will have a limited life span. For some reason we are seeing an expansion in P/Es in the big names right now. The market has decided that these stocks should now be given a better valuation than in the past. I'm not sure why, but once that revaluation plays out and the big dogs adjust to their new P/E level, there are no further drivers. Growth isn't going to suddenly pick up. P/E expansion is the driver, and that has its limits.

Some argue that P/E expansion in the big-caps could play out for quite some time, but I'm skeptical of that. The market tends to make these sorts of adjustments much quicker than it used to.

In addition, as P/Es expand for big-caps, the relative value of small-caps becomes much greater. A big-cap with a 25 P/E and 7%-10% growth doesn't seem like such a great buy when compared with a small-cap with a 30 P/E and 25% growth. There are some major limits to how far big-cap P/Es can expand without dragging along everything else out there.

At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.

Cody Willard's Blog: Build a Ship on the Sea of Emotion

Originally published on 10/13/2006 at 9:35 a.m.

The markets continued to power ahead Thursday, putting quite an exclamation point on this strong rally from midsummer. Let's look at the psyche of each side:

Bulls

After a strong start to the year, most bulls got crushed as the May-July tanking in the markets took big-caps, small-caps, value plays and momentum juicers to new lows on the year. Very little was spared -- retail, energy, tech, finance, all were trashed. Most money managers have a long-only, all-the-time strategy, so in May they were staring at huge losses and wondering if they were gonna get paid this year, or even keep their jobs.

Few put money to work at the lows, but as the rally showed some sustainability into autumn, they did put money to work. Now most bulls have some gains on the year, could even ahead of the DJIA, which is now up 11% on the year.

The dominant emotion among these bulls? Relief. Relief that they're likely to make it through another year and relief that if the market can keep rallying into year-end, they might actually get a decent payday. Greed? I don't hear it. Fear? Yup, nobody wants to give back their hard-won gains before this year's over. Throw in a little bit of cockiness from the retail bull contingent and you pretty much round out the bull psyche.

The takeaway from the bull emotions is bullishness, because relief and fear are what bull markets are built on.

Bears

It was a horrible start to the year as the bears were once again shocked that the economy didn't collapse --

any day now! -- so the new year started with a bear squeeze. By early May, just as the commodities were blowing their tops off and the economy was finally cooling with inventory problems in semis -- a recipe for a bear market -- the bears got bullish. "For a trade," they'd tell us. And then by the time the market had all but crashed into midsummer, the bears finally got bearish. Just in time for another squeeze.

Now, the bears have been fighting this rally every step of the way, expecting to see the markets pull back as the economy finally does find that "any day." It's been a rough year for the bears. Again.

And the dominant emotion? Fear. Anger. Exhaustion. The bears are terrified that this economy will land softly or that the

Fed

really will start to reliquefy. And they're scared that

Microsoft's

(MSFT) - Get Microsoft Corporation Report

Vista and tech really do take off. And they're angry that they've been so foolishly fighting a boom for so long. (Bet I'll get email on that one.) And they're exhausted from losing so many battles during that fight.

Net/net, the takeaway from the bear emotions is slightly bearish, because exhaustion isn't a brick for a rally's wall.

As earnings season besets us, we should be able to game some of the reactions to both good and bad reports with this emotional set-up to guide us. But who's going to come to my emotional rescue? More all day.

At the time of publication, the firm in which Willard is a partner was net long Microsoft, although positions can change at any time and without notice.

Steven Smith's Blog: The Cost of Protection

Originally published on 10/12/2006 at 2:15 p.m.

The options column in this morning's

Wall Street Journal

posits that, with the VIX and the implied volatility on related index products near historic lows, it makes sense to use puts to gain some downside protection.

That makes a world of sense to me, as

I've noted that the cost of put insurance rarely gets cheaper than it is now. It's running at just about 9% on an annualized basis if you use options with six months remaining until expiration.

So I don't understand why the options strategist from Credit Suisse who is quoted in the piece would recommend using a ratio spread in an attempt to bring the cost down to zero. Specifically, he suggests using

S&P 500

index options to buy one December 1275 put and sell two December 1225 puts for even money.

The article does point out the profit/loss and breakeven points based on where the SPX is at the Dec. 15 expiration: You'd start making money on a 6% decline, or at 1275, and the maximum would be achieved on a 10% decline, or 1225. Losses would be incurred if the index falls below the 1175 level, or about a 14% decline. What the article does not point out is that the losses are unlimited if the market keeps declining.

Of greater concern and confusion is the idea of recommending a ratio spread -- that is, selling more contracts than you own, which results in a "naked" position -- without addressing the impact that an increase in IV would have on such a position.

If the S&P 500 were to decline even 10% within the next month, it's safe to assume the IV on the December options would rise back above 20%. Remember, during the summer swoon, the VIX hit a high of 24% when the SPX bottomed at 1220 in mid-June.

A quick look at this handy

options calculator shows me that if the S&P 500 were at 1215 one month from now and IV rose to 20%, the value of that 1x2 spread would be worth just $3.

This illustrates the two main problems with using a ratio put spread to gain downside portfolio protection. First, it is negatively impacted by an increase in implied volatility, something that usually accompanies the type of steep drop you're trying to protect against. Second, it's very difficult to take any profits before expiration.

If you want to use a spread to reduce the cost of buying downside protection, I'd suggest a straight one-for-one vertical spread. For example, one can buy the December 1300 put and sell the December 1250 put for a net debit of around $5 for the spread. The position has a maximum profit of $45, which is similar to the $50 maximum profit of the aforementioned ratio spread, but it only takes a 4.3% decline to start realizing a profit.

Also, the even number of contracts bought vs. sold will mitigate the impact of an increase in implied volatility, meaning one can take a profit if the spread moves into the money before expiration. Most important, the risk is limited to that $5 upfront cost, which equates to about a 3.5% expense for 10 weeks of protection.

Using a ratio spread might save you a few bucks in the near term, but if the very market decline you're trying to protect against becomes too much too fast, it could end up wiping you out. The last thing one wants to do in establishing portfolio protection is to be penny-wise and pound-foolish.

Tony Crescenzi's Blog: The Onus Shifts

Originally published on 10/13/2006 at 2:56 p.m.

Whereas the rate-cut camp was under pressure recently to support itsexpectation for a rate cut that had already been built into prices, for theupcoming week the "rebound" camp will be under new pressure. This isparticularly because the recent bond selloff has been in accordance withthe idea that the economy is holding up well enough to ward off a rate cut.

Highlighting the calendar are two reports on regional manufacturing activityin October (Empire survey on Monday and Philadelphia survey on Thursday),and the home builders survey on Tuesday. Inflation news will also beprominent, with the release of the PPI on Tuesday and the CPI on Wednesday. The inflation data are seen as backwardlooking, so the PPI and CPI reports could take a back seat to other datathat give insights into the pace of economic growth.

Nevertheless, highinflation readings would not be welcome in the bond market, especially givenrepeated

Fed

comments recently about how the inflation rate is too high, andalso because the economy appears to be performing better. In other words,context matters, as always.

Stock Talk Blog: Like the Market? Then Buy Legg Mason

Originally published on 10/11/2006 at 1:09 p.m.

Legg Mason

(LM) - Get Legg Mason, Inc. Report

is down a whopping 18% today after

warning of weaker-than-expected third-quarter earnings and revenue. While others are selling, those with an aggressive outlook for equities over the next 12 months should be buying this stock.

Asset managers benefit disproportionately from stock-market rallies, as their existing assets deliver more revenue and investors pour more money into their mutual funds. Legg Mason is likely suffering from outflows in the ever-popular

(LMVTX) - Get ClearBridge Value C Report

Legg Mason Value Trust mutual fund, which is down 3.6% year-to-date, according to Morningstar. That performance is courtesy of some poorly placed bets on stocks like

Yahoo!

(YHOO)

,

Amazon

(AMZN) - Get Amazon.com, Inc. Report

and

Sprint Nextel

(S) - Get SentinelOne, Inc. Class A Report

.

However, in the money management world, a rising tide lifts even boats with leaks, so Legg Mason would do well in a strong stock market.

Plus, the valuation just got a heck of a lot cheaper. Hacking 10% off the consensus fiscal 2007 (ending in March) EBITDA forecast of $1.2 billion implies a valuation of about 10X that number, which is not bad for a company with very steady cash flow and good long-term prospects. I incurred the wrath of many a Legg Mason shareholder when I spoke negatively of the company

here, but I do believe today's move has created an opportunity for the bulls.

In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

David Morrow is editor-in-chief of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

click here

to send him an email.