2008 March 03 | money blog

03 03 2008

‘Hot’ stocks: From the leader board to the doghouse

Posted by: in Stocks Money News

Filed under: Stocks to Buy, Stocks to Sell

Investors frequently like to chase “hot stocks.” While not based on fundamentals, momentum investing does sometimes work as stocks that are “working today” frequently “work tomorrow” as well.

So, as 2008 is 1/6th done, it’s time to look back at the highfliers from 2007 and see where they’re trading today. As usual, the analysts at Bespoke Investment Group have some good data and charts for us.

In a post, titled “How the Best Have Done,” Bespoke analyzes the best performing U.S. stocks of 2007 and tracks them into 2008. The results:

First Solar Inc. (NASDAQ: FSLR), 2007’s best performer, is down 21.86% year to date. See BloggingStock’s Aaron Katsman’s article on why he shorted this stock into the New Year.
The second best, Onyx Pharma Inc. (NASDAQ: ONXX), is down 49.51%.

While some solar stocks are down big in 2008 after a huge run-up in 2007, the big winners are heavily concentrated in materials, agriculture, and energy. BPZ Resources Inc. (AMEX: BZP) is the stock on the list that has done the best in 2008 — rising another 44% so far this year.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

03 03 2008

Are debt-burdened companies a good buy?

Posted by: in Stocks Money News

Filed under: Bargain stocks, Blackstone Group L.P (BX)

The latest issue of Barron’s is suggesting that investors may want to look at beaten down, debt-laden companies(subscription required):

Blackstone Group, Apollo Management and the rest of the private-equity crowd may be sidelined by the mess in the credit markets, but investors still can play at their game by purchasing shares of debt-laden companies in the public markets.

Barron’s goes on to suggest that, if credit markets stabilize, some companies with heavy debt loads will rebound well. I don’t dispute this analysis but I also don’t think most investors should go chasing companies with big debt loads. It’s always struck me as being somewhat akin to tiptoeing in front of steamrollers to pick up a penny. I’ve never bought shares of a company with a lot of debt. Sophisticated investors with an ability to really understand the debt, how it’s structured, and the risks that go with it may do well with these companies. But if that isn’t you, I think your best bet is to stay away.

As Barron’s warns, the ultimate danger with investing in heavily leveraged companies is bankruptcy. If you’re a disciple of Warren Buffett’s first and second rules of investing — don’t lose money and don’t forget rule number 1 — this probably isn’t a game you want to be playing.

03 03 2008

Consumers now spent up, not pent up

Posted by: in Stocks Money News

Filed under: Personal finance, Recession

In another nod to a slowing economy, consumer spending slowed in January, while income growth sputtered as well. The Wall Street Journal reported recently (subscription required) that the Commerce Department said “personal spending rose 0.4%, but was unchanged after adjusting for inflation. Such spending was also flat in December and October.”

It seems to be a perfect storm of sorts. Consumers are cutting spending as they face dropping home prices, high energy prices, tightening credit markets, and a more limited job market.

As consumers spend less, they may be forced to dip into the proverbial cookie jar and start spending rainy-day savings. The same article said, “Rising prices may be prompting consumers to dip into their savings. The personal saving rate fell 0.1% in January, repeating December’s performance.”

While economists and politicians debate whether the U.S. has dipped into a recession, consumers are already feeling the pinch.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

03 03 2008

Robert Shiller: Why most couldn’t see the housing bubble for what it was

Posted by: in Stocks Money News

Filed under: Housing

Robert J. Shiller’s Irrational Exuberance is the classic book for understanding the stock market bubble of the late 1990s and early 2000s. His contribution to the study of real estate is equally compelling. The House Price Index used to track our real estate market was co-developed by Mr. Shiller — and is innovative in that it adjusts for the quality of homes involved in transactions.

So given his expertise in bubbles and real estate, he is probably the guy to listen to when it comes to the topic of the real estate bubble.

In a column in this Sunday’s New York Times, Shiller gives an interesting possible explanation for a question that hasn’t gotten a lot of attention: Why were Alan Greenspan — and a lot of other presumably intelligent people — unable to see that real estate bubble for what it was given that, in retrospect, it seems so obvious?

The answer may lie in a psychological phenomenon known as information cascade. Be sure to read Shiller’s column for an explanation of how this may have applied to the real estate market. It’s fascinating stuff.

And understanding why the bubble wasn’t widely detectable is key to understanding why it happened. As Shiller writes, “The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks.”