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Sunday, October 28, 2007

ISP Bandwidth Problems Good News for Fiber Makers

Fiber optics companies like Finisar (FNSR), JDS Uniphase Corp. (JDSU), Opnext, Inc. (OPXT) and privately held Avago Technologies Limited all stand to benefit from the bandwidth woes that ail internet service providers and broadband cable companies such as Comcast (CMCSA), Verizon Wireless (VZ) and AT&T Inc. (T).

Comcast users report that the file transfer is cut off when they try to download legal copies of movies when they use peer-to-peer, file-swapping software like BitTorrent and Gnutella. Comcast has acknowledged "delaying" some subscriber data transfer, but said "the delays are temporary" and intended to improve surfing for other users. Vindu Goel of the San Jose Mercury News wrote:

You're at home and get a hankering to watch a movie. You fire up your computer, turn on your Comcast high-speed cable modem and start downloading a legal copy of the vintage Hitchcock thriller "The Man Who Knew Too Much" using BitTorrent, a popular file-sharing program.

Suddenly, the transfer stops. The computer sending you the file has dropped the connection. You wait a minute. Nothing happens. You try restarting the transfer. The data flows for a few seconds, then stops again.

What's going on? Comcast is breaking your connection. On purpose.

This does not sound "temporary" to me.

Is this legal? Goel reports:

Comcast's user agreement officially bans file-sharing and "gives them the ability to do anything they darn well please," said California Deputy Attorney General Robert Morgester, who prosecutes Internet crimes in the state.
Why does Comcast stop users from using the bandwidth they think they paid for? A quick search for "Video on Demand" shows Comcast offers Video on demand for a fee. "Net Neutrality" advocates, who want the FCC to prevent internet service providers from favoring some content over others, have argued that "virtual monopolies" will force internet users to pay for things they could get for free if they had unrestricted access to bandwidth.

The heat is already on the companies. The AP report "Senators Want Probe on Content Blocking" says On Friday October 26, "Senators. Byron Dorgan, D-N.D., and Olympia Snowe, R-Maine, said the incidents involving several companies, including Comcast Corp., Verizon Wireless and AT&T Inc., have raised serious concerns over the companies' "power to discriminate against content."

Who stands to benefit?

In the long run, if you pay a company for bandwidth then elect to get your video content from one of its competitors, then US laws should prevent a monopoly or powerful company from stopping you from doing this. Microsoft paid a heavy price for using its monopoly power to prevent computer companies from putting "unapproved" software and features on the Windows desktop.

I am sure ISPs will eventually have to give unrestricted access to bandwidth so you can download your movies from Blockbuster, Netflix or any of their competitors that offer you a better price. If this downloading makes the overall experience poor for their paying customers who share the network, then they will have to upgrade the cable networks with fiber optics.

Some of the leading fiber optics companies are Finisar Corp, JDS Uniphase Corp. (JDSU), Opnext, Inc. (OPXT), Bookham Inc. (BKHM) and privately held Avago Technologies Limited (where I worked on fiber optics when it was part of HP in the 1980's and 1990's.)

Another company I own that may benefit is Carrier Access (CACS). Carrier provides "Exxtenz" product that enables service providers to utilize passive optical networking, PON, technology to deliver services, such as wire-speed Ethernet, voice, T1, and video services to businesses.

Disclaimer: The author is long Finisar (FNSR) and Carrier Access (CACS) at the time of this article.

BKHM: Oct 26 $3.15 -5.12%
FNSR: Oct 26 $2.24 -5.08%
CACS: Oct 26 $3.43 -3.65%
JDSU: Oct 26 $14.73 +0.89%
OPXT: Oct 26 $13.29 -0.75%

October 2007 State Street Investor Confidence Falls to 82.6

The State Street Investor Confidence Index Fell From 88.7 to 82.6 in October 2007. This the lowest reading since November 2006 when the reading was 82.2 and the DJIA only $12,280. The confidence index peaked at 99.6 in August 2007 with the Dow Jones Industrial Average at $13,379.

Click Sentiment Chart to see full sized

Press Release :

Boston, October 23, 2007: State Street Global Markets, the investment research and trading arm of State Street Corporation (NYSE:STT), today released the results of the State Street Investor Confidence Index® for October 2007. Global Investor Confidence fell by 6.1 points to a level of 82.6, from last month’s revised reading of 88.7. Sentiment in North America declined from 102.8 to 89.2. Asian investors were also feeling more cautious, resulting in a decline of 1.7 points in the Asian Confidence Index. Only in Europe did institutional risk appetite improve, rising from 82.9 to 83.6.
According to State Street, their “State Street Investor Confidence Index® measures the attitude of investors to risk. Developed by Harvard Professor Ken Froot and State Street Associates Director Paul O'Connell, the Index uses the principles of modern financial theory to model the underlying behavior of global investors. Unlike other survey-based confidence measures that focus on expectations for future prices and returns, the Index provides a quantitative measure of the actual and changing levels of risk contained in investment portfolios representing about 15% of the world's tradable assets.

More Graphs

I cover five other sentiment indicators in my newsletter. These indicators are:

  • ISE (International Securities Exchange) Sentiment Index
  • II-BBS: Investors’ Intelligence Bull Bear survey
  • CBOE (Chicago Board Options Exchange) Put/Call Ratio (CPC)
  • VIX (CBOE Volatility Index)
  • AAII Bull/Bear Ratio (American Association of Individual Investors)

Friday, October 26, 2007

John Bogle on Managed and Index Funds

Runner Twentysix posted this in our "Asset Allocation" forum in the facebook group "Investing for the Long Term."

Index funds or managed funds when allocating your asset classes?

Here is some eye opening info from Jack Bogle from his “The Little Book of Common Sense Investing”, Chapter 8.

Jack took a look at the 355 equity funds in existence in 1970 to examine their 36 year track record.

He says the first surprise is that 223 of the funds,

  • 2/3 of the total no longer exist, have gone out of business, mostly from poor performance.

  • Another 60 underperformed the S&P 500 significantly by more than 1% per year.

  • 48 were within 1%, above or below.

  • 15 funds outpaced the market by > 1%

  • 9 funds outpaced the market > 2%

  • “…a superiority that may be due as much to luck as to skill.”

    “When the accomplishments of these nine successful mutual funds were noticed by investors, cash poured in, and they got large….As they grew, the records of six of them turned lackluster. One fund reached its performance peak way back in 1982, 24 long year ago. On balance, it has lagged ever since. Two other peaked in 1983. The remaining three peaked no more recently than 1993.” (one was Lynch’s Magellan Fund).

  • That leaves only three superior funds.
“The core of you program should consist of at least 50 percent index funds, up to 100 percent”…. “Actively managed mutual funds? Yes. But only if they are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging. (Don’t be disappointed if the managed fund loses to the index fund in at least one year of every three!)"

This is great advice from John (Jack) Bogle. I recommend investors place 80 to 95% of their investment assets into "core" portfolios that use very low index funds from Vanguard or Fidelity (or anywhere else you can get the index funds I recommend in my newsletter that you can find with lower annual expense charges.)

With the remaining 5 to 20% I "explore" with individual stocks where I try to beat the averages over the long term (my results) while avoiding "benchmark hugging." This means I don't expect my good and bad years to always match that of the major indexes. Higher return comes at a price of higher volatility but you can use the time of lower returns to take profits in what is up to add to what is down.
I heard John Bogle on a TV interview say he uses managed funds the same way I use and recommend my "explore portfolio."

Monday, October 22, 2007

Citigroup Compelling 20 years after Black Monday

Twenty years after Black Monday (see "Black Monday 1987 Graphs") Citigroup (Ticker C, Charts) looks even more compelling to me today than when I added it to my newsletter “Explore Portfolio” back in September 1998 at a fraction of today’s price.
Click chart to View full size - More charts

On October 1, citing “dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment” Citi said its third quarter 2007 net income would decline about 60% from the year ago $5.06 Billion. Citi said it would:
  1. write down about $1.4B of its $57B portfolio of highly leveraged loans
  2. lose about $1.3B on the value of securities backed by subprime loans
  3. lose $600M in fixed-income credit trading. It also said consumer credit costs rose $2.6B, mostly due to a boost in loan-loss reserves.
CEO Chuck Prince said during the earnings conference call
  • "Looking ahead to the fourth quarter, while we obviously cannot predict market movements or other unforeseeable events that may affect our businesses, we expect to return to a more normal earnings environment as the year progresses."
Citigroup's plan is to write off all the bad news in this quarter and hope they can look forward to the future. If they over estimated their "subprime meltdown losses" then they can reduce loss reserves in future quarters to report better than forecast results going forward.

The fear is they under estimate their losses and more write-downs will follow. I believe people are selling like lemmings running off a cliff on fear things are much worse. Those of us with the ability to buy through periods of massive fear often end up with superior returns.

Technically, the chart for Citigroup found support on the dashed-blue uptrend line that marked the bottom for two major fear days in 1998 and 2002. The fear from this subprime meltdown is no different.

With a dividend of $2.16 and today's closing price of $42.61, Citi pays you a 5.07% yield that is considerably better than the 4.41% 10-year Treasuries currently pay.

Sunday, October 21, 2007

Black Monday 1987 Graphs

Charts of the markets for Black Monday October 19, 1987.

Two year graphs from one year before through one year after Black Monday.

S&P500 Click to see in more detail

S&P500 & DJIA
Click to see in more detail

DJIA - Dow Jones Industrial Average
Click to see in more detail

Saturday, October 20, 2007

Warren Buffett Sold Last Shares of PetroChina Before Price Surges

Despite his reputation for "buy and hold forever," billionaire Warren Buffett said last week that his company, Berkshire Hathaway, had sold all shares of PetroChina Co. Ltd (Ticker=PTR, website), a Chinese oil conglomerate.
  • "Our Favorite holding period is forever.” -Warren Buffett
Activists had urged Buffett to sell his PetroChina shares due to the world's second largest companies ties to strife-torn Sudan via Petrochina's parent company, China National Petroleum Corp.

Click to see full size graph

Despite vocal activist shareholders in support of this divestiture, Buffett insisted in an interview on the new Fox Business Network (FBN) the decision to sell was driven by valuation.

  • "If it went down a lot I'd buy it back."

Buffett told Rupert Murdoch's FBN that the recent price gains of PetroChina's shares means he sold too soon and "left a lot of money on the table."

Buffett said Berkshire Hathaway made as much as $3.5 Billion dollars on the initial $500 million investment. As of July 2007, Berkshire Hathaway owned 11 percent of the publicly traded shares.

Berkshire bought PTR in 2003. Friday PTR closed at $232.98 after peaking at $266.81.

Friday, October 19, 2007

Elaine Garzarelli is Bullish: Indicators on a Strong Buy Signal

Today Elaine Garzarelli is very Bullish with her Indicators on a 75% Strong Buy Signal.

Elaine Garzarelli is one of the few analysts that called the 1987 bear market and got out before the crash 20 years ago today. (See 20 Years After Black Monday: October 19, 1987)

During a CNBC interview today, Elaine Garzarelli had this to say:
  • Market in '87 was 35% over valued
  • Today it is 28% under valued

Her indicators today are at 75% for a major buy signal

  • 1987 they were at 9%
  • Below 30% is a sell signal
  • Above 65% is a MAJOR buy signal

Elaine has 14 indicators in 4 areas with 25% weighting for each area. The areas are:

  • Economic Cycle: Earnings will bottom this quarter and next. Near the bottom not the top. Bullish
  • Monetary Policy: Fed is easing. Before the crash the Fed was raising rates; Bullish
  • Valuation: Market via the Fed Model is 28% under valued using her "Street low" earnings estimates. This is Bullish
  • Sentiment: Neutral hence the 75% reading.

She thinks oil is near a peak now and will come down since everything outside the US is slowing down too. But she she said the economy could handle oil going to $125 per barrell and still grow as long as it gets there slowly.

Click Graph to see it full sized

Wednesday, October 17, 2007

Bradley Turn Dates for 2008

More info at

From Bradley Turn Dates for 2007, today, 10/17/07, is supposed to be the most important turn date for 2007.

The Bradley siderograph (more information) was developed in the 1940's by Donald Bradley to forecast the stock markets. Bradley assigned numerical values to certain planetary constellations for every day, and the sum is the siderograph. It was originally intended to predict the stock markets. William Eng, a noted technical analyst, singled out the Bradley as the only 'excellent' Timing Indicator in his book, "Technical Analysis of Stocks, Options, and Futures" (source: Astrikos).

These are the eight Bradley Turn Dates for the remainder of 2007 and 2008:

  1. December 22, 2007 (A most important date)
  2. March 8 to March 9, 2008
  3. April 4, 2008
  4. April 27, 2008
  5. May 24, 2008
  6. June 6, 2008 (A most important date)
  7. September 9, 2008
  8. September 20, 2008
  9. December 14, 2008 (A most important date)

Also see: Bradley Turn Dates for 2007.

Two investment newsletters rely heavily on the Bradley Siderograph and their returns are terrible. Mark Hulberts "Hulbert Financial Digest" reports in the "Long Term Performance Ratings through June 30, 2006" the following:
  • "The Crawford Perspective" has an average annual return of only 4.9% since its 12/31/88 inception. If shorting is allowed, the returns are a negative 7.2% while a buy and hold of the Wilshire5000 over the same period yielded an average annual return of +11.5%!
  • Peter Eliades' Stockmarket Cycles has an average annual return of only 4.7% since its 12/31/84 inception while a buy and hold of the Wilshire5000 over the same period yielded an average annual return of +12.4%!

My newsletter has a much better record but I am always interested in new ideas. Click for a FREE SAMPLE issue.

Monday, October 15, 2007

Piper Jaffray Target for Finisar

Finisar Corporation (more FNSR Charts) designs, manufactures and markets fiber-optic subsystems and network performance test and monitoring systems that enable high-speed data communications over local area networks (LANs), storage area networks (SANs) and metropolitan access networks (MANs).

Today Piper Jaffray started covering Finisar (FNSR) with an outperform rating and a $4 price target.

"We believe the stock was oversold following its July quarter earnings call and has created a compelling entry point."
Finisar is focused on the application of digital fiber optics to provide a broad line of high-performance, reliable, value-added optical subsystems for data networking and storage equipment manufacturers. Its line of optical subsystems supports a wide range of network applications, transmission speeds, distances, physical mediums and configurations.

Click chart to view it full sized

To get my current thoughs about Finisar in greater detail and more, subscribe NOW and get the October issue of “Kirk Lindstrom's Investment Newsletter") for FREE!

Disclaimer: I am long Finisar in both my newsletter and personal portfolios. I accumulated Finisar between $1.01 and $1.99 in my newsletter portfolio so I have significant gains at this time. I may sell or add to my position at any time. I will tell my newsletter subscribers when I sell, but I will not necessarily post about it online before or after.

Sunday, October 14, 2007

20 Years After Black Monday: October 19, 1987

As I write this, the stock market is near an all time record high just like it was on Black Monday in 1987. On October 19, 1987 (Black Monday) the US stock market fell 22% in a single day. Can do the market do the same now, twenty years later?

Circuit breakers and trading curbs should prevent another 22% single day fall that came from sellers wanting out at any price while buyers were nowhere to be found, but nothing is impossible.

Back in 1987, the Standard & Poor's 500 traded at over 22 times earnings while Treasury bond yields hit 10%. Today the S&P500 trades at about 18 times earnings and long-term treasury bonds yield less than 5%. The "Fed Model" (that I update each month in "Kirk Lindstrom's Investment Newsletter") says the earnings yield in a fairly valued market should be equal to the ten-year US Treasury Bond rate.

In 1987:
  • PE was 22
  • Earnings Yield = 1/PE
  • 1/PE = 1/22 = 0.0455
  • 0.0455 x 100% = 4.55%
  • 10-year Treasury = 10%
  • Over Valuation = 10% / 4.55% = 2.2


  • PE is 18
  • Earnings Yield = 1/PE
  • 1/PE = 1/18 = 0.0556
  • 0.0556 x 100% = 5.56%
  • 10-year Treasury = 4.68%
  • Over Valuation = 4.68% / 5.56% = 0.84

According to the very simple application of the Fed Model, the market was overvalued by a factor of 2.2 in 1987 and is under valued today by 16%.

To get more detailed monthly updates on the Fed Model and more, subscribe NOW and get the October issue of “Kirk Lindstrom's Investment Newsletter") for FREE!

Friday, October 05, 2007

US Economy Gains 110,000 Jobs in September 2007

U.S. job growth rebounds. 110,000 new jobs were created by the US economy in September

(5:30AM PST) August was revised from a loss of 4,000 jobs a gain of 89,000 new jobs, mostly in government.

This better than expected jobs report could tip the scales away from "recession fears" back to "fear of inflation" as the markets obsess over needing something to worry about

U.S. Sept. job growth seen in health care, food services
U.S. Sept. household employment rises 463,000, most in 2 yrs
U.S. payrolls annual benchmark revision down 297,000
U.S. Sept. public teacher hiring rises 46,000
U.S. Sept. average hourly earnings up 0.4%
U.S. Sept. private-sector payrolls rise 73,000
U.S. Sept. unemployment rate 4.7% as expected
=> 4.7% Unemployment rate was the highest in a year.
U.S. July, Aug. payrolls revised up 118,000
U.S. Sept. nonfarm payrolls up 110,000 vs. 113,000 expected


Click Graph to View Full Sized

Treasuries plunged after jobs report; 10-yr yield up to 4.597%
S&P 500 futures rise 10.40 points to 1,563.00
Dow industrial futures up 69 points at 14,110
Dollar rallies after jobs report; euro down 0.5% at $1.4061
Crude futures drop 39 cents at $81.05

Unemployment Rate Chart from BLS

(Series Id: LNS14000000 Seasonal Adjusted)

© Kirk Lindstrom

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