9/30 newsletter

*** Market
The quarter ends with slight gain on SP500, ~3%. My portfolio gained about 7%.
September is also a positive month, but unfortunately with two huricanes on a row
and high oil price, the market did not fair too well.

Summer is over. October will be a sell-off season. You should stand on the buy side when the selling is over in November.

*** Murphy Oil
I promise you to talk about Murphy Oil. I am stuck in an IM session with my bosses and can not shut down my PC. So I decide to type this up.

Murphy Oil is just another oil company. But... It has a very unique business model. The company has two sides of business. Oil exploration and pump stations. What is special about it? Well, oil exploration profit tends to rise and fall with oil price and that is very cyclic. Cyclic is bad to conservative investors. However, pump station's profit tends to counter that. When oil price drops, the demand will increase. If the demand can increase more to compensate the earning shortage, the business can sail safely through multiple business cycle.

How can you make demand increase? Murphy aligns with WalMart to set up pump stations in front of WalMart with a discount price. Those who shop at WalMart will be loyal customers. This way when oil price drops and economy booms, people will pump more gas -- at the parking lot of WalMart.

Is this smart? However, if you study carefully of Murphy's stock price, you will find it fluctuates a lot. I did a short-term calculation on return pattern. It is very hard to make money with 6 months of investment window. What it says is "Do not speculate on my stock. Go away!" I learned it in a hard way, bought at peaks twice. I am only make 10% off of it so far. It's long term tend however is very strong, rising more than 30% a year. I will tell you if I indeed make that kind of money in the years to come...

--Steve

9/21 newsletter

*** Market
Greenspan raised the interest rate again. His goal could be very well at 4%. Historically that is the level that can contain inflation. But that will make whoever bet on the spread pretty hard to breath. However, it is a question whether such a rate hike will bring the economy into a recession or not. Corporate profit is on the rise. With the spending on huricane reconstruction, it is hard to imagine the economy will lose the steam. Of course, it is another open question at what level oil price will become a cost to corporates. You see two airlines went busted this week.

Oracle bought Siebel. Mastercard is planning an IPO. Keep an eye on this big fish. Murphy Oil is added to SP500. I hold this stock. So maybe I will explain this stock in more detail next time.

*** Portfolio
My portfolio is about 1% ahead of SP500, >2% ahead of small-cap so far in September. The differential works out nicely. Small-cap shows quite a weakness so far this year. We are hitting really hard obstacle in the economy right now.

--Steve

9/10 newsletter

*** Market
SP500 is pushing toward the 1240 high again, after a month of correction. Of course, energy stocks are well-known winners in this game. Texans and Canadians must be very happy. "Wall Street is testing how high of price consumers are willing to pay for a gallon of gas compared to other household spendings?"

My portfolio stands at +13.4%. If the bull pushes a little bit this year and survives October selloff, it could be making 20% by December. Then I will hit my performance target...

Government is going to spend more than $60 billion in Katrina relief effort. This is a good news to many companies. Especially it pumps revenue to construction, transportation, and companies with significant Bush tie. Why did not FEMA act? Because the money was not there (hey Congress!). Rule #1 of Homeland Security.

Large cap seems to catch up with small cap in past few months. The highly followed Russell 2000 small cap index fairs the same as SP500 YTD. But Russell mid-cap and S&P mid-cap indexes are still significantly ahead of SP500. This makes capitalization analysis somewhat difficult. You have to hit in the middle to gain the excessive return, not too big, not too small.

With all the stuff going on, the market is still favoring value over growth with a small margin. On the sector front, you have to be heavy on energy to glean the excessive return. But that will put your portfolio on a large cyclic risk, since industries take turns to perform from long history. No industry can shine more than 2 years in an economic cycle. Especially energy sector is a hedge against other sectors, since it is generally a cost, not profit, of most businesses.


--Steve

9/02 newsletter

*** Portfolio
Auguest finished with a small (~1-2%) correction across major indexes. High oil price, interest rate hike, and devastation of Katrina did not deter Corporate America from the road of economic growth. Amazing... My portfolio return stands at +12% since 12/1/2004. This ranks at the top of Lipper mutual funds.

*** Comment
http://www.cs.auckland.ac.nz/CDMTCS/chaitin/sciamer.html

In my search to understand random walk better (which is the foundation of my portfolio model), I stumbled into something that I never expected and never knew before. Check out the above URL. Randomness is far more permeating, it goes into the foundation of math and science, even religion. This man is described as the man who have scratched the corner of eternity.

I still remember, during the college days, we were debating on Bertrand Russel's famous paradox, "Find the smallest positive integer which to be specified requires more characters than there are in this sentence." I thought I understood math quite well over the years. But when I read Chaitin's discovery, I do not think I ever think of anything thoroughly. And that discovery is in the 70's, before I attended college.

If someone is asking whether God exists or not and claims he has thought about it deeply, he should re-examine himself twice. The debate over God in those evangelistic sessions seems so amature compared to Chaitin's research. The glory of God is to hide the truth, indeed... If someone claims he knows the rule of something, he should also restrain himself. For there is a good part of it being random. He is right by accident... The financial market and the church history are the best examples. In the church history, after a long time, only a few doctrines stands as truth, the others are washed out sooner or later. In the financial market, very few companies can survive the random forces. Only the "market" remains after all...

--Steve