12/26 newsletter

*** Market
SP500 is still hovering around its high level 1270, accumulating technical energy for the last few days of the year. If it moves up a little bit, it is likely to close at ~10%, another year of "normal" return, which is not so normal in Buffett's eyes. He is looking for a norm-averse behavior of SP500 in order to profit from Mr Market's folly.

FED is tightening up housing market by regulating so-called non-traditional mortgage, such as interest-only. How the yield curve will shape in the coming months remains the biggest puzzle for the economy. Did you check the Nasdaq-100 rebalancing? Google enters the index, and a little known stock NIHD, which I own, also enters the index :-)

My portfolio is approaching ~20% (19.9% since 12/2004). It is thrilling to see it breaks through the first 20% in less than 13 months. We will see how the market close in a few days...

--Steve

12/16 newsletter

Samuel is a bit unfortunate to have some developmental issues that will need physical therapy. Please pray for him that he can grow out of these issues gradually. We are going to eye doctor next week to check on his eyes.

*** Market
One little stock SJI (South Jersey Industries, a utility company) is added to SP600. I somehow feel that my model coincides with S&P Research quite a bit. It seems that whatever is strong in my model has a high chance to be picked by S&P Research. but on the other hand, this is only flattering on the face value. I noticed that due to the large publicity of S&P indexes, stocks added the index usually will "rest" for a couple months...

S&P500 continues to challenge new high (1278). We will see how much it can go with this push. The upside is limited, judging from volatility index. My portfolio briefly touched +20% two days ago. Energy stocks are recovering to their highs, same as commercial real estate stocks. Don't look bad on them, yet... You probably already know, the merger between NYSE and AX is completed to create the new NYSE, which I believe will lead the exchange consolidation with CME.

*** About Merck
Merck just had its most important analyst meeting today. I kind of have an idea what is up there now with the new number posted by CEO and CFO. As I previously told you, MRK is about 20% controlled by institutional investors. These are typically value investors bottom-fishing on large enterprises (Southeastern just got into GM when everybody bailed out). So you want to ask what is the bottom line here at MRK? Merck is generating about 5 bil of free cash flow. Management is committed (or have no choice) to maintain this FCF. This number is derived from what it has now, not any speculation into future growth. CFO begins to talk about keeping the dividend AND share buyback. The dividend part will take about 3 bil (60 bil * 5%) and the rest of money will be used for buyback. CEO talked about tight cost control -- cost will be the same (not inflation-adjusted) from 2005 to 2010. No growth company will do that. This is obvious a value approach -- tight-fist on bottom line.

Merck also repatriated 15 bil. That money probably will be used for targeted acquisitions and new research. This is the growth part to compliment the current pipeline. Even if it does not acquire any company, it can somehow return this cash to shareholders, this is 25% dividend. CEO promises to deliver double digit growth in the next 3-5 years with his agressive strategy. (Wall Street certainly did not buy into his optimism today) Therefore, the value investor gets about 10% return on FCF even if the company is not growing. And if the growth story works out, the capital gain will be nice. if not, get a 25% special dividend. Not bad, right... (This is not a recommendation to buy MRK. You need the kind of patience to sail with it for 2-3 years.)

--Steve

12/02 newsletter

** Market
Just when I boasted November's easy money last week, Wall Street decided to take some of that gain back :-) But have faith in November and December (if you ever trust the stock market). There are cash flow reasons that make these months shine.

** Portfolio
I have finished my one year benchmark of the stochastic model. It is a long and trying journey (Every time I buy or sell a stock, the uncertainty of future just make my heart beat slightly faster. But that is all stock market is about -- the future). But the result is quite good.

12/1/2004 - 12/1/2005
- Portfolio return is +18.7%
- SP500 is gaining +8%, small-cap, nasdaq have similiar gain.
- Mid-cap is gaining +16%, slightly below my portfolio.
- Value index outperformed growth index by ~1%.

I have traded almost 60 stocks this year (almost one very week, Ummm). About half of them are related to the restructuring of the portofolio. Also in the first half of the year, many bank stocks are being stopped out. I do care about turnover, just to make sure you do not misunderstand. Turnover increases cost of commission and spread. And I have ~30% of fund not in tax-sheltered accounts (IRA). Therefore, if excessive capital gain is incurred, I only enrich Uncle Sam, not myself. As it turns out, the stocks sold are losing ones, therefore, I
may even have a capital loss this year. Not too bad.

The portfolio is tracking the model well, within +/-2%. The success is that the model indeed works. I can count on it for my accumulation of capital. The bad part is that the worth of my financial intelligence minus the model is only ~1-2% :-)

Steve