In the short term, the stock market is a game of perceptions, perspectives and expectations. The real world, which ultimately decides our fate, gets shoved aside, distorted, even inverted.
Nasdaq — Up, Sideways or Down?
Or consider yesterday’s excitement on Wall Street about the Nasdaq. They ballyhooed a “big breakout to the upside,†and the “highest level in six months.â€
True, if you focus your microscope on the Nasdaq since March, you see a picture that, on the surface at least, looks quite bullish. “This market is obviously going up,†you say.
But step back from the trees a bit and look at that same market with the naked eye, 
expanding your horizon to the period since 2004. NOW, what do you see?
“Wait a minute,†you respond. “Maybe this market isn’t really rising after all. Maybe it’s just going sideways, in a narrow range between 1,800 and 2,200.â€
Indeed.
But don’t stop there. Take a moment to truly distance yourself from the day-to-day, week-to-week perspective and look at the market with a wide-angle lens. View the Nasdaq since 1990, encompassing both the big boom and the big bust. Big difference, eh?
Instead of a rising or even sideways market, the picture which emerges is that of a deeply depressed market — a technology sector that suffered a devastating crash, tried to recover, and to this very day, is wallowing a lot closer to its lows than to its highs.
One good thing: Unlike the old days, you don’t have to dig to uncover this reality. Each of these perspectives is readily available to you on Yahoo Finance with a few clicks of the mouse. So no one can claim they were out of the loop.
Of course, all you see in these pictures is in the past. If you want to take a stab at charting the future, you need to do a lot more. You have to:
1. Evaluate perceptions and expectations
2. Evaluate the actual facts
3. Compare the two
I started doing that with you yesterday. I showed you how today’s prevailing mood is complacency, while today’s predominant reality is danger. That’s the big picture — a very unstable situation.
And focusing on the here and now, we see a similar pattern …
Earnings: Big Hopes
and Bigger Shocks
Tony Sagami
Wall Street is expecting a lot for the second-quarter earnings. What they’re actually getting is another matter entirely.
Want objective evidence?
OK. Just refer to Thomson Financial, a company that measures the expectations-reality gap by doing the same three things Martin told you to do a moment ago …
1. They evaluate Wall Street’s expectations for earnings
2. They evaluate the actual earnings
3. They compare the two
And right now, they’re finding that, most of the time, Wall Street’s expecting a lot more and getting a lot less. Indeed …
For every 10 companies announcing better-than-expected second-quarter results, Thomson Financial reports that there are 25 companies announcing worse-than-expected results.
That’s a lot of disappointments. It’s also the worst high-hopes/bad-news ratio since 2003.
A glaring example came this week from DreamWorks, once a stock market darling. The reality:
- Instead of breaking even in Q2, DreamWorks now plans on losing 7 to 9 cents per share.
- Instead of making $1.39 a share for the full year, DreamWorks now expects to make 80 to 90 cents.
- Compare that to last year’s earnings of $4.05 per share: Earnings this year are going to be down by about 80%!
- The SEC is investigating for fishy trading of the DreamWorks shares at around the time it reported Q1 results.
- The company is withdrawing its plans for a $500 million secondary offering.
What’s the main problem? DreamWorks’ movies are doing OK at the box office. Even “Madagascar†pulled in $180 million. The big challenge is weak after-market DVD sales. And again, there was no lack of warning. Pixar complained about the identical problem nearly two weeks ago.
In this kind of a situation, you can stay on the sidelines and keep your money safely tucked away. Or, if you have some extra funds you can afford to risk, you can transform the fall of stock market dogs like this one into a series of profit bonanzas.
In early May, for example, DreamWorks plunged by over 20% in just two days, and even a non-aggressive put option on this stock (the July 30 put) surged from $3.30 to a high of $6.70, in 48 hours.
Yesterday, the company’s shares plunged again — this time by 13% in just ONE day. And again, a relatively moderate option on the stock (the August 25 put) surged from a low of $0.75 to a high of $2.35, a gain of 213% in just 24 hours.
Needless to say these volatile instruments are not for everyone and not for more than a modest portion of your money. But the risk is strictly limited and the profit potential virtually unlimited.
American Consumers Less Prepared
for Financial Bumps Than Those of
Any Other Developed Nation
When you think of A.C. Nielsen, you probably think of ratings for TV shows. But Nielsen surveys more than just TV tastes.
According to Nielsen, 28% of Americans live paycheck-to-paycheck and “have no spare cash.†That is the highest percentage of any developed country in the world.
Sadly, that’s no big surprise. What is a surprise is how Americans are spending their money: Less on home entertainment, clothing, and technology … and more on home improvement and paying off debt.
Here are the questions and answers from Nielson’s latest survey:
|
Once you have covered your essential living expenses, which of the following statements best describes how you normally spend your spare cash? |
|
May 2005 |
October 2004 |
|
I have no spare cash Savings Home improvements, decorating Out of home entertainment New clothes Holidays/Vacations New technology Stock/Mutual fund Retirement fund Short holiday locally International holidays Source: ACNielsen Online Consumer Confidence Study |
28% 23% 21% 21% 15% 14% 9% 7% 7% N/A N/A |
28% 23% 20% 29% 21% N/A 10% 5% N/A 10% 2% |
|
What I see is a consumer that’s up to his eyeballs in debt, cutting back on everything except joining the real estate boom, and vulnerable to rising inflation, rising interest rates, or both.
One popular alternative to stock investing is starting your own business. The trick is to sidestep the sectors where consumers are going to be spending less and focus on those where they’ll be spending more.
Problem: 9 out of 10 small businesses fail after the first year.
But if you take the right precautions and pick the right sector, it can also be financially rewarding.
Precaution #1. You need capital for a lot more than just the start-up. You need capital for delayed launches. You need it for costly errors you can’t avoid … and for revenue downturns you can’t predict.
Precaution #2. Keep your capital safe and liquid. If you’re investing in a business, that’s risky enough. If you turn around and invest your working capital in someone else’s business at the same time, you’re doubling up your risk.
Precaution #3. Commercial checking accounts don’t pay interest. So to get the most on your available cash, use the checking facility of a Treasury-only money fund. The longer it takes for your check to clear, the more interest you can earn.
There are several good ones to choose from. But I especially like the free checking facility of the Weiss Treasury Only Money Market Fund.
Precaution #4. Try to avoid debt. And if you must borrow to finance your business, seek the longest possible term.
Plus, here are the three sectors which should do best in good times and suffer the least damage in bad times:
Education and health services
Professional and business services
Pharmaceutical and medical manufacturing
For more information, take advantage of the following online resources:
- US Small Business Administration
www.sba.gov
(800) U-ASK-SBA (827-5722)
- Entrepreneur Media Inc.
www.entrepreneur.com
(800) 421-2300
- The Internal Revenue Service
Small Business and Self-Employed
One-Stop Resource
http://www.irs.gov/businesses/small/
(800) 829-4933
They offer a wealth of information including: online courses, checklists, business advice, franchise opportunities, and more.
Plus, there’s one more major resource I like. I’m biased because I’m a regular contributor. But anyone running a business or managing their personal finances who wants to save — and make — tons of money should subscribe to Weiss Research’s Your Money Report. At just $49 per year, it’s a no-brainer.
Best wishes,
Tony Sagami and
Martin Weiss
About MONEY AND MARKETS
MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, David Dutkewych, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss.
© 2005 by Weiss Research, Inc. All rights reserved.
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