Should you be a fool?

The Motley Fool, in an article entitled Companies you should buy right now is recommending the following stocks as buy and hold candidates. I have some difference of opinion, but here's a key quote from the article:

What makes a great company? That's the rub. There can be a lot of ways to measure greatness. eBay (Nasdaq: EBAY) and Southwest Airlines (NYSE: LUV), for example, have high net promoter scores. Coca-Cola and Nike (NYSE: NKE) have nearly unmatched brand and marketing savvy. Boeing (NYSE: BA) and 3M have long histories of innovation. Starbucks (Nasdaq: SBUX) and Genentech (NYSE: DNA) have strong corporate cultures and are among Fortune's 100 Best Companies to Work For.

The article was originally published Dec. 8, 2006 and has been updated for publication on Jan. 9, 2007. (Makes one wonder which ones were switched out)

Right off the bat, I have some concerns over anyone calling eBay a great company. As I explained in my stock of the day feature, the company has been mismanaged and made poor business decisions for years.

Southwest Airlines? The stock has ranged between 12 and 22 for 5 years and is currently in a holding pattern over 15. Perhaps the "Fools" expect us to hold stocks that fly under the radar of the S&P 500. Maybe we'll just walk away.

Besides being suspected of operating in many countries as a CIA front, Coca-Cola still has that brand appeal, but the world of soft drinks is evolving quickly, toward more eco-friendly and trendy offerings. Coke has hung in gallantly and is a leader, but where is the growth and price appreciation going to come from? I don't see it.

Nike? See above, though the stock has been a stellar performer. Since late 2002, share price has appreciated from 40 to 100. Even I can't knock a 150% return over 4 years.

Another star performer is Boeing, which has run from the high 20s in early 2003 to near 90. Those monster returns are not likely to recur. recommending stocks near their highs may be foolhardy, but hardly prudent.

What can I say about 3M besides that it's so old school. The stock hasn't budged since late 2003, so maybe it's time for a move. Like others here, it does pay a dividend. Are the Motley Fools suggesting that 2-3% returns are de rigeur?

I like Starbucks coffee and the company has a great culture, but American's appetite for $4 lattes may wane and competition is sure to take a bite. Starbucks also sports a p/e over 40, so it's no bargain. Shares have ridden up from 10 to 40 over the past 5 years, and that kind of performance (400%) is going to be hard to top. If there's a winner on this list, this may be it.

Probably the most recognizable name in biotech, Genentech is a leader in profit as well. The company is expected to return 2.68 per share in 2007. However, the price of the stock doubled in mid-2003, split in 2004, ran up to nearly 100 in 2005 and was flat in 2006. This is a well-entrenched company, but maybe a touch pricey with a p/e close to 50. Value may still matter to some.

Overall, what impressed me about these picks was how many were close to their highs after impressive runs over a long bull markets. The Fools might have better served their readers - in an article professing that investors trade too often - by advising to time their buys on these stocks or wait for a general market correction before taking a plunge. They didn't.

I'll keep an eye on these stocks and check back in 6 months, a year, and beyond. Obviously, I don't care much for these picks and will stake my reputation against the Motley Fools, a bunch with whom I've frequently found fault.

Here are the closing prices from January 9 on the Fool's picks:
eBay: EBAY 29.75
Southwest Airlines: LUV 15.81
Coca-Cola: KO 48.61
Nike: NKE 99.76
Boeing: BA 88.00
3M: MMM 77.68
Starbucks: SBUX 34.86
Genentech: DNA 84.69

Blue Chips give back, Nasdaq counter-rallies

The Dow Jones Industrials were down more than fifty points by mid-day, but rallied to close with a minor loss of 6.89. The Nasdaq fared better, adding 5 points and change, closing positive for the 4th time in 5 sessions in the young year. The wider NYSE index lost 17.22 and that's where our counter-rally begins.

The Nasdaq is higher for the year, with the Dow and NYSE composite lower. The figures today are telling, with gainers outpacing losers on the NYSE, though down volume was 55%, up volume, 44%. Over on the Nasdaq the opposite was true.

As sure as Donald Trump dislikes Rosie O'Donnell, this is a sign of cyclical profit taking and reinvestment. Volume on the NYSE was far ahead of the Nasdaq, suggesting that massive profits are being pulled out of big caps and the only play is into smaller, albeit riskier issues. Much of the money taken in profits is being put aside until the market can be more reliably read and quarterly earnings get into full swing over the upcoming two weeks.

A good site for tracking earnings and lots of other useful advice is Earnings Whispers who also sees the Nasdaq counter-rally as indicative of a topping pattern. Finally, somebody with brains (and a web site) who agrees with us.

In a Give and Take Environment, the Takers Will Rule

Entering the first full week of trading on the major US markets, investors are swamped with signals running the gamut from bullish to bearish to bust, putting the direction of the market unreliably up in the air.

It's not a pretty picture, but hardly one which the behemoth American economy cannot endure. The usual drivers of investment - Fear and Greed - have been seen shuffling about Wall Street with notable hangovers, especially Greed, which ended 2006 with a six-month long 17% buying binge on the DJIA.

Fear, which had been praying quietly at home for most of the 2nd half of last year, binged through the holidays on news of slow retail sales and the continued run-down in the construction industry.

So the two of them are planning a partnership of sorts for the early months of 2007 - lubrication for the skids - to keep everyone somewhat afloat on the money and credit mothership.

Greed says there are bargains out there and you don't want to miss out. Fear says your mortgage is tapping you out and you should retreat from the speculative market.

That's where the partnership stands, with both boys tossing signals of varying strengths of Doom, Gloom, Boom, Bust and Bonanza. And of course, it's January, so market watchers and witches of all stripes and hats will trot out the ancient adage - how goes January, so goes the year.

It's enough to drive a rational investor batty, the operative word being rational, begging the question: what's a reasonable strategy in an up and down market?

One word: allocation. One more: hedge. Um, forget it, here's a plan. If you've got more than 75% invested (25% cash), you're normal, but right now, overexposed. If you've been at that percentage for the past six months, you probably have some hefty profits and now would be a good time to relieve yourself of them before the market does it for you.

Converting some - not all - of your profitable investments to cash within the next few weeks makes sense. If the market sells off, you can buy back in at lower prices. If it continues rising, you still have the cash which should be invested in either CDs or if your appetite for risk is still unsated, dollars.

That's right. The greenback is likely to rise over the short term against the Yen, Pound and Euro due to three distinct forces: 1) Some expression of fiscal restraint and responsibility by the newly-installed Democratic majority in Congress; 2) The US economy will perform its peers in 2007 as their slowdown will be more painful than ours, and 3) Lower inflation and slightly tighter credit after years of excess.

My plan calls for shifting as much as 50% of the whole out of stocks and into a mix of fixed investments or currency trades. Since the chances for a meaningful correct some time soon are very good and getting better every day, you should take some of the profits, pare some losses and wait until January has an imprint - either up or down - before making any major strategic investment moves.

Keeping track of the market - just the Dow, since that's the one that counts for gauging purposes - we've had three days up and one down (Friday, Jan. 5), though the losses on that one day more than outdid the cumulative gains thus far. The Dow is down roughly 40 points in 2007, but it's far too early to discern direction. It's likely that the index won't give us a reading that we can use as an indicator until the 24th or 25th, but let's keep a sharp eye on it.

Markets lift off the new year, stall out

Anxious traders got 2007 off the ground a day later than originally planned due to the death of former president Gerald Ford. The markets were closed on Tuesday, but made up for lost time on Wednesday morning, driving vigorously into the positive in early trade. The Dow reached an intra-day all-time high of 12,630.34, but stocks pulled back through the afternoon, especially after the release of the minutes from the Fed's December meeting. The Dow closed up just over 11 points higher. The Nasdaq was up a nominal amount, while the S&P 500 and NYSE Composite finished slightly lower.

The minutes revealed that certain members of the FOMC were concerned that the economy was still expanding at a pace that might induce inflation and traders saw this as a sign that the Fed may still be pondering rate increases.

This kind of reverse-engineered thinking normally occurs when the markets - and the economy - are at pivot points and questioning future direction. If stronger growth is actually on the horizon, that should be good for stocks, but the consensus opinion seems to think that rate increases would be a worse outcome, so it's back to head-scratching and crystal ball gazing.

The biggest news of the day and the stories that really moved stocks early were the forced resignation of Home Depot (HD) CEO Robert Nardelli and a sizable drop in the price of crude oil, which fell below $60/bbl. to end the day at $58.32.

While Nardelli will retire with a handsome severance package worth more than $210 million, the price of oil may not have such a rosy future. Despite repeated and continuing efforts to convince the public that crude supplies are extremely tight, production cuts by OPEC (1.2 million barrels per day announced in November and another 500,000 cut planned for February) and the warm winter in the US Northeast are pushing prices closer to 3-year lows.

With more than they usually need to consider, investors are facing a slow-growth economy (retail for December was not as good as expected), lower oil prices and a Fed concerned with inflation. Two of those three are good, and it can be argued that a cooling off period for the economy is not only welcome but overdue.

The real issue is valuation, which is at somewhat ridiculous levels for entire classes of stocks. Corporate profits have been exceptional during the long bull market and it would be foolish for investors not to take some of their gains off the table soon in hopes of getting back in later in the year.

From the looks of things, being out of this market in the first half of the year may be the wisest investment decision of all.

2007 Predictions (part 2)

Management will be key in 2007. Those companies which can outperform their rivals and adjust to changing economic and market conditions will appreciate dramatically in 2007, while the bulk of publicly-traded companies will skirmish with health care, distribution and marketing issues.

Stocks in general will perform poorly, however, and some will fail outright. A correction is fairly due in the near term, most likely in the first two quarters of 2007, though either sharply rising prices or range-bound fluctuations are equally possible. There has not been a 10-15% correction in the Dow for the entire length of the current bull market, which has now extended to 51 months.

The Dow has just completed its 4th consecutive year of positive returns and 2006 was the best year in the past three. It's not surprising that stocks have accomplished such sparkling gains considering the healthy profit scenarios and rather loose policy guidelines over recent years.

What is surprising is how the markets have behaved with rigid resolution during a time of high deficit spending, a poor balance of trade and the general malaise associated with the conflict in Iraq and the poor US foreign relations policy. Falling currency values must have contributed to higher share prices over this period. Foreigners have, in relation to dollar-denominated assets, more money to boost stock prices, and they certainly have. One could assert that stocks must rise just to stay even with the falling value of the US dollar.

Continued loose policy on many fronts, including the Fed's rate policy could lead to a hyperinflationary environment, but that's all about to change. The shifting politics in Washington should foment positive movements on fiscal policy, foreign relations and spending. A conclusion in Iraq is overdue and calls for an end to US military involvement in the Middle East will only grow louder if the conditions remain the same or worsen.

It's going to be a year of transition in which strong internal management will not only profit but lead into a more balanced and dynamic market. With that in mind, a 15% rise on the Dow would put the average at 16,675, a number that not only seems unrealistic, and probably is. Don't expect the Dow to cross much higher than 16,000 at some point in 2007, but be reminded that a pull-back in the first half will make such a move all the more daunting.

To say that every rally climbs a wall of worry is to speak loudly of this current bull. Sustaining the edge during a transition will not be easy for traders or investors. Expect a cyclical change in sector leadership, and small emerging technology companies in computing, agriculture, medicine and energy will perform very well and many will be takeover targets.

Large value companies, like those comprising the Dow, will continue to diversify to meet changing demands and become even more entrenched in their respective business sectors. That's all positive news for US stocks and 2007 will present quality buying opportunities. The underground, or unseen, economy will continue to thrive and feed into the mainstream at an unprecedented rate. Cash and credit are circulating and growing remarkedly; a condition that must be approached and understood to be cautionary.

2007 will experience political disruptions more often than economic ones. The world's currency exchange system, precarious as it is, has now interpreted globalization effects and accommodated. While areas of fragility will persist, no cataclysmic events can be seen looming and those problem areas such as inflation and disparities in markets will be met with policy action. Areas outside the US will almost certainly afford better returns, though with the associated higher risk. Established foreign firms based in stable nations should be given a hard look.

Expected gains are 7% on the Dow, 12% on the Nasdaq and 5% on the S&P 500 at year end, though the range, especially the lows, could be dramatic.