June 2007 Market Timing Update

""Diversification is a protection against ignorance. It makes little sense for those who know what they're doing."

- Warren Buffet

The Cyclical Bull Market

Bob is of the opinion that there is no Bear Market in the near future.  A Bear Market is viewed as a market 
decline of over 20%.  

This month he sets forth his reasons for believing the market is going to reach new highs going forward.

Recession Risk

There is a very low chance of recession with the real GDP as anemic as it is.  Bob estimates the GDP for 2007 in
the range of 2-2.8%.  That is pretty anemic.  No unrestrained growth here.

People are still adjusting their spending to accommodate for high gasoline prices.  No out of control spending in sight.

Overseas however, US companies are enjoying robust sales.

Housing troubles are likely to persist through 2007.  The median price for a home  is now 212,000, 
the lowest since the first quarter of 2005.

Inflation risk - there isn't any.  It is being restrained by very slow domestic growth.

Energy - "Although an active hurricane season could push energy prices higher in the months ahead, this would have
the effect of restraining economic growth prospects as consumers would be forced to reallocate additional
discretionary spending dollars into their energy budgets.  In our view, higher energy prices serve to constrain
economic growth, and thereby have a de facto counter-inflationary impact on the overall price trend."

Inflation and Valuation -  The S&P 500 index is currently 17.6 and Bob is comfortable with a range of 16-17.
Inflation is only apparent to inflation gremlins trying to find it.

The Secular Bear Market Trend

Somehow I missed this one.  Bob believes the secular Bear Market we have been in since 2000 is over.
Bob expects to see significant gains going forward.  This is a big deal.  Money is out there to be made.

The 60 day Put-Call Ratio

This contrary indicator remains solidly in bullish territory, with a reading of .997.

There is lots of skepticism out there and the level of short interest is very high.
Bob expects to see significant gains going forward.  

In summary,  the Market Timing model is solidly bullish and corrections will be minor.

"The Market Timer Stock Market timing model remains in positive territory, and we expect to see
the  s&P 500 index make a series of new record highs going forward. We continue to recommend a dollar
cost average approach for new subscribers looking to add to stock market positions. "

Portfolio Changes

No portfolio changes.  All stocks  are still rated hold.

Personal Portfolio

I decided to lighten up a bit more on  international exposure buy reducing holdings in NBITX and shifting that to
the Hodges fund (HDPMX).  NBITX has  very little exposure to energy, commodities and transportation.  Hodges
does. Hodges has a higher expense ratio than NBITX and is also doing about  4% better than NBITX.  

Hodges fund is run by John Hodges out of Texas.  It is one of those funds that don't quite fit into a Morningstar 
category.  It can be best described as an All-Cap fund.

The fund is not for everyone, with a Beta of 1.72 and  should things go south - one of the first to liquidate.  If the
market  is to continue on to new highs through 2007,  this fund could perform quite admirably.

Anyway, this is the latest breakdown.

Owens Corning  (OC)

This stock continues to perform well.  I have it as a 17% gain YTD,  and a weighted average gain from original
purchase of about 23.7.  Not bad at all.

The following is an opinion on OC from the Yahoo Message board by  a Mr. dr7dozpro, whose writings I follow with
some interest.  It is kind of long, but worth the read if you are considering OC:


Why OC will prosper in a slowing housing market  

Very few things in life are a certain to happen no matter what. Death and taxes are two things
you just can't avoid. One other thing that is going to happen no matter what is aging roofs
are going to need to be replaced. Very few things are as important as the roof over your families head.

In a slowing economy, people tend to spend their money on needs rather than wants. There is a huge
difference. A need is replacing the roof that needs to be replaced, either by aging or storm related.
A want is an ipod; you don't actually need an ipod, you want one.

OC not only caters to the needs of aging homes, they are the leader in innovative technology for
building materials that are cutting edge not only in energy efficiency but architectural trends
in building as well. Cultured stone exterior is certainly the hot thing in many parts of the world;
especially where I live in north Scottsdale, AZ. Not only is this building material being used in
just about every commercial building in Arizona being built recently, homeowners are jumping on this
vastly growing trend and updating older homes to give them a new and updated look.

OC is the world leader in making this stuff. I feel this is going to be one of the fastest growing
segments of OC's business in the next few years adding tens of millions of dollars to earnings
in the next 36 months. This incredible profitable building trend that OC is the world leader
in making is in it's infancy stage and will grow and make OC and shareholders of OC lots of money.
Follow the trend from the infancy stage and watch you money grow.

Re: Why OC will prosper in a slowing housing market  

I do not disagree with anything you are saying and it seems with the volume increases,
the smart money wants in this stock. However, they are only expected to 1.56 a share
next year.

The company, from the conference call, seems to be forecasting a better new home
construction market than what the experts are saying. The balance sheet looks great,
but assets are lifted with a large goodwill and intangible amount. Plus their tax rate
is lower due to putting money in a trust for asbestos.

This overall lower tax rate will not last forever. Besides the insider buying, and high volume on the upside, I am
obviously not seeing something others are. Based on fundamentals, how does this stock go much higher?


You mention and I quote, "However, they are only expected to earn $1.56 a share next year."
Please realize that the money from the merger that was suppose to take place this summer
is not going to happen until first quarter of 08. This will add to the bottom line in 08
significantly. Also, $1.56 is based on very low hurricane activity, very little from the
basement refinishing business that is a profit center for OC (see a previous post of mine
a few months back regarding this and you will see why the basement refinishing business
is going to make 2008 earnings easy to beat).

Compound these two factors along with the 08 projections were based on next to no hurricanes,
tornadoes, or other storm related activity.

Don't forget about the siding business that is up for sale. The money from that sale will
be in 08. Again the $1.56 earnings are not factoring this in as well. Once that sale goes through;
OC will be a debt free company. The entire debt of OC is only 2 billion and I would expect the
siding business to fetch between 2.5 and 2.8 billion.

You mention the balance sheet looks great. I think anyone that looks at the balance sheet
will be extremely impressed that OC has a Book Value of $28.98 a share. Even at todays all
time high OC is trading at just $6 dollars and change over the book value.

OC is a company worth 12 billions dollars and the smart money knows this. The correct P/S
should be 2.50 not the current 0.70. That is just too low for a fortune 500 company with a
bright future. Leaders in their industry should trade at a premium to their competitors;
OC is trading at valuations much lower than than competitors.

Stocks vs Mutual Funds - which is best for you?

Well,well. I actually had a request for a topic suitable for lunch time rumination.

I thought I could knock this out during one lunch hour but after thinking about it a bit,
this looks like at least two lunches.

Establishing an Asset Base

In Tax Deferred Accounts

The best way to establish an asset base is through a tax deferred account. 401K's, SEP-IRA's, 403B's are
examples of tax deferred accounts. Picking good, low cost mutual funds for your initial investments is a good
way to start.

Choose funds representing several broad areas.  Large Cap, Small Cap and International funds give an account
broad exposure  and lots of diversification.

Funds which throw off lots of capital gains at the end of the year are perfect for deferred accounts.

One of the ideas behind tax deferred accounts is to maximize your returns. It makes little sense to choose money
market and bond funds as an investment of choice in a deferred account.

In Taxable Accounts

Choosing the appropriate funds for taxable accounts is a big deal.  Anyone who listened to the news up to and
after April 15, 2007 more than likely heard some of the horror stories about people getting hammered with
capital gains taxes to the tune of thousands  of dollars. 

I learned my lesson in 2001.  Paying massive capital gains taxes is not cool.  In those days I did not pay much
attention to where I held my tax friendly and tax hell funds. As a result I got walloped with short term capital
gains taxes.
owned some funds that did close to 200% turnover and were in taxable accounts.  You only need to go
through an experience like that once to see the wisdom in properly allocating funds.

Choose tax friendly funds for taxable accounts. A Google search on the term provides lots  of sources for tax
friendly funds.

Index, Long Term Growth and Growth and Income funds are examples of tax friendly funds.

A few that come to mind are UMBIX, VFINX, FBRVX, JAENX, DODFX, AMANX and of course the index funds.

DRIP Accounts

DRIP's, aka Dividend Reinvestment Plans are a good way to begin purchase (notice I said purchase, not trading)
of individual stocks and the first step in further reducing the overall cost for managing your portfolio.

In a DRIP plan, you make monthly purchases of a stock and the stock's dividends are reinvested in new shares of
stock.  The only thing you pay is a fee for buying shares and taxes on the dividends (currently 15%).

Expenses are an important point here.

Lets say you start a DRIP plan with GE (General Electric).  GE is a good stock to start with because the company
itself is about as diversified as a mutual fund. A drag on the financial or health sector for example is not going to
cream the stock.

The minimum investment per month is about $20.00. The plan charges $1.00 for each investment.
That's it - $1.00.

Now lets say you invested $100.00 a month for 12 months. Total Cost to you is $12.00 and dividends are
reinvested for free.

Assume the shares around $30.00 apiece, and that is 40 shares of GE.
Reinvested dividends are around $20.00.
Taxes on dividends are $3.00
Total cost is about $15.00

Pick an average mutual fund and run the numbers using the SEC's handy dandy cost calculator
http://www.sec.gov/investor/tools/mfcc/mfcc-intsec.htm  and the cost is about $21.00

A DRIP plan in this example costs 33% less in terms of fees and expenses than one of the better performing
mutual funds.

Start tacking some zeros on to these examples and the difference is dramatic.

Some companies offering DRIP Plans:



During the early Accumulation of Assets phase, adequate diversification is the key. Adequate diversification is
accomplished by the right kinds of mutual funds in the right types of accounts - tax friendly for taxable and high
octane for tax deferred.

Direct stock ownership should be limited to DRIP or like accounts and regarded as a long term hold,
not as a trading vehicle.

Now that you have a few $$$........

One of the biggest drawbacks to individual stocks is lack of diversification.
One of the biggest drawbacks to mutual funds is management cost.

What is the right balance? 

Somewhere in the middle, I think.

Some professionals say a portfolio of 25 quality stocks broadly diversified throughout the market is optimal.

No more than 4% in one individual stock helps assure proper diversification.

Some professionals consider direct stock ownership in any percentage as entirely too risky.

My own personal comfort level is currently about 90% in mutual funds and 10% in stock with no more than about
4-5% in any one stock.  Half of the stock is invested for the long term in Drip plans, in taxable accounts.  The other
half is invested in a deferred account for growth.

While I would not be comfortable owning only 25 stocks and I think there are ways to reduce portfolio costs -
by owning stocks.

ETF's (Exchange Traded Funds) should be mentioned as well.

An exchange traded fund is a basket of stocks which trades like a stock.  Fees associated with ETF's are
generally pretty low. The thing about ETF's is know what you are buying.

ETF's come in many flavors. ETF's are indexes of just about anything.  You can buy ETF's which contain all the
stocks of the S&P 500, the Dogs of the Dow, only gold stocks, stocks from Malaysia and a host of other sectors. 

Some ETF's trade like water and others....some days you might not find a buyer at the price you would like to
unload them at.   I would treat narrowly focused ETF's as I would a sector fund or stock - no more than 4-5%.  

Looking at the latest YTD returns for the more popular ETF's, one thing which stands out is some of my mutual fund
selections are out performing the best performing ETF's.

I think if you own an ETF in whatever the hottest sectors at the moment are, you could do pretty well.  I traded in and
out of ADRE when oil and metals started moving up and did ok. I ended up being more comfortable with PSPFX,
a global materials mutual fund, which I still own.

Whichever way you go, here are couple of my favorite do's and don'ts.


Educate yourself.  This is a great place to start: http://www.bobbrinker.com/books.asp

If you are uncomfortable managing things yourself, use the services of a fee only planner.  Get references.

Spend some time listening to Bob Brinker. You can record shows yourself or sign up for PodCasts.  It's amazing
how much you can pick up by osmosis.

Another option for help in managing your accounts comes from the Mutual Fund Store. www.mutualfundstore.com
If you have 50K in assets, they will manage your portfolios for you.  They charge a sliding scale from @ 3% down,
depending on how much they manage.

I've listened to Adam Bold, founder of the Mutual Fund store for several years and I would use his services if I didn't
like doing it so much myself. He also has another service called Smart 401K where for about $50.00 a quarter
(cheaper by the year), you can log in and input the fund choices you have and a real person gets back to you
with a preferred list of suggestions.

They are active managers - if a fund fails to perform, they dump it.  Compare this to a broker who sells you
something and that's the last you hear from him.

Be sure to consider Taxes on trades - a rarely mentioned item.


Do Not buy broker sold funds unless you think giving the broker 5-6% (or more) or your money to buy from their
house funds is a good idea.  No load brokerages have hundreds of funds to choose from.

Do Not get suckered into buying an annuity.  Especially despicable are those who try to convince you that placing a
tax deferred account like your roll-over IRA in to a "Guaranteed Income" annuity is a smart idea.  It is not. 
Fees and expenses will eat you alive.

Do Not buy stocks as a result of Lunchroom Gossip or the latest message board hot topic and expect to do very
well.  Spend some time doing actual research.

Be wary of the 'Cramer Effect'.  There are actually some published papers on this. The short of it, is stocks featured
on 'Cramer' frequently move up in after-hours trading. Buy first thing the following morning and you pay a premium
price for the stock. The stock tends to drift back down after a couple days. There are other papers out there whose
topic is 'Shorting Cramer', which attempts to take advantage of the short term price spike.

Taxes - one item rarely mentioned is the taxes you get to pay on short term trades.

Someone once gave me some pretty good advice when it comes to stocks:

Buying a good quality stock once for the long term - you only have to be right once.

Buying stock short term - you have to be right twice (when to buy and when to sell).

Which has the better odds?

Well,  enough of that.  Time to go to press.