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Saturday, 12 January 2008

Bulls, Bears, and Baristas

by Mick Weinstein

It's looking ugly out there. The Dow recorded its worst first five days of any new year and the S&P 500 has fallen over 6 percent in the past month. And despite Fed Chief Bernanke's market-sparking suggestion yesterday that sharp rate cuts are on the way, sentiment grows that we're facing a recession.

Bargaining with the Bear

John Lincoln points to the combination of five factors -- slowing corporate profit growth, the prolonged housing slump, a continued credit crunch, and slowing consumption and manufacturing -- that suggests this bull market is coming to an end. "I don't know if this will be a 'grizzly' (vicious) bear market or a 'knut' (light) bear market," says Lincoln, but "regardless of the severity, one must be prepared for the downturn that will no doubt feel like it's the end of the world."

John Mauldin, advisor to the hedge-fund stars, believes the recession is already here, but that it's going to be a mild one. The recovery period, however, will be "prolonged and slow," and will start in the third quarter of this year.

Yet Markham Lee argues that the very concept of recession is more a political designation than a financial or mathematical reality: "...the reporting of economic growth, the declaration of recessions, etc., are more about confidence than about the real impact on our household budgets, investments, and businesses." Lee's advice? Ignore recession talk and focus on your own economic reality -- i.e., budget well and diversify your investment portfolio.

If dealing with a recession means being realistic, then Wall Street veteran Barry Ritholtz helps process that reality. Using Elisabeth Kubler-Ross' five stages of grief, Ritholtz believes we've already passed through Denial and Anger and have arrived at the Bargaining stage. With growing expectations of a 50-basis-point interest rate cut, investors are bargaining for steady stocks if the Fed cuts aggressively. But steps 4 and 5, Depression and Acceptance, have yet to occur, which means "we have some downside work to do before this is all over."

Bullish on Bullishness

Looking at the dropping stocks and the widening corporate bond spreads, bond professional Accrued Interest notes the unusual situation that "the stock and bond markets don't agree about where we're going next." He thinks the economy will be weak in 2008 and corporate defaults will keep rising, and while he's not advising selling off stock portfolios, the numbers "certainly don't inspire a lot of confidence."

Jim Kingsdale, head of Energy Investment Strategies, expects further "strum und drang" in the American stock market, sensing "that this is a time to stay away from virtually all markets." Bespoke Investment Group agrees, commenting that the continued fall of the Nasdaq is news that the bulls simply don't "want to hear."

But there are some thoughtful bulls out there to consider as well. Trader Babak believes a correction is in sight, telling

investors and traders that they "are reacting with complacency but fear." Greg Feirman is thinking along the same lines, waiting for stocks to bounce, though not by much -- "about 50 points on the S&P."

Fund manager Daniel Carroll concurs, and believes the market sell-off is "presenting great opportunities to make lots of money... In five years, my most likely regret will be that I conceded and got scared, and failed to capitalize on some unbelievable sales. The challenge is deciding how aggressive I can afford to get." For now, Carroll's looking at ways to increase his exposure and "take advantage of these fire-sale prices."

Starbucks' CEO Shuffle and Baristas at Mickey D's

Starbucks stock, a top performer over the past decade, has fallen 23 percent over the past three months. This week, Howard Schultz announced his return as CEO of the company, and Schultz's first challenge will be to stave off the new gourmet coffee product from a going-upscale McDonald's. As Sharon Zackfia said in the Wall Street Journal, "This is [Shultz's] baby. If anyone's going to figure out how to make this train get back on the rails, even in these tough economic times, it's going to be Howard."

Greg Feirman echoed that sentiment, calling all the hype "bullish for Starbucks' business," as Schultz has the "motivation and will do his best to right the ship." But Feirman also thinks this is "only the beginning of any potential turnaround. Starbucks has already gone a long ways down the wrong path and it is going to take time to repair the business and... reputation."

In reviewing Zackfia's analysis, Turley Muller agrees that the coffee brewer is actually "well insulated" from consumer spending downturns because caffeine is highly addictive, "closer to a staple than a discretionary good."

Moreover, says Muller, the challenge from Mickey D's "will only mildly impact growth in the sense of potential future new customers, and will not steal current SBUX customers. MCD is just taking advantage of their high foot traffic already in place."

But Todd Sullivan believes McDonald's continued growth, as well as its recent announcement to provide free Wi-Fi in its UK stores, "offer[s] people another cheaper alternative to the pricey Starbucks."

Adds Sullivan: "When you consider that I can get one [coffee] at McDonald's for $2, or, make it myself for about 60 cents, then the $5 purchase will just not be made. Judging from recent results at Starbucks, there are ton of folks out there that feel the same way." He believes there isn't anything to stop the fall of Starbucks shares, but that the java brewer "may give us a value play soon enough."

Finally, Wall Street Journal blogger David Gaffen thinks Starbucks stock is benefiting from a "post-Schultz bounce." For traders, the 10 percent rise "may be enough -- it represents a shift in momentum. A switch from decaf to espresso, as it were."

Investment Idea: Capitalize on Beijing Olympics

Ctrip.com, a Chinese online travel planning and booking site, is the equivalent of America's Orbitz and Expedia. The company's stock is traded on the Nasdaq in the U.S. as an American Depository Receipt, with ticker CTRP.

Hedge fund manager Zachary Scheidt is bullish on the stock -- he believes CTRP is unique from its foreign equivalents due to its essentially "monopoly status." With roughly 57 percent market share of the Chinese online travel market, and the expectation that the online travel market itself in China is expected to grow at a 37 percent rate through 2010, "CTRP is set up nicely to benefit from these trends" as well as upcoming Olympics and the "general willingness of the global population to visit China." Scheidt doesn't think it's reasonable to call this stock a value play because it truly is trading at a high multiple, but a "diversified account would benefit from a strong competitive position such as CTRP."

Shane Farley couldn't agree more, and recommends taking positions in Ctrip with the Beijing Olympics approaching, a certain catalyst for domestic revenue growth.

Read more on the Ctrip's unique competitive position from Trader Thoughts, who says given the online travel company's earnings prospects of 35 percent growth in Q4,"investors would be fair in expecting another blowout quarter from Ctrip... CTRP is the perfect long-term play on the emerging Chinese middle-class and their rising purchasing power."

1 comment:

Anonymous said...

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