Investment & Financial Articles
Title: Homegrown Terrorists Spook the Stock Market
Author: Charles Payne
Article:
The negative, and at times scary news seems to be coming hitting
the stock market from all corners of our world. Just as the
headlines from the geopolitical realm let up, the glare of
terrorism raises its ugly head again. This time with a twist
that was as tart and hard-hitting as any lemon or lime mix. The
country's enemies are now recruiting US-born operatives and that
makes the likelihood of a successful strike in the nation much
more likely creating a cloud over American life and over the
stock market.
Somewhere down the line, some major company will report
fantastic earnings and guidance and at the same time all the
economic data will paint a picture of a healthy nation and, at
that point, the Dirty Bomb may seep back to the crevices of our
minds that houses the Dirty Bird (my apologies to Falcons fans
for bringing that up), and the movie "Dirty Dancing". Until
then, it will always be a convenient reason to sell stocks or
explain a sell off. In addition to a healthier economy, more
closure in the war on terror would also mitigate the concerns of
the Dirty Bomb. That may not happen until Iraq is invaded and
the likes of Saddam and Osama are brought to justice. Yet, as
long as the market is off in part to worries like these, it will
create that much more of a rebound once the dust is settled.
As unsettlingly as the "Dirty Bomb" scare is, the dirty actions
that continue to rain on the market from the nations wealthiest
people. Say it ain't so Martha! In the biggest stroke of luck
since Hillary made one hundred grand in a single year from a one
thousand dollar investment, Martha Stewart says she sold her
shares in Imclone not from a tip but because she was a
disciplined investor. Of course, she also got a call from the
IMCL CEO a day before the FDA issued news that sawed the value
of IMCL in half, and coincidentally she sold her position on the
same day. If she isn't telling the truth, then, it boggles the
mind. This is a petty crime for a billionaire. Sort of like
Dennis Kozlowski trying to beat the taxman on a million dollars.
It really is amazing and so hard to quantify as to the impact it
is having on the investing public. Americans will root for the
bad guy at times (some will even go to work for the bad guys
even if the caper is to destroy America) but they have never
rooted for unbridled greed. During a week in which the mega-rich
corporate CEO took another kidney punch, the "Dapper Don" was
being mourned by an entire city. John Gotti is seen as a hero by
scores of people because he did what he had to do. Skipping out
on a small tax bill or a minuscule hit in the portfolio isn't
doing what one has to do.
I think the shrapnel from these never-ending cases of violations
of trust are much more damaging than the shrapnel from a dirty
bomb ever will be. The consequences have been obvious if the
stock market is the proxy, but it really becomes a deeper issue
for the nation. Just as scientists say they can't predict the
true damage a dirty bomb would have, we never really will be
able to truly measure the degree of the radiation of trust that
has occurred. Investors also go into each day wondering when the
next allegation will rear its ugly head. From a life and death
point of view, we never want to deal with a dirty bomb, from a
stock market point of view; investors don't want to hear about
another billionaire beating the system for a few bucks.
Thinking has to be Turned Upside Down
As the market continues to crumble and the pundits continue to
scratch their heads, or in some cases pat themselves on the
back, the big question is how does the market turn itself
around? Stocks have been turned upside down and bounced on their
heads. In order to get on the same page the entire thinking of
the financial world has to also be turned on its head.
It is true of everyone that worked in the financial arena, each
day became a season and winners were at the closing bell. In
order to play the game, one had to adjust their thinking and
that more often than not meant abandoning a game plan that was
focused on long-term success, safety and balance. To get back on
track public companies will have to ignore the hue and cry from
investors and stick to realistic long-term planning. It means
more criticism and less income from stock options for those in
the executive suites. It also means that analysts will have to
focus on pick winners from a longer-term perspective.
The dilemma for the individual investor is to understand that
the stock market isn't a slot machine. They will also have to
pay for research and understand that it is an investment, a
blueprint that doesn't become a castle over night. Along the
way, it could look like an outhouse, but it will be the only way.
The word "investing" has always had long-term implications and
that is the way it will have to be again. Sure, there will be
those that want to trade for the quick buck and that's fine.
However, determining whether a foray into the market is a win or
loss after only 24-hours is a sure way to ultimately become a
loser.
So many money managers tried to cut corners and change the
tenants of their funds and missions. So many frugal individual
investors became undisciplined, quick-buck artists, and all paid
a price. Conventional thinking was turned on its head during the
90s and now it will have to be turned again. I don't think we
have to do a complete 360-degree turn, but the unrealistic
attitude among investors is also playing a role in the emotional
heartbreaks. I don't think we will ever buy and hold forever,
again; by the same token, I don't think we can buy stocks the
same way we roll dices.
Focus Group of the Week Insurance (property and casual)
The insurance industry has been quietly yielding a lot of ground
and is beginning to look very intriguing. These stocks made
fantastic rebounds after the post 9-11 nosedive. However, that
initial euphoric ride has come to a halt and now there are
questions or dilemmas that must be answered before the Street
has the nerve to upgrade the sector. Perhaps the biggest
question mark is how much government support will be provided
for terrorism insurance. This is a major sticking point as
pointed out in a column in the Chicago Tribune. Before September
11th, the costliest terrorist act on the planet was $907 million
for the attack on Nat West in London in 1993. So far, the
running tab for 9-11 is $40 billion! Even the costliest natural
disaster, Hurricane Andrew, has only added up to $19.6 billion
in 2002 dollars. (For the record, the Oklahoma attack cost $125
million and the first WTC attack amounted to $725 million.) The
House passed a bill for the government to pay 90% of the cost
related to future terrorist attacks. Currently, the Senate's
version has the government picking up 90% after the industry
pays $10 billion. It seems apparent that government help is
guaranteed, obviously the House bill is more attractive to the
industry, but in either case once this is resolved on Capitol
Hill, I think, the sector will turn it around.
The insurance index, IUX suggest that there will be a major
breakout through 300.
A good way to measure the pulse of the industry is to keep an
eye on AIG. The company has been on high spin for a couple of
weeks now; this suggests that the long anticipated retirement of
Moe Greenberg is around the corner. If, and when that happens,
the stock will come under some knee-jerk pressure, if it can
hold its own I think that will be a bold statement for the
entire sector. By the way, while there is talk of dirty bombs
and subsequent terrorist attacks, the truth is that insurance
companies have been able to use the hysteria to raise rates
exponentially.
Our picks in the group include Progressive (PGR), Allstate
(ALL), and Ambac Financial Group (ABK). If bottom fishing were
your game, we'd use the recent earnings warning-induced weakness
in St. Paul (SPC) as an opportunity to begin building a
position.
Progressive Corp (PGR) $56.30 Aside from the company's
charismatic founder this company has really stayed ahead of the
curve and lived up to its namesake. That is one of the reasons
the stock continues to outperform the industry. Even with its
great chart, the stock is trailing below the industry average PE
of 29. Its price to sales ratio is 1.62 versus 2.62 for the
industry. The company has also enjoyed very steady sequential
growth. The stock acts like its extended short-term, but the
long-term outlook is fabulous and we think the stock is a buy at
any price below $60.00. Our year-end target is $75 and
twelve-month target is $90.00.
Allstate (ALL) $37.00 In April, the WSJ wrote a report on how
the company could save money by working with retailers on
replacement parts as opposed to sending out claims checks. I'm
not sure if the company feels skittish about taking advise from
a newspaper, but it underscores the fact that there are ways for
insurance companies to derive additional revenues. Though the
company warned and lowered guidance in February, they have since
confirmed current guidance. Yet, the stock is still in a
downward trajectory and may have to test the 200-day moving
average around $35.00 before turning. Another area to look to
buy the stock is with a close above $39.00. In the meantime,
it's trading at a PE lower than the industry, a price to sales
ratio of 0.90 versus 2.62 and a price to book of 1.50 versus
2.30.
Ambac Financial Group (ABK) $66.50 This is a hybrid company as
they also provide investment services, interest rate swaps and
cash management services among other non-insurance businesses.
That said, this is the clear momentum champ in the space and we
all know that new highs begat new highs. The stock is trading
what looks like a real low trailing PE of 16 versus the industry
average 29, but the five-year range for the company has seen the
highest PE at 18.6 so this could be a problem. However, the
stock looks like it has room to $70.00 and a breakout from there
should land the stock north of $75.00.
About the author:
Since 1991, Charles Paynes' Wall Street Strategies has
successfully provided timely and effective equity advice to
institutional money managers, retail brokers and individual
investors of all types, and has thousands of subscribers from
hundreds of brokerage firms. Via its website,
http://www.wstreet.com Wall Street Strategies now provides
research online, including enhanced services and online
communication tailored to today's fast-moving markets.
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