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1/16/2006 6:46:41 PM - Stock Market Musings...

I follow the business market pretty closely. I haven't invested in any stocks in years, but I nevertheless find it all very interesting.

I figured that I'd write a few words - just for fun - regarding what I'd be doing if I were actually still invested.

Here are some stocks, my personal recommendation, and my thoughts on them. I do not recommend that you use this information for investing purposes. If you want to beat the majority of other investors in the stock market, it's really quite simple: go buy an index fund that tracks something like the S&P 500 with the lowest fees you can find...anything with annual fees above 0.3% per year is overpriced.

Microsoft - $27.20 - BUY at $24 and below.
I've been recommending this since it was just over $24 in October, 2005. I think that their Xbox 360 is going to do better than the original. I don't think that they'll make much money on it when all is said and done - I just think that they'll lose less money than they have in the past. I think that Windows Vista will generate a lot of positive press and stock momentum as its arrival draws near. It's scheduled for the second half of this year, and you'll need to be into the stock well ahead of that if you want to catch the updraft. I would look to sell at $30-33. I do not consider this a long-term stock to hold, but I do think that it's going to rise 20-30% (from my target price) over the next 18 months or so and that - because of the fairly regular earnings stream from Windows and Office - it's well insulated from much of a drop in the short term.

Intel - $25.75 - SELL above $20.
Intel is a disaster. Ever since their x86 architecture was chosen for the first IBM PC they have been able to ride the growth in the PC market to fame and fortune. What always amazes me is that people somehow equate the growth of the PC market - and therefore Intel's fortunes - with Intel being a well-managed company.
Smart managers do not price their products such that competitors with a far higher cost structure can still significantly undercut them on price. That is exactly what Intel did with AMD for decades, and it allowed AMD to eventually grow into a far stronger competitor that today dramatically limits the profits that Intel can generate. Microsoft and Intel - Wintel - used to rule the PC marketplace together. If Microsoft had priced Windows as exorbitantly as Intel priced its CPUs - even the older ones that could be inexpensively produced - Apple would have a lot more than 3% market share.
If Intel was so well-managed, why didn't they have a competent strategy for migrating PCs to a 64-bit environment? After their Itanium flopped and AMD decided to add 64-bit extensions to the existing x86 architecture, Intel repeatedly swore that they'd never follow their lead...and then wound up doing exactly that.
That was a monumental milestone in computing history. Intel - the original x86 architect and the wildly dominant supplier of the technology for decades - was resorting to copying AMD's CPU features. The irony of this is simply staggering and not what you would expect from a "well-managed" company.
I could go on and on about Intel's missteps...their dual-core CPUs are a generation behind AMD's, their CPUs generate far too much heat, their naming scheme is so inane that the typical consumer will never be able to make sense out of it, etc.. Suffice to say, though, that this "well-managed" company now believes that its salvation lies in producing CPUs and such for various other devices that will inevitably use commodity technology.
On an interesting side note, as far back as 1990 I always thought that Intel should have created their own operating system. Given their deep pockets, they could have suffered losses for years while they developed it. Microsoft always used their operating system profits to subsidize other investments...Intel wouldn't have had any problem attracting a variety of people from Next Computer, Sun, SGI, Apple, and all sorts of other computer companies to create such a product.
In summary...Intel is not and never has been a "well-managed" company. They've made huge and repeated mistakes over the years and continue to do so today. Put your money elsewhere.

Google - $465 - SELL above $250.
I started using Google when it was less than a year old after reading about how they had formulated their new approach to filtering search results. That said, I think that this stock is wildly overpriced and all of the good news for the next several years is already priced into it. It's entirely possible that the stock price will stay inflated for a long time (remember the late 1990s bubble?), but when the earnings start to significantly slow (which they inevitably will) or an earnings estimate is missed look for the PE to contract significantly.
I believe that Google's technology is far too simplistic to maintain a long-term competitive advantage. Ten years from now, do you think that you'll still want to be searching for generic terms and see them presented as an incredibly long list, or do you think that you'll want to have your search results automatically categorized into logical groups? If I search for "computer use", Google presents 979 million results. That's completely useless. You can try adding additional words, enclosing phrases in quotations, and other such things, but the fact of the matter is that searching for things purely via words that can be found on the actual pages is not an optimal solution in many, many situations.
As an example of a possible alternative, it would be nice to be able to delve deeper into a search engine's results by specifying a term and then repeatedly selecting a sub-term from a small list that the engine would intelligently provide. At any time, you could look at the search results from any part of the tree, but with each selection that you made the results would be tailored more and more specifically to what you're actually trying to find.
As another alternative, it would be nice if instead of simple pattern matching the search engine understood the meaning of the words (and let the user override its best guess.) For example, searching for the term "financial default" could return pages talking about bankruptcy even if the pages didn't contain those specific words. It could also avoid returning pages that didn't have any sort of a financial angle - those dealing with default court judgments, for example. A system like this would need to be able to do far more than simply provide synonyms for selected words - understanding the meaning of the actual words would be vital to avoid dramatically increasing the list of false positives.
The simple non-interactive data sifting that Google now performs certainly won't be the preferred method of search for many people in the future - it's simply too inaccurate. That means that a paradigm shift is coming, and companies that dominate a field often lose their elevated position when the underlying situation changes so dramatically. If Google doesn't maintain its dominance for many more years, its current price cannot be justified. Now that the value of search is known, though, Google will have to contend with defending its turf against both well-financed competitors (Yahoo, MSN, etc.) as well as endless start-ups trying all sorts of radical ideas.
In short...Google is wildly overpriced even when you take into account its impressive growth prospects. Anyone investing in this stock in the $450 range is gambling...not investing.

Bank of America - $45.55 - BUY at $44 and below.
I think that this stock will drift a bit lower in the next month or two and that will make for a good buying opportunity. The stock hasn't done much in the last five years on a consistent basis but the earnings and dividends during that time have steadily increased. It's currently paying about 4.5% annually versus most banks only paying about 2-3%. It's also significant that dividend income is currently taxed at 15% whereas interest income generated from leaving your money in a bank is treated as wages and may therefore be taxed considerably more highly depending on your situation.
Rising interest rates and the recently inverted yield curve (whereupon short-term rates are actually higher than long-term rates) usually signal difficulty for banks because it makes it more difficult for them to earn money. Inverted yield curves have not always predicted a recession, but I recently read that in the last 100 years they've always accurately predicted an economic slowdown. I wouldn't plan on making a lot of capital appreciation on this stock in the short-term, but if your investment horizon is pretty distant I think that you'll do pretty well.

Citigroup - $49 - BUY at $45 and below.
I like this stock for the same reasons that I like Bank of America, but whereas Bank of America is the second largest bank, Citigroup is the largest. The leaders in their categories typically command a premium, but in this case I don't think that it's warranted. If I had to pick one or the other I'd go with Bank of America. The growth rates of these two large companies will likely be fairly similar, but Citigroup's lower yield of 3% doesn't give it as much downside protection.

Washington Mutual - $45 - BUY at $42 and below
This is another bank stock, but it's significantly smaller than Bank of America and Citigroup. The smaller size enables it to grow faster, but it's also likely to make its stock price a bit more volatile. I see that as an opportunity. If you can pick it up in the range mentioned above you'll be getting a dividend yield in the roughly 4.8% range and probably capture some capital appreciation if you hang on beyond 2006.

- TZ

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