Sponsored By:
| Dow | 10,465.94 | -1.22 |
| NASDAQ | 2,254.70 | 3.01 |
| S&P | 1,101.60 | 0.07 |
WaveWire Weekly Volume 2, Issue 2
![[ ]](/Gui/Images/dotsbar.gif)
IN THIS WEEK'S ISSUE
1. The Kahuna's Big-Picture Context Rant AND Short-Term Market Forecast - Profiting From A Historic Opportunity.
2. The Learning Curve - Appropriately Enough, Learning
3. Hot Sector Of The Week - Charter Schools
4. Investable News On Our Favorite New Economy Companies
5. Question-And-Answer Time - Santa And Cost Basis
6. Wave O' The Week
7. Check Out The Big Kahuna On TV and AOL.
8. Wine Finds - What A Fine Find!
9. On The Road Again-Meet Toby In Sunny Florida
ADVERTISEMENT
It's Wall Street's dirty little "secret": 1 out of every 3 IPOs will drop in price within 6 months of issue--only to sharply recover in a matter of weeks. The "Flying V" lockup effect shows you exactly WHY it happens...WHEN it will happen...and WHICH stocks will bounce back. Take it from the analyst who just made investors quick and easy 81% gains using the "Flying V" trading system. He show you exactly how his system pinpoints explosive opportunities for gains like 63%... 71%... even 92%. See:
www.taipanonline.com/flyingvchangewave0110/
Dear WaveWatchers,
The extreme bearish sentiment bottom call at 2,250 is holding firm. In our public mutual fund/private hedge fund, our head trader Bryan Perry is pouncing on our favorite Techonomy leading companies at our Try Under prices. (Those are the lowest parts of the price-range channel.) He's buying millions dollars of stock each day with good results.
Something is going on here. It's called survival of the fittest growth stocks. There is $100 BILLION of cash in mutual funds; $200 BILLION in hedge funds; and $1 TRILLION in money market funds out there to buy growth stocks. You just need to have unblemished conviction about:
- Earnings risk-We have to have zero tolerance for earnings risk.
- Execution risk-We are only buying the leaders and we expect them to EXPAND their leadership in this tough market as real leaders ALWAYS do.
- 2001 earnings visibility-We are only buying the companies that have ALREADY fessed up with 2001 guidance for growth and earnings.
- Valuation-You have to feel that, relative to compound earnings growth rates out 3-5 years from the BOTTOM of the earnings abyss in June, your company's P/E earnings to growth ratio (PEG) is less than 2 to 1-and less than 1.5 to 1 is even BETTER!
Growth investors need to consider Fed history, delivered here courtesy of Ned Davis Research. According to their research, the Fed has embarked on an easing cycle 21 times since the Federal Reserve was founded in 1913.
On 17 of those 21 occasions, the first rate cut marked a market bottom. The second cut resulted in a bottom on three of the remaining four occasions. Even on the fourth, November 1929, the market rallied until April 1930 before dropping until 1932, when the Fed finally cut rates again. The average one-year gain after the 21 initial cuts was 20% in the Dow; after two cuts, the average one-year gain was 28%. A pretty compelling historical picture that does not favor the bears here.
To get some recent perspective, the inter-session rate cut that occurred in the fall of 1998 triggered a rally that would see the Nasdaq run from 1,500 to more than 5,000. Additionally, when the Fed ended its reign of terror in 1994, the Nasdaq Composite Index rallied from 720 to 1,060, or 45% in the next nine months, from the December '94 low to the topping pattern in September 1995.
The argument is that these cuts were about FINANCIAL crises and not recessions. Let's put our recession call on the table. Have you ever heard of a "full-employment recession"? Those economists who are calling for a recession (two quarters in a row of GDP contraction) are missing three key points according to our judgment:
1) The Techonomy industries are still starving for workers, and they pay 72% higher on average than the industrial industries. Layoffs in the Rust Belt and from exploding dot-coms are being absorbed-many times at higher pay. We project unemployment peaking at 4.5%. That ain't a recession.
2) We do have a low-tech/consumer-durable manufacturing recession AND a profit recession-no question. But manufacturing is less than 20% of our GDP-and low-tech and consumer-durable manufacturing is only about 50% of our manufacturing base today.
The fact is, Techonomy GDP will account for almost 50% of GDP growth in 2001-an increase over 2000. (That means, the industries that capture spending for the basic resources, components, equipment and intellectual property required for the creation, transportation, computing, viewing or communication of bits of data.)
Although 1%-2% GDP growth will FEEL like a recession, the fact of the matter is it will only SPEED the transition of our economy from consumer/industrial GDP to the inevitable emergence of the Techonomy industries as the majority of our GDP by 2010.
3) Greenspan & Co. have made a historic shift (FedQuake?) to a prospective monetary policy with the NON-FINANCIAL inter-session cut. AG is NOT going to have his legacy be that he screwed ALL the Bush boys by reacting too slow to recessionary data. A cut of 50 basis points in January and 100 more basis points through April will jumpstart the psychology of our economy out of the hunker-down mode to a the world-has-not-ended mentality.
Three things will help reverse the Perfect Storm that crashed the markets in 2000--$25 per barrel oil, $6 per million BTU natural gas and a $.95 Euro.
Technically, when the Nasdaq declined three straight days but volume also fell each day, it meant the sellers still hadn't eclipsed last Wednesday's record-volume up day. The bears don't appear to have the volume to send the Nasdaq back below that line.
The other big tell? Reaction to the bad news. When stock shocks on negative pre-announcements (i.e., Nokia) don't take the entire market down, you will know the worst has been factored in to stock prices.
Meanwhile, expectations for earnings growth continue to be slashed. Current estimates for the S&P 500 are at 5.9% earnings growth for the fourth quarter of 2000, and around 6% in the first two quarters of 2001. These are profit numbers that indicate a recession, and these low earnings expectations definitely set the stage for positive surprises.
Other tells: On the NYSE, the number of shares sold short and not covered--known as short interest--grew for a record fourth-straight month to 4.87 billion shares for the period ending Dec. 15. That's up 6.2% from the prior month. On the Nasdaq, short interest reached a record 3.50 billion shares for the month ending Dec. 15, up 3.5% from the prior month. Such high levels of bearishness tell us there is BIG-money bet on the downtrend continuing...which makes these short-covering rallies like today even more powerful.
Cash in mutual funds is now at its highest level in three years, according to the latest figures from the Investment Company Institute. Cash as a percentage of fund holdings rose to 6.5% in November, up from October's 6.0% and 4.1% in March at the market's peak. Cash levels haven't been this high since November 1997, when they also reached 6.5%. That was coming out of the Asian crisis panic in late October 1997, at another important market low.
Judging by what I hear, cash going into January was even higher. You need fuel for a rally, and cash and greed are the rocket fuel of rallies.
SUMMARY
If you are managing your own growth portfolio here, I'd use our sentiment and economic assumptions to make your moves NOW on your own "A" list of growth companies. You may never see a chance like this again to get the crème-de-le-crème growth companies at these prices.
ADVERTISEMENT
LOSE WEIGHT. PAIN FREE. "WaveWatchers: If you're looking for a strategy like I am to cut some weight this year FAST, these low-carb bagels taste as good as the real thing to me--minus a gillion calories and carbohydrates! Our friends at www.synergydiet.com will send you a FREE jar of their delicious, low-carb strawberry fruit spread when you order a trial sample (a $5.99 value)! Enter the coupon code 'kahunajam' when you check out. Try 'em-they're working for me,"
Toby "The soon to-be LESS Kahuna"
Try 'em at: www.synergydiet.com
2. THE LEARNING CURVE: EDUCATION MANAGEMENT
Long-time readers of the Weekly WaveWire (meaning about those of you who have been with us four months or more) have undoubtedly noticed a shift in our perspective as we've broadened our universe from a strict high-tech focus to address other changes and trends that offer investment opportunities. This week is another prime example as we explore investment opportunities in education management in this week's Learning Curve.
WHAT IS IT?
Education management encompasses the movement toward charter schools and management of public schools by private companies. Ultimately, these companies hope to benefit by improving education in areas where public schools haven't done the job and improve the efficiency in an area where some estimates place administrative costs as high as 50%.
WHY SHOULD YOU CARE?
There is big money to be made here-this is a multi-billion-dollar ChangeWave FROM traditional school district managed schools to for-profit management companies. With the new administration taking the helm in Washington in less than two weeks, there will be a push to implement some of the education system reforms that President-elect Bush emphasized in his campaign.
Along with the push for private-school vouchers, there should also be support for the charter school movement to improve results in schools, as parents grow increasingly frustrated with public schools.
Following that idea, several big-name investors are getting involved in the for-profit education movement including J.P. Morgan, Paul Allen's Vulcan Ventures and Edison Schools, led by former Channel One chief Chris Whittle. And if the fight to implement private- school vouchers continues along the same path that it has in the past, expect support to grow among parents who have difficulty finding the money for private schools but want a better education for their kids.
WHAT DOES IT DO?
These companies hope to succeed where the school systems have failed. Often taking over the most-difficult schools in districts, they set about the task of education with a more rigorous curriculum, longer school days and years, more parental input and less spending on administration.
WHAT DO I NEED TO KNOW?
The current status of education in America, where U.S. students often place near the bottom of the list of industrialized nations, presents a huge, multi-billion-dollar opportunity for these companies.
In December, New York City schools Chancellor Harold Levy announced a plan to turn over the operation of five of the city's worst performing schools to Edison Schools. Since Edison counts on economies of scale to make profits, success there leading to the addition of more schools to their program would be a huge victory for them. To paraphrase "New York, New York," if they can make it there, they'll make it anywhere.
Of course, there are several challenges this education management movement has to overcome to reach success. These include:
Documented results: In other areas of the country that have adopted the charter school concept, school district officials have had some difficulty getting evidence to back up the claims of improved performance. Better outcomes need to be documented to keep the momentum going.
Teachers' unions: Any threat to the status quo, whether its vouchers or charter schools, is likely to draw opposition from the teachers' unions. Needless to say, the leadership of teachers' unions disagrees with these alternatives and vouchers have run into opposition at the polls as well.
Passing tough tests: The schools that are being handed over to private control are often the worst schools in a district, meaning these companies have to prove themselves in the toughest settings.
Resistance to the profit motive: Some of the for-profit educational ventures are being criticized for methods like reducing extracurricular activities and turning away the severely disabled to protect profits.
Profits: Currently, none of the ventures have made money. The most optimistic forecast has come from Beacon Education Management, which expects to reach break-even in two years. Merrill Lynch estimates that the most prolific company in the field, Edison Schools, may not make money until 2004.
What are your favorite New Economy terms you'd want to place on the Learning Curve? Send your New Economy-related suggestions to research@changewave.com.
3. HOT NEW ECONOMY SECTORS AND SPACES (i.e. SUBSECTORS): CHARTER SCHOOLS
The Revolutionary Monster ChangeWave We're Riding: The educational reform ChangeWave from the ChangeQuake allowing more school choice as parents become less patient with an educational system that is not providing results.
Charter Schools Killer Value Proposition: Getting children out of bad schools. Parents are frustrated with underperforming schools and are seeking out educational alternatives to public schools including private and charter schools, and home schooling.
The Addressed Market Opportunity: Currently charter schools are allowed in 34 states and the District of Columbia. A Merrill Lynch analyst estimates that for-profit schools could capture as much as 10% of the $360 billion spent annually on K-12 education.
How To Best Ride the Charter Schools ChangeWave: In this wave, we want to bet on the early entries into this market that have some results to back up their claims of either improved educational outcomes or cost efficiencies.
Our favorite stock in this sector include:
Edison Schools Inc.--EDSN--Edison manages and operates public schools serving students in kindergarten through 12th grade. The company opened its first school in 1995 and currently manages 113 schools in 45 cities in 21 states and the District of Columbia serving 57,000 children. Edison contracts with local school districts to operate the facilities and dictate the curriculum in return for funding on a per-pupil basis. Note that the school figure is inflated because Edison counts grades K-5, 6-8 and 9-12 as separate schools, even if they are located in the same building.
The school population controlled by Edison is the estimated to be between the size of the Cincinnati and Atlanta systems. The company is counting on economies of scale as it controls more schools to help it reach profitability. Company revenues for the three months ending in September 2000 totaled $64.8 million, 57% higher than the same period in 1999. Edison Schools shares closed down 1.5% at 28 15/16 in Tuesday's trading.
Put this company in your Strategy.com portfolio at:
www.changewave.com/strategy.html
and look for my ChangeWave Investing advisory service for the best time to buy and the right price.
4. ALLIANCE REPORT: Personal Digital Assistants
Welcome to a new feature for the Weekly WaveWire. It takes the place of our news digest, but in many ways should be more newsworthy. This is the spot where we will update our WaveWatchers on news from our more than 1,000-member Alliance of industry professionals.
We will regularly feature some nuggets of industry intelligence as reported by our Alliance. As usual, the complete reports and the buy/sell/hold advice are available exclusively to our paid subscribers. If gaining complete access to this proprietary, firsthand and real time Techonomy industry intelligence would be valuable to you, go to:
In the meantime, profit this week's information from our recent report on Personal Digital Assistants or PDAs.
Our Alliance research on Personal Digital Assistants--such as Palm Pilots or Handspring Visors-indicates that they are rapidly moving from the techhead early adopters and "crossing the chasm" to the mainstream marketplace-a significant market moving event.
Our "market proxy" of ChangeWave's field experts indicates that more than two out of five (42%) use PDAs and more than half of the remainder (57%) are either planning on getting one or are seriously considering it. And nearly three fourths of those (72%) plan to purchase one soon.
Slightly more than half (51%) consider them "indispensable." One Alliance member agreed PDAs are necessary. "I have a Palm V. I carry it everywhere. When I travel it is my calendar, phone book, scratch paper and entertainment. When I am overseas, it is my currency and time converter. I love it."
We are in the early stages of an exciting ChangeWave (from PC to appliances) that will have large-scale investment ramifications as PDAs evolve from nice-to-have to need-to-have technology.
If you have a question, remember our guidelines:
- Keep your questions short.
- Check the website first. We have a glossary of terms and a Frequently Asked Questions (FAQ) section. They can answer many of your questions.
- Don't expect a direct answer. We may answer it in an upcoming Q&A or column or may choose to answer it directly.
- The SEC forbids us from giving personal investment advice.
Send your questions to research@changewave.com.
Now this week's questions...
Question: I read a lot of places lately where analysts were disappointed that we didn't have what they called the "Santa Claus rally." What's that?
Answer: The expression reflects the bump in stock prices that occurs around Christmastime each year. It's not quite a given like death and taxes, but it is something fund managers count on. The stock market is 95% psychology and 5% fundamentals-and the Santa rally NORMALLY proves this axiom. This year Alan Greenspan played the role of Grinch and nipped the rally before it started.
Question: I know you've gone over this before, but could you please explain cost basis for stock purchases one more time?
Answer: It's not really complex, unless you make it so. In a nutshell, it is your average cost of shares of a particular stock, taking into account your purchase prices and all of your fees. Let's try an example. You buy 100 shares of XYZ stock at $10 a share. Then the stock drops and you buy 200 shares at $5 per share. That means you have 300 shares that you paid $2,000 for or an average price of $6.67 per share. Then you have to add in your fees. Assume you paid $15 per trade so now the cost basis for each share is $6.77.
If that math moved too quickly, let's look at the instant replay. 100 shares times $10 = $1,000. 200 shares times $5 = 1,000 Total = $2,000 Then divide that by total number of shares (300) and that equals $6.67. If you add in the fees for making the trades, then the math really becomes $2,030 divided by 300 for a cost basis of $6.77.
Each week we will list the stock that is the Wave O' The Day on our website. You can also access this info by going to www.changewave.com early each trading day and getting both a Wave and a Wipeout O' The Day.
Avici Systems (AVCI) jumped Tuesday, one day after the company began shipping new high-speed optical networking equipment to challenge products made by Cisco and Juniper Networks. A spokeswoman for the company also announced that the AVCI's products were used in AT&T's OC-192 Internet Protocol backbone which was launched Monday.
We don't think its smart to bet on the ants in a land of elephants, and Avici has a bit to go before they can make a dent in this business. Avici Systems shares rose 32.6% to 26 3/16 on Tuesday.
Toby will make his next regular appearance on "Bulls & Bears" on the Fox News Channel Saturday, Jan. 20, at 10 a.m. and 6 p.m. and Sunday, Jan. 21, at 9 a.m. EST. Toby will also be a guest analyst on "Your World With Neil Cavuto" at 5 p.m. Friday, Jan. 19. Check your local cable listings or satellite guide to find the Fox News Channel in your area. NOTE: These shows are NOT on your local Fox network station, but the cable Fox News Channel.
And don't forget that Toby's also on the web every Thursday at Sage Online on America Online at 6:00 p.m. For AOL browsers only, you can view AOL MarketTalk produced by Sage via AOL keyword: MarketTalk.
The find of the holiday, bar none, was St. Clement's 1998 Napa Valley Oroppas-a blended wine of intense Bordeaux qualities at about 70% off the price. Rush, do not walk to try this winner if you are a lover of luscious reds without the big price tag.
Send me your favorite vineyard that nobody has ever heard of. Let me hear some Wine Finds from you! To share your favorite Wine Find, e-mail me through the form at:
www.changewave.com/winefind.html
9. CHANGEWAVE IS ON THE ROAD!--Catch Toby LIVE at the Money Show in Orlando.
The further north you go, the colder and more unforgiving winter gets. Down south, though, the sun's shining and the investment climate is HOT! So we're taking ChangeWave on the road, to Disney's Contemporary Resort, Feb. 20-23, for the 23rd Annual Florida Money Show.
Enhance your mid-winter vacation break by getting Toby's latest take on the market. Plus, attend an EXCLUSIVE event just for WaveWatchers and WaveRiders (where Toby will share some tips he WON'T give during his other scheduled appearances).
By attending the FREE Money Show, you'll get a chance to meet and talk with your fellow WaveWatchers... A "sneak peek" of what's ahead for WaveWatchers and WaveRiders... And seminars from other leading stock investment advisors. To automatically reserve your spot at the exclusive ChangeWave event, just go here:
and follow the simple instructions.
ADVERTISEMENT
Cut Paperwork! Be more productive! Instantly automate routine business tasks with online time cards, expense reports, invoices, payroll, forms and more - All for FREE! Get automatic reminder messages and instant reports too! Try Freeworks.com today at
by.advertising.com/1/c/31128/10466//11093
Editor: Tobin Smith
Executive Editor: Dan Gainor
Managing Editor: Greg Tucker
Stocks Editor: Bryan Perry
Chief Technical Analyst: Sam Collins
Researcher: Chris Wachtelhausen
ADVERTISING INFORMATION
For more information on advertising with The ChangeWave Investing newsletters or website, contact:
East Coast
John Baldwin (jbaldwin@changewave.com)
West Coast
Philippe Maman (pmaman@changewave.com)
