On Target

December 25, 2006 11:22 am

It has been quite a year. Surely the downs and the ups have been memorable. The ups fortunately outlasted the downs and the year seems to be closing in with the Dow Jones 30 up over 15%. The S&P 500 also did well as did almost every growth oriented mutual fund. There have been a few surprises as well, even if the year is not yet complete.

Probably the most notable has been the fact that only a month ago, the Democrats took over the majority in the House and Senate. This has had mixed results on the markets.

On the positive side, it allowed for several Stem Cell related biotechs to move, actually rocket, higher. On the down side, this party was not received as well by “Big Pharma”, and we have seen a rather precipitous contraction of prices within these stocks over the same time period.

Once we hear the closing bell of 2006, it is probably going to be recorded as a victory for the Fed at the expense of the consumer.

For Horowitz & Company, 2006 was nothing short of wonderful. We have seen client accounts grow by a significant margin as they have been helped by a good dose of market cooperation and an even better selection of stocks. Even though there was a substantial downturn in the 2nd Quarter for many individual positions, we were able to see the way clear towards profits by utilizing good target price disciplines as well
as exercising patience.

That same patience wore thin in the 3rd quarter of the year as we looked to take profits from many of the positions that had seen a tremendous run-up in a relatively short period of time. Once again, price targets were breached, and instead of looking for a reason to increase the target, we felt justified in taking some “money off of the table” to lock in gains. Some of the proceeds were reallocated to bring more stability within the portfolios while other proceeds were put to work on a few new investment ideas.This reallocation enhanced portfolio returns further as the new positions quickly increased in value. The same process of selling to lock in gains and then reallocating was repeated. For those portfolios with a moderate risk tolerance, this was repeated approximately 5 times within the latter part of the 3rd quarter and into the early 4th. Three of the five transactions hit their targets within days and the other two are closing in on theirs. In the end, the participating portfolios knocked out gains as follows:Aside from the trading, there were many notable gains produced in funds, particularly anything related to China’s Internet boom. The largest position we held in portfolios during 2006 was Baidu by far. The company has been called the “Google of the East”, and its run shows that it was appropriately named. Fortunately this purchase was right on the money and helped most moderate to aggressive risk portfolios profit as the stock went from $86 to approximately $110 before we started selling off the position.

Finally, the lack of investment within the Oil sector, which hurt returns in 2005, was a benefit in 2006 as crude oil prices have tumbled. The high of $77 was reached in July and now stands at 22% below the peak which hurt share prices of most oil companies as investors decided to move out before their profits drained away. This was also the case with the Real Estate market as homebuilders were hurt throughout most of the year, only to make a sharp rise in late November. Many real estate investors are holding on for dear life on a sinking ship. The speculators have pushed this market to a point which was unsustainable.

Now it seems that the Fed’s current stance of “wait and see” with a bend towards a looser monetary policy has helped propel the market. Amazingly, the rise was also assisted by the Democratic victory. Even as most analysts predicted a timid market if we found ourselves in this exact political position, the market seems to continue to defy gravity.

With only a few more weeks left in the year, it will be most prudent to continue with the higher than normal cash position until an investment idea comes along that is priced at a nice discount. Bargain shopping for stocks when they are on sale at a deep discount is a great way to build a portfolio.

It has become apparent that the thirst for technological items is still in full gear as holiday shoppers are buying the latest and greatest for their loved ones. Microsoft’s XBOX 360 and their new Zune have been excellent sellers as has been the new Wii from Nintendo (although the Wii already has a recall due to the controllers hurling through midair as the straps used to hold them are not quite up to necessary standards).

Add to the list Apple’s iPod and the Sony PS3 and you have all of the makings for a great holiday for the kids. As for adults, LCD and Plasma flat panels as well as GPS systems are the hottest items this year – a lot more exciting than the usual tie for dad. Last, but not least, is the ever popular Tickle me Elmo. I want one of those!

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