Conventional wisdom holds that magazine cover stories are contrarian indicators - by the time a company’s success or failure reaches the cover page of a major publication the story is so well known as to be completely reflected in the stock price. Therefore, all good news is priced in and the stock can only underperform or all bad news is priced in and the stock can only outperform.

While simplistic, the magazine cover indicator now has the support of recent academic research. This research did find that cover story headlines on Business Week, Fortune and Forbes tended to indicate that the mood (bullish or bearish) of the story had run its course in the market.

As a result of this research, I have decided to develop a portfolio of stocks based on using those three magazine’s covers as a contrary indicator. I also track this portfolio on StockPickr. This week’s results:

Forbes.com - Forbes Magazine Table Of Contents
Money For The Masses
Larry Light
Branch-heavy BofA leads rivals in retail deposits (also overall deposits), ATMs and card balances, which reap fees and interest.

Contrarian take: Stay out of financials, especially BofA. But you knew that already.

Risk returns - with a vengeance

For years big players ignored obvious dangers and reaped rich rewards. Now they are paying for their recklessness, and so is everybody else.  (more)

Contrarian take: Long everything. Risk premia, we hardly knew ye.

Modern Portfolio Theory is based on the premise that investors require higher returns (a risk premium) in exchange for taking on added risk. The risk premium can take on many forms, including:

• The higher interest rate normally received on longer-term bonds in exchange for tying up the money for a longer period
• Higher returns on corporate bonds than on government bonds
• The growth potential (in addition to earnings yield) available on stocks

Recently investors have asked for less return for most of these risk measures than they have in the past. The inverted yield curve is a case in point: instead of higher returns for tying up money for a longer term, investors get less.

Another example is the difference in returns between investment grade corporate bonds and government bonds - in particular the difference in yield (yield spread) between Baa- rated bonds and Treasuries (see graph).

The higher the spread, the more investors demand as compensation for taking on the risk of corporate bonds.  What’s more, as the labels show, the credit spread serves as a useful proxy for how much risk investors are willing to accept for other assets (such as equities) as well. When the spread started to widen in 2000, it marked the peak for equity prices. When the spread began to narrow in early 2003 stocks had bottomed.

Right now investors have been accepting less compensation for credit risk than they did at the peak of the Internet bubble (though other periods in history have been lower still.) But the spread has begun to widen, and has broken out of the downward trend in which it had dwelled since 2003. How much farther it will go is anyone’s guess. But the more investors demand in exchange for risk, the lower asset prices must fall in order to offer adequate compensation.

According to Reuters:

North American suppliers of equipment for making microchips saw orders slip slightly in February, a U.S. trade group said on Thursday.Bookings in February were $1.65 billion, down 1 percent from the previous month but up nearly 28 percent from a year earlier. Bookings increased sequentially in each of the previous two months.

This, however, doesn’t begin to tell the whole story. For example, orders were down 1 percent from January’s revised bookings of $1.675 billion but were down more than 3 percent from the $1.71 billion originally reported for January. What happened to the other $33 million of equipment orders? They were pushed out - which means that at best they will prevent $33 million from being ordered later this year, and at worst they will be canceled completely.

The good thing about the downward revision, and also the decline in February, is that it restores some balance to at least the trend in equipment orders relative to end demand for semiconductors. Although supply (chip equipment orders) is still growing much faster than the roughly 10% growth in semiconductor demand, at least the rate at which the capacity is growing is starting to slow down again. Furthermore, the billings (which represent what is actually installed rather than orders, which may prove too optimistic) have been running at a slower rate than orders. The 22% growth of installed equipment is still well higher than what is needed, but has less far to fall.

Disclosure: William Trent has a long position in SMH.

Tech Data Reports Fourth-Quarter and Fiscal-Year 2007 Results: Financial News - Yahoo! Finance

Net sales for the fourth quarter ended January 31, 2007, were $6.1 billion, an increase of 10.7 percent from $5.5 billion in the fourth quarter of fiscal 2006 and an increase of 12.7 percent compared to the third quarter of the current fiscal year.

The numbers were well ahead of the $0.58 consensus number, which is partially explained by the company’s very low margins - it doesn’t take much of a margin improvement or sales increase to have a large effect on earnings.

For the fourth quarter of fiscal 2007, operating income was $65.5 million, or 1.07 percent of net sales. This compared to operating income of $55.3 million, or 1.00 percent of net sales in the fourth quarter of fiscal 2006.

You see - going from razor-thin margins to wafer-thin margins can help a lot.

As far as the health of technology spending, our main interest when looking at Tech Data (whose status as one of the largest tech distributors makes it a decent read on the overall industry,) it didn’t look so hot. Excluding any currency effects sales were up about 5% year/year. Nothing to write home about (though Dell would take it.) Overall, it supports what we’ve seen throughout the industry - a mid-single digit growth rate, roughly in line with nominal GDP growth. Given the double-digit long-term growth estimates we see provided for many tech companies (Yahoo shows 10% for TECD and 15% for the distributors as a whole - what a laugh) investors are presumably hoping for better.

They won’t get it. The company’s outlook:

For the first quarter ending April 30, 2007, the company anticipates net sales to be in the range of $5.20 billion to $5.35 billion. This assumes year-over-year mid-single digit growth in the Americas region and flat year-over-year growth in Europe on a local currency basis. The company also anticipates an effective tax rate for the first quarter of fiscal 2008 in the range of 42 percent to 44 percent.

Consensus was for 5.36 billion in sales. And if that long-term growth rate doesn’t come down it won’t be the last disappointment for either Tech Data or the industry.

Minyanville recently reported:

“When the Dow closes below its December closing low in the first quarter, it is frequently an excellent warning sign. Jeffrey D. Saut, Managing Director of Research, and Chief Investment Strategist at Raymond James, brought this to our attention a few years ago. The December Low Indicator was originated by Lucien Hooper, a Forbes columnist and Wall Street analyst back in the 1970s. Hooper dismissed the importance of January and January’s first week as reliable indicators. He noted that the trend could be random or even manipulated during a holiday-shortened week. Instead, said Hooper, ‘Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out!’

Thirteen of the 27 occurrences were followed by gains for the rest of the year – and twelve full-year gains – after the low for the year was reached. For perspective we’ve included the January Barometer readings for the selected years. Hooper’s ‘Watch Out’ warning was absolutely correct, though. All but one of the instances since 1952 experienced further declines, as the Dow fell an additional 10.5% on average when December’s low was breached in Q1.

Only three significant drops occurred (not shown) when December’s low was not breached in Q1 (1974, 1981 and 1987). Both indicators were wrong only three times and six years ended flat. If the December low is not crossed, turn to our January Barometer for guidance. It has been virtually perfect, right nearly 100% of these times (view the complete results at www.stocktradersalmanac.com).”

-The Stock Trader’s Almanac

The December low in question was 12,194, and it was breached by Friday’s closing low. The fact that it was a weekly close probably added some additional significance for the chartists out there. Our readers know we have been bearish, particularly on tech stocks. We looked pretty dumb there for a while, less so now. We’re more interested in finding some good stocks to buy than in looking smart, however.

The major report on the Economic Calendar this week is the employment report on Friday. Consensus expects 95,000 jobs added on a month/month, seasonally adjusted basis. We think that basis is full of beans, and will be expecting something on the order of 2 million jobs (plus or minus a hundred thousand or two) on a year/year, unadjusted basis.

The earnings calendar is also light. None of our Watch List names are scheduled to report. However, Finisar (FNSR - Monday), National Semiconductor (NSM - Thursday) and Tech Data (TECD - Thursday) should offer some further insight into the technology outlook.

No matter what one is trying to accomplish, in the process of learning mistakes will be made. The key is trying to learn from them. Although fairly experienced with stocks, we are learning the ropes on options, and have noticed the same mistake several times. It is time to learn from it.

For example, in early May 2006 we bought put options against the Nasdaq (QQQQ) at a $42 strike price. When the Qs bottomed at $36 in July we considered selling (and placed a limit order.) We were too greedy and lost it all in the subsequent market rally.

Then, in December we bought put options on FedEx (FDX - Annual Report) with a $115 strike price. Until this morning, they were up more than 100% as the call was right on the money.

Ahead of the Bell: FedEx Gets Upgrade: Financial News - Yahoo! Finance

Shares of FedEx Corp. rose Tuesday in premarket trading, after a J.P. Morgan analyst raised his rating on the shipping and delivery service, citing a growing parcel market and lower fuel prices.

Since our options expire on Friday, chances are we missed the maximum-gain boat. We should have sold and rolled over any continued bearish feelings into a new option with a lower strike price and more distant expiration date.

We are ready to learn from the mistake, and are establishing an initial trading rule to sell when a long option position is up 100% net of trading costs. On that basis we are selling our Intuit (INTU) puts. While we may still refine the rule in the future, for now we have to stop being too greedy. It is too painful to keep getting calls so right and not make money.
Disclosure: At the time of publication the author is still (unfortunately) long FedEx (FDX - Annual Report) put options.

We have largely left the housing bubble meme to other writers. We saw significant differences between the run-up in housing prices in the early 2000’s and, for example, the late-90’s run-up in tech stocks. That’s not to say it wasn’t a bubble - simply that we weren’t confident enough to call it one. We did, however, see a similarity in company’s desire to call a quick end to the troubles.
Toll Brothers: Scraping the Bottom?

The colorful CEO of luxury homebuilder Toll Brothers (TOL), Robert Toll, stepped forward on Dec. 5 with the claim that some housing markets might be stabilizing. His comments came as a slight disconnect from the company’s quarterly news: Profits plunged, customers canceled more orders, and the company took a deep hit on its property holdings.Most analysts and builders are bracing themselves for further tough times in the housing market, noting that the pain has yet to go around — especially as homebuyers stomach steeper mortgage rates and monthly payments — or, at best, hemming and hawing about what happens next.

If it was a bubble, we have a pretty good guide as to what happens next. Without peeking at the ticker, can you tell which of the charts below belongs to Toll Brothers recently and which belongs to the bubble era Nasdaq 100 (QQQQ)?

16 months after its peak, the QQQQ was just above $40 (and still is), barely a third of its peak level. 16 months after the peak in homebuilders, Toll is cut nearly in half.

So if history is any guide, Toll Brothers may be going essentially nowhere for the next five years.