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This site will be offline this afternoon, Saturday, September 30th so that we can complete the upgrade. We will try to minimize the disruption but we expect that it may last a few hours. Please check back this evening or Sunday for the new and improved HedgeFolios.

Thank you,

Mike Steinhardt

When we upgrade the site (planned for tomorrow Saturday 9/30/06), MY FOLIO will be enhanced. Once you log in to HedgeFolios, MY FOLIO will be server-based rather than its prior version which used cookies specific to the hardware. Going forward, you will not have to duplicate your watchlist when you go from your work computer to your home computer. Additionally, we have increased the number of stocks and ETFs that can be stored in MY FOLIO from the current limit of 30 to a new maximum of 100. Lastly, the default is now the Technical View so you will immediately see the prices, dates and related HedgeFolios performance of all the symbols you are tracking.

TO ENSURE THAT YOUR CURRENT WATCHLIST IS NOT LOST DURING THE UPGRADE, PLEASE PRINT OUT OR WRITE DOWN THE SYMBOLS.  We cannot guarantee that your list will be automatically generated in the new version, but will do our best.

Beginning this weekend, HedgeFolios will become a membership site. Upon your visit, you will see a new tab called “MEMBERSHIP” that will guide you through registration and login. I expect the whole process to take just a few minutes and at this time, it does not require you to provide any credit card information. The site will be FREE for only a few more weeks. When you register, you will be given a one-month trial and at the end of that period, subscriptions will begin.

The membership site will have open access to the READ and ANALYZE sections and they will be available to anyone, regardless of whether you register or not. Any visitor will be able to continue reading my commentary, view the HedgeFolios Timing Indicator, analyze signal performance and review the fundamental parameters of the Hedgefolios universe of stocks and ETFs. Using the MY FOLIO, EVALUATE, MANAGE and PROFILE sections will require a login following your successful registration.

I will be providing another post tomorrow with some basic instructions to help make your registration as easy as possible and to discuss some enhancements that we have made to the site.

You can look at the Dow and see new highs or you can parse it in as many ways as you want. Some have suggested that we are already at new highs when you factor in the changing composition of the Dow membership. David Briggs from Federated just downplayed the whole thing saying that the Dow is way below the historic high if you calculate it based upon the Euro (and other currencies I guess). Most investing professionals care very little about the Dow so they inevitably point to the S&P 500 benchmark and suggest that the true market has a long way to go before it gets back to historical highs. Tech stock lovers really don’t want to talk about the Dow given that it would be too painful to equate it to their favorite, the Nasdaq Composite which is still 50% off its own historical highs.

Like any other bit of statistical data, you can twist it into any shape you want. I have no idea why any of this is worthy of more than a cursory analysis but I’ll leave that up to people that seem to have a lot more time to waste than I do. Each trade above a historical high is a new high. How long will we have to suffer the distraction if this thing keeps going up? Realistically, I doubt it will last very long because then we will switch to an infatuation with Dow 12,000. So enjoy the drama of the moment and parse it in as many ways as you can.

“Not too hot, not too cold…. just right.” Goldilocks has somehow become idolized for this one statement and yet I find it amazing that she isn’t held accountable for the rest of her acts. By my accounts she was a disobedient child, trespasser, thief, ingrate, vandal, and coward. Remember all that during the gazillion times you are going to hear the term “Goldilocks Economy” in the coming weeks and try to apply those terms to investors and the economy.

I know it’s easy to dream of the 90’s and especially the late-90’s with its bubblicious market of high stock returns. Ahhh… the good old days. But were they just right?” Seems to me the economy may have been just right but the stock prices were not. I know it’s sacrilegious to be in this business and not romanticize or fantasize about ridiculously high stocks but that is my world. Just because economists, pundits and financial media love to switch from a landing that is “too hard” one day to “too soft” the next day doesn’t mean they are correct when they find one that is “just right” today. Even if it feels comfy for us to hear it. There is a fine line between stagflation and Goldilocks or slow growth and moderate growth so don’t get used to the one you believe in today. It’s likely to change.  With each new economic report investors allow themselves to get pushed from one investing climate to another. I am not expecting or wanting everyone to ignore the economic data or the Fed’s potential reaction to it, but there are so many aspects of investing that need to be given more attention.

One more thing about the Goldilocks parable… there were three bears that everyone seems to forget. You could call them Papa “Inflation” Bear, Mama “Geopolitical” Bear, and Baby “Debt” Bear. If they show up at her house, I have a feeling she will be “not too hot, not too cold… just right” as they eat her for lunch.

I just went outside for a walk and almost got hit by a flying pig. Not really, but when I saw Joe Battipaglia of Ryan Beck on CNBC a few minutes ago, something even stranger happened. He was a poster child for the bears and started talking about a recession, inverted yield curves, housing problems, etc. etc. I was getting less bullish over the last few weeks but if you truly believe in contrarian indicators, this was about as close to the ultimate as possible. By the way, I don’t disagree with a lot of what Joe said, but it was shocking to see one of the greatest permabulls picking this moment to switch sides. Make of it what you want, I still cannot believe it. I have to go now to check if there are icicles forming in hell.

Wal-Mart announced a potentially revolutionary change to the marketing and pricing of generic drugs - I get that. But when I looked at investors’ reactions to this whole thing, I had to ask myself “What drugs are they taking?” It seemed to me that the market overreacted. So I decided to take a look at three leading companies in the three industries most affected by Wal-Mart’s announcement and the one-day financial impact was:

Retail: Drug Stores
CVS lost 8.4% and $2.4 Billion of market cap
RAD lost 5.0% and $127 Million of market cap
WAG lost 7.3% and $3.7 Billion of market cap

Wholesale Drug Distribution
ABC lost 4.3% and $399 Million of market cap
CAH lost 2.4% and $681 Million of market cap
MCK lost 1.8% and $296 Million of market cap

Pharmacy Services
CMX lost 4.3% and $1.09 Billion of market cap
ESRX lost 3.5% and $401 Million of market cap
MHS lost 3.8% and $708 Million of market cap

Meanwhile….
WMT lost 0.8% and $1.7 Billion of market cap

For the sake of this analysis, I had to assume that 100% of the move in WMT and the 9 other stocks on Thursday, September 21st was due to this one issue. While that’s not an assumption I usually like to make, I feel it’s acceptable given that all of these stocks had volume on Thursday that far exceeded their 3-month averages. In fact, the volume was a major reason I decided to look at this whole thing. For example, CVS traded 42,717,900 shares versus a 90-day average of 5,284,360 ( a 708% increase.) WAG had a 482% increase and the other 7 stocks all exceeded 100% increases with an average of 201%. And what to say about WMT’s incremental volume? It was inconsequentially 11% higher than normal. Somehow - this event encouraged a lot of institutional (and retail) holders to sell the other 9 stocks, but didn’t really excite anyone to buy into WMT. Clearly, this has a lot to do with the fact that drugs are the primary business for the others and only one of many revenue streams for WMT. However, I was expecting to see more action in WMT and it just didn’t happen. And as you can see, WMT lost money on the day of their big announcement.

For anyone that actually missed the highlights of the actual deal - Wal-Mart plans to sell 291 generic drugs (about 10% of the 3,000 generics sold at pharmacies) for just $4 per month in Florida before it migrates the plan to the rest of the country. Critics of the program say that the 291 drugs include several that are listed multiple times, using different dosage amounts and they also point out that the drugs are mostly older ones that have been on the market longer and are already less expensive. Most of the drugs on Wal-Mart’s list are cheap, marginally profitable and rarely use co-payments for their purchase. This last part is critical given that customers who pay with cash, rather than through insurance, are a small fraction of the major drug store purchases. In fact, CVS said that cash sales represent less than 0.5 % of its total pharmacy sales and WAG echoed that saying nearly 95% of their pharmacy patients have insurance coverage. A Walgreen spokesman said the average co-pay for the medications on Wal-Mart’s list is just over $5 and that really makes a key point - How many patients are going to change their purchasing behavior for $1 per month per drug? And is it revolutionary? - because a comparison of prices on Drugstore.com revealed that some generics could be purchased cheaper (albeit in larger quantities) than Wal-Mart’s new plan and Kmart was quick to claim that its existing plan is already superior.

For Wal-Mart’s part, I think this was a great public relations move and that’s about it. I really doubt that their pharmacy sales and profits will benefit from this strategy. If it’s really going to work, a whole new crop of shoppers would have to be inspired to come into WMT for $4/month drugs and then buy other stuff in the store that will actually make some profit. I doubt that too. I suspect that many patients are loyal to their existing neighborhood pharmacy for reasons such as proximity and convenience. There’s a big difference between parking in the back of a humongous Wal-Mart lot and the drive-throughs that so many CVS and WAG stores offer, especially for senior citizens or sick people. I suspect that “big difference” is more than $1 to $5 per month per drug.

The group that will benefit most from the new program will be the uninsured and they are clearly deserving of help. For them, the average out-of-pocket cost for a generic prescription drug last year was $29.82, according to the National Association of Chain Drug Stores. Wal-Mart’s plan could represent substantial savings for this group, especially for families that are repetitively taking several medications on the list. However, as I mentioned before, this customer group is probably about 1-5% for the major drug retailers and given their low-income demographics, there is a pretty good chance that they have been greeted with a big yellow smiley and “Welcome to Wal-Mart” for years.

It was clear from the market reaction that this was less of a story about WMT and more about a projected change to the other stocks I mentioned. While I have UP signals on all the other 9 stocks, I don’t like the current prices as good new entry points for positions. I just don’t think the WMT plan was a great reason to dump them. At some point, you really have to wonder whether the $9.8 Billion in lost market cap from the 9 stocks I analyzed was reflective of the actual financial impact. If you think that it was, then you probably have sold. If not, it’s still questionable in my undrugged mind whether it’s worth rushing in for a trade. You’d probably save more money by purchasing your drugs at Wal-Mart!

Since the Fed announcement yesterday, the market has traded with a downward bias. I am not going to predict anything here but I am getting less bullish -not bearish, just less bullish. I don’t go from one to the other overnight so I’ll just let the market play this out. Compared to a month ago - oil is lower, interest rates are lower, geopolitical tensions are lower and yet, the market is just plodding along and looks to be more focused on not losing, rather than winning. I am all for boring, calm trading environments every once in a while, but it feels like we need something to juice this thing or I suspect that we will be hit with a wave of programmed selling.

From a technical perspective, the double-top pattern setup is a legitimate concern, but I think it’s more important to look at some of the fundamentals. Maybe I watched too much of Stephen Roach on Bloomberg today, but I am buying more and more into the possibility of a scenario of perilously low growth. I am not yet convinced of a full-blown recession, but I think it’s ignorant to discount the extent of economic change that has been occuring. Many people that would tend to disregard this anxiety today are also the ones that tried to explain why the flattening yield curve during the past 2 years was not a worry or why the inverted yield curve we witnessed early this spring was “different this time.” Even Ben Bernanke promoted this theory. However, it seems to me that if you look at it objectively, the yield curve did matter and did an amazing job of signaling the economic data that is actually occuring today.

Good luck with your investing and don’t get stuck in a rut.

Yes - I know there is an announcement coming in a few hours but you’d hardly guess it based upon the lack of the ridiculous, incessant hype that has accompanied every other meeting for the past few years. As much as I abhor the myopic focus on what the Fed does or doesn’t do, the change in market behavior is worthy of attention. Maybe this means everyone else has finally come around to my way of thinking that the Fed is overemphasized, but I am surely wrong on that. Regardless, I still believe that when the announcement finally comes, the sideways move that I have been seeing will come to an end. One way or another, I expect the direction for the next few weeks to become clearer. There appears to be unanimity that there will be no change in rates, but if the language is not dovish enough we will likely see some selling. There’s a lot of complacency out there today and that should never be ignored.