I am not impressed with the top sectors of stock performance coming from areas like Utilities, Telecom, Energy and REITs. For far too long, this bull market has relied on performance from value stocks and dividend plays.   Call me nutty, but I’d rather have appreciation from companies that make high value-added products or services. I know you can point to examples like AAPL and GOOG, but those are isolated stocks, not sectors. Instead, investors are throwing money at parts of our economy that I hope are not considered leaders.

When I think of leadership, I immediately look for innovation. Unfortunately, our country is spending more time and money on financial innovation than product innovation. Excitement in our market comes from Private Equity buyouts and the subsequent speculative premiums that keeps hyping stock valuations. Sorry but that story will end some day and then we will have to find a replacement. I’d like that to come from new products that make us the envy of global competitors but our R&D and capital spending plans have not been inspiring. Instead, we are using cash flow today to manipulate and manage EPS through buybacks and the market cheers. At some point, we will realize that product innovation provides long term revenue streams and financial innovation just maximizes short term goals. Meanwhile, much of the world is growing rapidly and we are getting mired in pre-recessionary trends or maybe even stagflation.

It is what it is, but I am disappointed that we fail to accept the facts. Instead, investors are buying into the spin that first quarter earnings are great and Dow 13,000 means something.   Neither of those are true.  When it comes to the consumer, bulls want you to ignore everything but consumption (at least when the weather is nice). Just forget about how that spending was funded and I guess you will be ok. Deny the impact of lowered housing prices, increasing foreclosure risks, fuel price inflation, food inflation, and just keep hoping that it all gets fixed somehow. Whenever someone brings up a concern, I hear the bulls criticizing but I am yet to hear how they see these things reversing. It almost seems like they want you to believe that if you just do nothing and wait for long enough, the problems will go away.

We have serious problems in this economy and yet, stocks don’t seem to care.  I intend to play along and look at this on a stock by stock basis, but we need some better leadership and we need it soon.  Despite seeing improvements in technology stocks recently, I am missing the catalyst for this new leadership.  The last time I looked our economy is slowing and earnings growth is pathetic.

I know everyone loves the idea of decent yield at a time when rates are so low and Fed rate cut dreams have given them another boost, but the Utilities sector is overdone at this point. I have been giving DOWN signals on some of these stocks during 2007 and that has not worked out as well as I had hoped. Still, the technicals and fundamentals keep telling me to look for any opportunity to exit UP signals. Having this low growth sector as a leader of S&P performance is not encouraging to me. High profile buyout premiums like TXU have certainly fueled this rally but the investor love affair with yield chasing has been the bigger factor.

Along the way, prices have risen so high that the yield on utilities are right around historical lows of about 2.8% versus 6.3% at the start of the bull run. The last time the yield on the S&P 500 Utilities Index was lower than today occurred in 2000 but no one seems to care that you can get a much higher yield in a money market account. The utilities index has risen about 13% this year and since past bear market ended in October 2002, they have advanced almost twice as much as the S&P 500. Lovers of utilities will point out that total returns are a function of capital appreciation as well as dividends. I get that, but there comes a point when that story is more about the past than the future. We are at that point.

I pulled up the valuation metrics I used last April and compared them to today’s numbers on the same 90 utility stocks covered by HEDGEfolios. The average PE(TTM) was 18.5 last year and it’s 26.7 now. The average forward PE was 16.6 last year and now it’s 23.6. At a significant premium to the the S&P 500, Utilities are richly valued and as previously mentioned, dividend yields have declined dramatically. Were investors so wrong about valuations back then or are they more wrong now?

One of the most dangerous portfolio management scenarios is focusing on returns while ignoring risk and I see that in abundance with utilities and frankly, most yield plays whether that is mortgage-backed securities, junk bonds, REITs, etc. Investors have been told for eons that stocks like utilities are defensive plays because the high yield will serve them well during periods of slow growth. However, that usually occurs after a period where Utility stocks were out of favor and that is not the case in the current environment. You cannot avoid risk for this long and not have to deal with repercussions down the line. As the old saying goes…”I’d rather be out wishing I was in, than in wishing I was out.”

Carl Icahn used to be called a “Corporate Raider” and with all the Private Equity guys taking out companies left and right, I don’t know who is a raider and who is the good guy anymore.  Regardless of what you call him, Icahn has been amazing lately.  His brand of investor activism has risen to an art form and if you just followed him into high profile deals after his position was made public, you would have greatly outperformed the market.     From Las Vegas real estate to IMCL to MEDI, this guy is a master at buying cheap and selling high.  So when you look at MOT, just remember that Icahn is in there and betting against him has been a losing proposition lately.

“Mike is negative a lot.” That’s what people close to me would tell you. They would also tell you I am extremely blunt and often, my negative talk also turns out to be right. When I was warning people about market risks for the few months prior to February 27th, it was annoying. When I was right about those risks during March, it was also annoying, but if you had followed the signals at HEDGEfolios, you probably would have more money in your account than if you had listened to all the “shiny happy people.” You decide which is more important.

Sometimes, in weak moments, I start to question why I just don’t sell out and be like the majority of commentators who are stuck in permabull mode. And then I snap out of it. I would not be very convincing and everyone would see through the act. When I am bullish, I am bullish. The rest of the time, I am not. A few years ago, my partner and I dared to be negative on LLY at $103 per share. With Indy being its headquarters, you cannot imagine the backlash for taking such a view. Clients told us we were wrong and felt like we were always negative on the stock. Of course, their opinion did not change when the stock got halved. I learned a very valuable less back then: “Being negative will not make you friends, but being positive may make you poor.”

Most people love market optimism. They could have just suffered through a one-day 10% decline in a stock and if some talking head tells them that it’s a great buying opportunity, the pain is gone. There doesn’t seem to be any accountability for bad advice as long as it was said with optimistic enthusiasm and a smiley face. Mea culpas with positive tones are often given a rapid forgiveness. On the other hand, people don’t want to hear negatives when they are happy. In fact, they don’t want to hear them when they are sad either, because they already feel like they have heard enough negative talk.

The market is having a mini-mania right now. Saying something negative, no matter if it is true, will likely not be rewarded. So Rah Rah Rah! Wow - Dow 13,000- New record highs - Blah Blah Blah. I just had to get that out of my system so I could go back to telling you what I think will help you make money and avoid losing it.

This weekend’s review of the signals left me feeling less bullish, but not yet bearish.  I unexpectedly found more UP signals turning to DOWN despite the huge positive tone to the market that has persisted for the past several weeks.   With all the hype about record highs and Dow 13000, I know I should be jumping for joy, but that is not the case.  I have not been impressed with earnings season and several of the economic data reports lately have been very concerning.  The bullish spinjobs have been impressive and the momentum is clearly on the rise.  However, I am seeing some early warning signs that will be getting a lot of analytical attention from me.  My posts are shifting to more cautionary thoughts but I am still sitting here with 63% UP signals and a HEDGEfolios Timing Indicator with a bullish bias.   So, if you want happy talk I am confident CNBC will be a better place for you.  On the other hand, if you want to follow ideas that might be negative and save you some money, then stick around.

In the research for my previous post comparing cars to computers, I tried to find a good reason for cars becoming so complex. Supposedly, today’s vehicles are so much better than they used to be and that may be true depending on your perspective. Paint colors, less rust, nicer interiors, better sound, etc. etc. - lots of cosmetic stuff seem better to me. You might have guessed that I am not a car fanatic. For me, vehicles are about transportation: 4 wheels and a motor that move people and things from place to place with safety (including pollution control), reliability, and utility. Except for rare cases like antiques or exotics, vehicles are terrible assets to own. I understand that many people love cars for emotional reasons and I support their right to do that but that’s not for me.

Outside of the esoterics of style - why don’t we evaluate the factors that should have been improved from making cars more complex - like fuel economy? Isn’t that what everyone bitches about when gas heads to $3.00 per gallon? For some reason, I don’t hear how “fun” and “cool” cars are when that happens! Just take a look at this chart from the US EPA report entitled Light-Duty Automotive Technology and Fuel Economy Trends: 1975 Through 2006 and you’ll see that while improved dramatically from 1975 to 1987, not much good has happened for the past 20 years.

If you really want to dig deeper and find out what we did right from 1975-to-1987 and what we did not do right from 1987-2006, just look at the data in the EPA report that shows the changes in mpg, weight, horsepower, 0-60mph time, % trucks, % 4-wheel drive, and % manual transmission. It’s clear that weight is the biggest contributor to improvements in fuel economy. Advances in aluminum, other lightweight alloys, plastics, and composites have done a lot and sadly, not much has been accomplished with all the computerization of the vehicle. Sure - we can go from 0-60 a few seconds faster than we did in 1987 and the vehicles have more horsepower to push around all the weight that has been added. But I don’t call that much progress for 20 years - do you? In fact, I find it pathetic that automotive manufacturers have done almost nothing to compensate us for cars that are much more expensive to buy, maintain and repair.

This country is full of people who love to complain about big oil making “excessive” profits and supposedly ripping them off - but that is a farce. When gas prices rise, consumer behavior and gasoline demand do not respond. Instead, all we seem to hear are complaints about how bad capitalism is and how we need to tax big oil to change their behavior. So as we head towards $3, $4 or $5 per gallon this summer, let’s look in the mirror at our behavior. Manufacturers are making cars that have done little to improve fuel economy so shame on them. However, shame on the consumer who buys them. Obviously, American consumers prefer big, heavy cars and SUV’s that go real fast with lots of horsepower.

I am confident my opinion is not as easy to accept as blaming big oil, but we need to do better than pointing fingers and whining. We need to change our consumption behavior and our purchasing behavior. Until we do that, automotive manufacturers are unlikely to invest in technology that gives us better fuel economy. It hasn’t happened for the past 30 years despite the lessons from the 70’s oil crisis. I doubt it will happen now.

The average American used to be able to work on his own car or truck. There was enough room under the hood to use a wrench and remove things like starters or adjust the carburetor. Since much of the car was mechanical, you didn’t need electronic diagnostic equipment to figure out what was malfunctioning. All it took was an occasional owner’s manual, personal knowledge, standard tools and some experience. Those days are long gone and today’s vehicles are so sophisticated that the dealership or a trusted mechanic is your only choice at $80 per hour. It’s no wonder that dealerships make about 40% of their profits from parts and service.

I don’t drive very much since I don’t commute to work so maybe I am not an expert commentator. Cars have never been an important asset for me, but the automotive industry is extremely critical to what I feel about our economy. The hundreds of thousands of high paying jobs at Chrysler, GM, Ford and foreign brands building cars in American factories are immensely important, but the number of smaller companies and suppliers to this industry provide a strong framework for manufacturing in general. Previously, I have written about my concerns for the loss of manufacturing jobs in America and what I would like to see done to save Chrysler. However, when I look at the past 30 years and assess the state of the automotive industry, I am greatly disappointed to see how far it has eroded. I cannot help but wonder whether the added complexity of the vehicle has contributed to the demise. I have this strange notion that consumers benefit from personal involvement with the products they buy. When cars became too complex to work on, I believe pride in ownership has declined and along with it, so did the companies and their stocks. Obviously there are other key factors like labor costs and poor design, but I think there is something to this idea.

After buying my new personal computer last week, I thought a lot about the similarities between computers and cars. I was fine with the old computer and didn’t need all the stuff that Vista is supposedly going to do for me. I know it may sound like I don’t like progress but I just cannot make the tradeoff between something I was perfectly happy with before and a much more complex product that I find to be a giant pain in the ass. I have no problems with my Excel and Word versions from 2000 other than Microsoft wants me to pay more for new ones that are more compatible with Vista. Like the car with a bigger sticker price that gives me new technology I really don’t benefit from, this new personal computer is not much better. And as far as maintenance, that’s a similarity as well. I find it really insightful that Best Buy makes a ton of money from its “Geek Squad” when only a few years ago, most people did not have a problem buying a computer and getting it functioning at home. For me, the “Geek Squad” is like having to pay a mechanic to change your oil or adjust your car’s timing. Here’s a satirical post that sums it up.

In their pursuit of coming out with a new product to generate sales, Microsoft has given us Vista. I should spend more time with all the features I never needed in XP to find out the goodies I am missing, but all-in-all, I am disappointed. I think the personal computer for home consumers or small businesses have crossed the same line that cars did. I suspect that Vista may be appealing to some market niches that are computer geniuses or have corporate IT departments, but for the vast majority of users, I think they have just shot themselves in the ass.

There’s a huge buyout premium developing throughout the Biotech sector thanks to the AstraZeneca purchase of MEDI. As you know, I am not a fan of speculating on which company is the next target, but that strategy is working quite well right now so who cares what I say. Kudos to Carl Icahn once again but the price paid for MEDI was over the top. The company is now trading at a trailing 12 month PE of 300 and a forward PE of 70. It’s up 74% since I gave the UP signal on 3-19-07 and I say “congratulations” to anyone lucky enough to be playing along. However, that deal is done so making the next bet is another story. At a time when credible biotechs with multiple products on the market like AMGN and DNA are well off their highs and trading with valuations a fraction of MEDI, I get concerned with the speculative game on the rest of the sector. If you are a biotech with minimal sales and narrow pipelines, don’t fret. The market is bidding you up on the hopes that your unproven drugs will not have to make it past Phase 3 - just look like a target. When I looked through the charts this weekend, I was struck by the number of biotechs catching strong bids and I can only imagine what they look like after yesterday’s AZN/MEDI announcement.  I hate to criticize the momentum ride, but I strongly caution you to evaluate fundamentals before entering any new long positions.   I understand that big pharma needs products to move forward, but despite the broad-based lift in the sector, not every company will be acquired.  So if you get into this area, please pay close attention because if the momentum slows down, reality may set in and your shares may suffer.

There’s a lot of debate about inflation - some economists see it and others don’t. With conflicting economic data reports from the government and other sources, I can understand the opposing views. As for stripping out food and energy and then spinning housing numbers to make whichever case, I find that to be ridiculous and confusing. You need to make up your own mind and I am constantly analyzing all the data to make up mine. But here’s a less scientific and much more personal way to view it. I don’t mind paying more for stuff if it is actually better than what it was before or if I get more enjoyment out of it. So I got to thinking about some items and wonder am I “Getting What I Pay For?”

• Is the house I live in now “better” than the same house when I bought it 12 years ago? The neighborhood is up about 50% but I feel the same living here.
• Would a 2007 Maxima do more for me than a new 1992 Maxima (the car I still drive) did for me back then? $30,000 vs. $20,000
• Is the gasoline now much better than the gasoline in 1997? $2.75 vs. $1.22 per gallon
• Does milk taste better today than it did 10 years ago to make up for the price increase?
• Is a college education at Indiana University in 2015 for my kids going to be so much better than the one I got in 1985?
• Is Windows Vista so much better than Windows XP to make up for all the new hardware and application software costs?
• Is my Dish Network monthly charge worth it compared to the same channels I got a few years ago at half the cost?
• Is the Disney movie Meet the Robinsons (2007) better than Disney’s Lion King (1994) that I paid less to watch?
• Were the 2006-2007 Chicago Bears better than the 1985-1986 Super Bowl champs? Just compare the ticket and concession prices.

I could go on and on but I am sure you get the idea. These assessments are subjective but in the end, they are the ones that affect my life and I don’t feel like I am getting what I am paying for - at least for many items. If you want to get a sense of inflation, try looking at it from your personal perspective and compare items that are meaningful to you. If you are paying a lot more for something and it doesn’t meet up to past experiences, to me, that’s inflation.

Until the Nigerian election is resolved, the short term bearish view on oil I wrote about two weeks ago is no longer valid. Until further notice, I am bullish on oil prices.

For far too long, the world has largely ignored problems in Africa (Rwanda, Darfur, Nigeria, Congo, et al) and any efforts to intervene have been very ineffective. I won’t go into a political rant here, but when it comes to the oil markets - Nigeria has only been paid lip service in my opinion. If OPEC makes a quota adjustment, it gets a lot of attention. If Iran threatens supply interruptions or brags about its nuclear development, it gets a lot of attention. Yet, problems in Nigeria have been tolerated as if they were meaningless.  I don’t appreciate rapidly blaming things on race, but things like this certainly add credibility to those complaints.  Hostages were repeatedly taken and untold lives have been lost in the past but their impacts have been treated as a “so-what” by major media. With the weekend elections and the killings that have followed, I think that has changed.

Bloomberg interviewed Sebastian Spio-Garbrah of the Eurasia Group today and while I find his commentary to be excellent, I was struck by one of his blunt observations which I am paraphrasing: Authoritarianism would be good for Nigeria since it brings control to an economy that is 80% dependent upon oil. In a world full of oil producing countries controlled by dictators and authoritarian regimes, both sides of that argument can be made.  If you want a peaceful democratic government, you might want to push the need for better elections.  If your focus is on trying to keep oil supplies constant, you might be fine with an authoritarian.  I don’t want to compare the Nigerian government to the ones run by Prez. Chavez or Prez. Imanutjob, but it seems that the world accepts oil state dictators in exchange for the hope of less problems with oil supply and lower prices.  Dealing with them has been tough and unsuccessful.  However, getting rid of Saddam didn’t work out well either.  So take your pick but either way, much of the US and world fuel supply is determined by the decisions in these countries.  I’ve heard rumblings of $4 and even $5 gas this summer so if that is where the upper bar is being set, it won’t be long before consumers start their whining.