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8:30 AM Wednesday, April 13, 2005:
The stockmarket was weird yesterday.

As the Wall Street Journal explained this morning, "Through 2005, investors have cringed whenever U.S. policy makers opined on the economy. Early Tuesday, stocks fell sharply as investors hunkered down for another pummeling ahead of the release of minutes from the March 22 meeting of the Federal Open Market Committee.
Investors instead got a pleasant surprise when the minutes showed policy makers aren't likely to put the pedal to the metal on interest-rate increases any time soon, and stocks rallied into the close." (See my chart above.)

In other words, the Fed will continue to lift interest rates -- but gradually as it has been doing. This does not mean stockmarkets won't go down this year. I predict they will go down. But it does mean stockmarkets are as irrational as ever (look at yesterday) -- perhaps more so, given the extent of programmed trading, which accentuates dips and rises.

More reasons why the housing boom is unsustainable: Interest rates are rising. Adjustable Rate Mortgages (ARMs) will start to get very expensive. Yet, according to the Mortgage Bankers Association, 37% of homeowners are expected this year to finance their home purchases using ARMs. The reason is simple: one-year ARMs average 3.9% last year, compared with 5.84% for 30-year fixed rate mortgages. But in three years, when these rates adjust to reflect higher rates, a whole bunch of "homeowners" are gong to get nasty surprises. It gets worse. The National Association of Realtors says 42% of first time homeowners put no deposit down. There are also a whole bunch of homebuyers who have been buying their homes using interest-only loans, i.e. no principal repayment. Go figure what will happen in the next few years. In many areas of the country, homes will be foreclosed and prices will come tumbling down. I got these numbers from the Financial Times. Click here.

How bad are Wall Street analysts? Pretty bloody awful is the simple answer. On Monday, the Wall Street Journal ran this most remarkable story"

After all the post-bubble scandals involving analysts who recommended stocks they knew were troubled, you would think that Wall Street analysts would be doing a better job of picking stocks.

You would be wrong.

As has been the case in past years, stocks with large proportions of "sell" recommendations from Wall Street analysts have lately performed better than those with plenty of "buy" or "hold" ratings and no sell ratings at all, according to an analysis by Zacks Investment Research in Chicago, done for The Wall Street Journal. In fact, the stocks with sell recommendations have widened their lead since the stock bubble burst in 2000.

It might seem surprising that the stocks that Wall Street hates would do better than the ones it loves, but it makes a certain amount of sense.

Contrarian investors actually look around for stocks with a lot of sell recommendations, and, if the company looks likely to survive, they buy. The reason is simple: Wall Street analysts hate to tell clients to sell. They avoid lowering their recommendation on a stock until after something bad has happened, when the stock already has fallen.

"I have noticed it and I frequently buy stocks when they have sells on them," says Robert Marcin, who runs a hedge fund called Defiance Asset Management in Conshohocken, Pa. "By the time analysts get around to putting sells on stocks, the stocks are probably primed to perform well."

Mr. Marcin recalls speaking with an analyst last year about home builder KB Home, on which the analyst had an "underperform" rating -- a nice name for a sell. "It is up 100% since I spoke" with the analyst, he says.

Consider computer maker Gateway. At the start of last year, eight of the 14 analysts following it rated it a sell, and no one considered it a buy (the rest called it a "hold.") Gateway rose 31% last year, eclipsing the 9% gain of the Standard & Poor's 500-stock index. By the end of the year, its gains had turned some analysts into bulls -- just in time for it to fall 33% in this year's first quarter. ...

Despite some analysts' awareness of the problem, they clearly have trouble with their ratings. The problem has gotten worse lately, even after the Wall Street stock-research scandals. After the market's bubble, e-mail messages showed that some analysts had put buy ratings on stocks they privately ridiculed. Brokerage firms had to pay millions of dollars in settlements and promised to change their ways. Analysts were pressured to issue more sells. Wall Street firms assured clients that, henceforth, a buy would be a real buy, and when an analyst lost faith in a stock, he or she would issue a sell.

On the face of it, things did change. For a brief period in 2000, just as the stock bubble was bursting, 95% of the stocks in the S&P 500 had no sells at all, according to Zacks. No stock had more than one sell rating. That soon changed. Today, only 38% are without sell recommendations. Of the 62% with at least one sell, 9% have five sells or more.

But human nature doesn't seem to have changed. Even after this groundswell of Wall Street sincerity, the stocks with the highest percentage of sell ratings still are doing better than those without any sells.

In fact, the period when buy-rated stocks have recently performed best was during the stock mania of the late 1990s, when out-of-favor stocks were being abandoned and it was hard to find sell-rated stocks at all. From 1991 through 1996, the stocks with the most sell ratings outgained those without any sells, Zacks found. But from 1996 through 2000, those with no sells outpaced those with the most sells -- possibly in part because there were so few sell-rated stocks to measure. Since 2000, even though Wall Street supposedly has become more discriminating, the sells are leading again. In 2003-04, for example, the sells rose 36% on average, while the buys rose just over 25%. ...

Of course, not all stocks with heavy sell ratings are good stocks to own, and not all stocks with many buys are bad stocks. Enron, for example, was widely hated by analysts shortly before its demise, and they were right.

"You do have to do a fair amount of research" if you invest this way, to be sure you aren't getting an Enron or a WorldCom, says David Dreman, chairman of Dreman Value Management in Jersey City, N.J. He likes to buy stocks such as retailers, which can rise and fall sharply based on the economy, and tobacco makers, whose fortunes can depend on litigation. He finds analysts tend to abandon them at the bottom and begin recommending them at the top.

But the experience can be scary. He bought scandal-plagued Tyco International in 2002 in a belief that its business was solid, but the stock continued plunging, losing another 50% of its value. He needed courage to hold on, but today the price is almost twice what he paid.

Mr. Dreman believes analysts are often wrong. A study he has done shows that analyst forecasts for corporate profits in a wide group of large and small companies have been off over the past 30 years by an average of 40%, either above or below the actual result.

Scott Black, president of Boston money-management firm Delphi Management, ignores analyst reports and does his own research, saying, "We've always thought that they were promotional literature."

Screwy facts about technology:
+ In the early 1990s, Novell spent $1.5 billion building a software suite around WordPerfect and Quattro Pro to compete with Microsoft Office. In 1996, it sold the whole thing to Corel for $10 million, which proceeded to screw it up also.
+ In a survey of 136,000 PCs at 251 North American companies, AssetMatrix Inc. found Windows XP Service Pack 2 (SP2) installed only 9% of the PCs. The reluctant companies identify software compatibility issues as the main reason they're holding back. What that means in simple language is that after you install SP2 on your computer, some of the software on your computer will no longer work. As I've written a million times, beware of installing SP2 on your PC. If in doubt (or lacking time to do the testing), don't install SP2. My personal experience shows most of us don't need it.

Heaven less opulent than Vatican, reports disappointed Pope. The Onion is a satirical site on the Internet. Today it runs this perfectly wonderful "top story:"

HEAVEN—The soul of Pope John Paul, which entered heaven last week following a long illness, expressed confusion and disappointment Saturday, upon learning that the Celestial Kingdom of God to which the departed faithful ascend in the afterlife is significantly less luxurious than the Vatican's Papal Palace, in which the pope spent the past 26 years of his earthly life.

St. Peter's Basilica, with its 90-foot bronze baldachin designed by Bernini, is one of the many Vatican splendors no longer enjoyed by Pope John Paul II.

"Where are all the marble statues, sterling-silver chalices, and gem-encrusted scepters?" the visibly disappointed pope asked. "Where are the 60-foot-tall stained-glass windows and hand-painted cupolas? Where are the elaborately outfitted ranks of Swiss Guards? Why isn't every single surface gilded? This is my eternal reward?"

Heaven, according to the New Testament, has "brilliance like a very costly stone... of pure gold, like clear glass..." with "twelve gates... each gate a single pearl." Yet the pope, who spoke from the afterlife, said heaven is nothing like the "solid-gold city" detailed at length by John of Patmos in the Book of Revelations.

"Evidently, the Bible was not intended to be taken literally, after all," John Paul II said. "Don't get me wrong: It's very nice up here — quite beautiful and serene. It's just not as fancy as what I'm accustomed to. If I'd known heaven was going to be like this, I would've taken one last tour through my 50 rooms of velvet-draped thrones and priceless oil paintings before saying 'Amen' and breathing my last."

According to the pope, heaven is merely a place of unending peace and happiness, wherein all the spirits of the Elect live together forever in perfect harmony and goodness, basking in the rays of God's divine love.

"Up here, everyone is equal," John Paul II said. "No one has to go through an elaborate bowing ritual when they greet me. And do you know how many times my ring has been kissed since I arrived? None. Up here, I'm mingling with tax collectors, fishermen, and whores. It's going to take a little getting used to, is all."

The pope said it is amusing to think that he has been waiting for this "so-called Paradise" his entire life.

"I spent almost 84 years reciting novenas and Hail Marys to get to this restful place," John Paul II said. "If I'd wanted peace, quiet, and pretty clouds, I could've moved to the Italian Riviera. Frankly, this afterlife represents a significant drop in my standard of living."

An artist's depiction of a disappointingly austere heaven.

The difference between Potentially and Realistically
A young boy went up to his father and asked him, "Dad, what is the difference between potentially and realistically?"

The father thought for a moment, then answered, "Go ask your mother if she would sleep with Brad Pitt for a million dollars. Then ask your sister if she would sleep with Brad Pitt for a million dollars, and then, ask your brother if he'd sleep with Brad Pitt for a million dollars. Come back and tell me what you learn from that."

So the boy went to his mother and asked, "Would you sleep with Brad Pitt for a million dollars?" The mother replied, "Of course I would! We could really use that money to fix up the house and send you kids to a great University!"

The boy then went to his sister and asked, "Would you sleep with Brad Pitt for a million dollars?" The girl replied, "Oh my God! I LOVE Brad Pitt I would sleep with him in a heartbeat, are you nuts?!?!?! "

The boy then went to his brother and asked, "Would you sleep with Brad Pitt for a million dollars?" "Of course," the brother replied. "Do you know how much a million bucks would buy?"

The boy pondered the answers for a few days, then went back to his dad. His father asked him, "Did you find out the difference between potentially and realistically?"

The boy replied, "Yes... Potentially, you and I are sitting on Three Million Dollars.............. but Realistically,......... we're living with two Sluts and a Queer."

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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