The Big Picture for the Week of April 24, 2005

I was amused by a segment on the Cavuto show called retire rich. Each of the four panelists gave one pick. Gregg liked Citigroup (C), Bob Froehlich liked China Mobile (CHL), Dani Hughes picked eBay and Jim Rogers picked commodities and airline bonds.

If you saw the segment you saw that Ms. Hughes could not come up with the P/E ratio for her pick. Having been in that seat (literally) before, I would attribute that to adrenaline and excitement. You have in you mind what you will say and momentarily forgetting everything else you know about the company is easy to do under the circumstance.

The reason I was amused by this segment is that there are a ton of stocks that you could buy with the intention of holding forever. Chances are many of the stocks could in fact be held forever. They may not be the best performer forever, may have painful downswings and you can not buy any stock and never think about it again but the likelihood that Citi is something you can hold forever is pretty good.

I continue to have the same concerns about the market that I have been writing about for a while now. The path of least resistance seems to be down. I expect to take more defensive action on Monday if it is a down day.

One thing that I have started to think about is things that happen at market bottoms, but I don't think we are there now. One thing I have not written about is that significant rallies often happen in the face of spectacular bankruptcies. A few years ago there where three; Enron, Worldcom and Arthur Anderson. There have been others just as big that escape me at this early hour.

General Motors has a clear path to bankruptcy. We are not there now and we may not get there but the company has $300 billion in debt and very little in the way of assets, relatively, to service that debt. I am not making a prediction but who would be surprised at this point? I think thus far GM has contributed to the market action and a bankruptcy would cause a big panic that would probably be a turning point. I'll write more about this if it happens.

Bob from Bob's Advice for Stocks has left some excellent comments about his bottoms up approach here, here, here and here. In these comments, Bob has generously shared his process for stock selection and risk management. Bob and I have gone back and forth on this before. I can't refute what he says but after you read his comments you probably know what I would say; sorting out the big picture first would do a lot of the heavy lifting for you.

For example I have been writing about being underweight tech for ages. There are some clearly visible headwinds hurting the group. I don't think this is particularly insightful analysis. What would require keen insight is being able to find tech stocks in this environment that have gone up. Google is one. Yahoo (personal holding and client holding) has also done a good job of holding most of its value too. The point is trying to pick the right stock in the wrong group is an uphill battle.