August 2010 Investor Report

August 2010

The charts referred to below can be viewed at http://www.ibdinvestor.blogspot.com/

August 2010 Monthly Report

· Another Failed Rally

· Stocks to watch Salesforce.com (CRM), F5 Networks (FFIV), Akamai Technologies (AKAM), VMware Inc. (VMW), Netflix (NFLX), GLD (SPDR gold trust ETF), Silver Trust ETF (SLV)

· Risks of a double-dip recession, or the “d” word is on the rise

Figure 1

Another month, another failed rally as shown in figure 1. On the S&P 500, it is the fifth time since May this index has bounced off of the psychological “tax” or 1040 support line. A break below this may find the index down to 1000. Leadership did show up as cloud computing stocks Salesforce.com (CRM), F5 Networks (FFIV), Akamai Technologies (AKAM), and VMware Inc. (VMW), and online video renter Netflix (NFLX) posted double digit runs. Monitoring these through this correction will provide valuable clues to their strength on the next market rally. Look for signs of low volume selling and high volume buying, or for the weekly price action to be flat. Buying leading stocks in this wild market has been difficult as many breakouts have lead to break downs. Thus, the longer term approach for this portfolio has been GLD (SPDR gold trust ETF), which we have held since ???. An position in Silver Trust ETF (SLV) was also initiated. Both have made strong runs this month (figure 2).

Figure 2

Despite government efforts to stimulate the economy, unemployment remains high at 9.5%, with other estimates as high as the 1930’s depression level 25%. GDP growth also is reported at a disappointing 1.6%. Fed admitted that “the pace of recovery in output and employment has slowed in recent months.”. The country is getting fed up with current monetary policy of printing money, and the markets also showed disapproval with a near 3% drop on 8/11, on reaction to Bernanke’s QE2 announcement, which will dig the nation deeper into debt.

QE2 is a plan to prime the economy’s pump, by reinvesting principal payments from agency debt and agency mortgage- backed securities (from the stimulus and bailouts) into longer term Treasury securities. This money, which was created out of thin air, will earn 25-50 cents on the dollar, will then be used to help fund the nation’s budget deficits, now about $1 trillion a year. Add this to the $2 trillion pumped of stimulas, which only provided a temporary economic boost, and it appears the risk of a double-dip recession, or even the “d” word is growing.

Netflix (NFLX) is a good example of the “N” in CANSLIM. A new product or service to fuel company growth. Put another way, a better mouse trap. I took note of the company in my 1/2010 blog when it announced deals to make downloads available on TV’s, DVD players, Playstation 3, XBOX 360, Wii, iphone, and just recently the ipad. Since then, the stock has jump over 135% this year in anticipation of Blockbuster plans to file for bankruptcy protection in Sept. The movie studios are also jumping on the Netflix wagon as they see demise of video rental stores. The deal with Epix will allow timely showing movies from Lions Gate (LGF), Viacom’s (VIA) Paramount, and MGM. That means Netflix could potentially stream some of the big summer hits, such as "Iron Man 2" and "Dinner for Schmucks," at the same time DVD retailers and premium cable channels show it. This agreement will fuel already stellar growth, with the company adding more than 1 million net new customers for third straight. The 15 million users it had at the end of June was up 7% from the first quarter and 42% from a year ago.