ASK THE ANALYST: Q & A WITH DOUG ROGERS

Editors Note:

Welcome to another installment of StockUpTicks’ Ask the Analyst where members’ questions are answered by respected analyst Doug Rogers of ManageSource Research ( http://www.managesource.com ).

Take a look at Doug’s answers to our reader’s queries and gain a little extra insight into the muddy waters of the modern market. Also feel free to submit your own questions for Ask the Analyst by e-mailing us at: ask@stockupticks.com

Question: I realize this is an unenviable question but if anyone knows, it's you: If the U.S. does indeed attack Iraq, are we likely to see a subsequent "recession" as occurred with George the First, or, were there such different market conditions then that it's a whole different ballgame? Also, if the war drains on, is it a boon or a hindrance to economic recovery?

Doug Rogers:  The markets respond positively to confidence and stability.  The single greatest threat to confidence and stability is military action.  If the U.S. attacks Iraq in the current environment, I think the markets will take an unfortunate beating that won't completely lift until the American public receives clear signs of achievement and direction.  Today's New York Times cited only one other country (Great Britain) that supports the administration current line.  This means that the majority of our allies oppose aggressive action by the U.S. into Iraq and we would be almost completely without support in the geopolitical landscape.  Further, Middle Eastern countries would rather contend with omnipotent unease than overt aggression.  Saddam has enough influence to negatively impact global markets through oil production and prices and potential terrorist attacks abroad and here in the U.S. to do significant harm to corporate and personal interests, alike. The ubiquitous uncertainty that a U.S. assault would create could be devastating to a fragile market trying to find a post-recession foundation to build upon.

I also believe that the negative impact would be related to the scope of military actions.  In other words, a major military move would have a major impact on the markets and vice versa for less significant and less aggressive actions.

Question: I'm new to investing but one of my first stock buys was my favorite dot-com, online auctioneer eBay (EBAY). As a regular user I had become acquainted with the online payment service, PayPal (PYPL), who eBay has now acquired. I see that the stock is STILL trading long after eBay's acquisition. Why is that, and why would anyone still be buying and selling it NOW? Thanks in advance and I love your commentary.

Doug Rogers:  This is actually a complex question, or at least there's a complex answer to this question.  Due to antitrust laws, proxy service, SEC filings and regulations there may be significant lag time between the time that an acquisition or mergers are announced and agreed to and the actual time that it takes place.  Eventually, all the bureaucratic red tape will be satisfied and the company will identify an "ex-" date when all shares of PayPal will be converted to shares of eBay at a predetermined conversion rate.  Prior to that, investors will continue to trade the stock for the same reason they trade any other stock, but with the added knowledge that if they are holding PayPal stock on the ex-date, it will become eBay stock. Keep a close eye on press releases and SEC filings from both companies for more information going forward.

Question: The markets seem to have stagnated since the recent run-up?  What can we expect for the end of the year?

Doug Rogers: During the month of August, we saw the broader market indices regain some of the composure they lost during July.  Historically, business in general, and the markets in particular, show significant strength in the fall after a long and lifeless summer.  The anomalies present in the past three years' data (Sept. 11, 2001, the bursting bubble in 2000, etc.) overshadows this fact, but the strong Durable Goods Orders published today, combined with the return from summer activities suggests a strong fourth quarter. Businesses and investors typically refocus their agendas and engage in business activities that should drive confidence and prices to more stable ground.  This culminates in the holiday season generating the retail industries' strongest quarter of the year. Thus, despite the recent stagnation in the broader markets, expect solid performance to become evident after the Labor Day weekend.

Question: Do you think the presidential sign-off on financial statements marks a return to honest accounting practices in corporate America?

Doug Rogers: This question reminds me of a very similar question regarding Enron and the permanent effects on business that it may or may not have a couple of issues back.  If you remember, I felt that after the political "dog and pony" show subsided, Enron would unfortunately not cause any significant long-term changes, but I was hopeful that the shock and financial pain it caused would burn a hole in our collective memory and make us slightly more savvy in the future. With respect to this overtly vacuous display of political maneuvering, I can't even be hopeful.  It was the silliest thing I've seen in a long time.

First, how many executives came forward and announced that they had been misleading investors and should be arrested?  How many came forward and announced that they needed to restate their earnings?  Ultimately, it was a cheesy way to restore investor confidence, but the fact is that if there are any more accounting frauds being perpetuated, those perpetrating them are knowingly breaking the law (i.e. crooks) and won't be showing up at the Justice Department steps anytime soon. Crooks break the law in the hope of evading the law, not to come forward and go to jail.  Please remember, though, that the vast majority of executives in this country are bright, honest, quality individuals who are focused on doing a good, honest job and building an honorable legacy.

Question: Should I be buying bonds until the market rebounds?

Doug Rogers:  Bonds are an important part of any portfolio and, hopefully, you already have some that suit your risk tolerance and goals while providing income and greater overall stability. However, you might find it difficult to find good deals right now. Investors have been shifting into bonds and bond funds at a tremendous rate during the market's erosion.  In fact, according to Lipper Analytics, July saw the largest redemption of stock mutual fund shares (over $49B) ever in absolute terms, and the largest absolute inflow to bond funds (over $19B).  The point is that bond prices have been driven up dramatically during the past 24 months or more, and driving down yields sharply (price and yield work inversely - the more you have to pay, the less your return in percentage terms).  Thus, investors might have a hard time finding bonds that return the yield they demand at a price their willing to pay without increasing their risk tolerance too much.

You may consider sitting down with your financial advisor to establish bond criteria that suits your needs and goals.  They can then sift through the various offerings on a regular basis and alert you when opportunities come up that fit your pre-determined criteria.

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