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How Do The Windows Look This Quarter? + Vic Wisemann’s Thoughts on: ESC, BKD, MGM, LVS, WYN, IBM, INTC, PALM, AAPL, RIMM, XOM, CVX, HES

Vic Wisemann
InvestorsObserver
Featured Contributor

We have come to the end of another fun and exciting quarter in the market. We started the quarter off well enough, with the Dow at 7,522 and S&P at 787 on April 1st. We flew right up to 8,000 on the Dow (840 on the S&P) the next day but then it took us the rest of the month to gain 200 more points. June started out with a bang as we made all our gains for the month that day, flying up to Dow 8,800 (S&P 944), but that's where we called a top and cashed out and it's been pretty dull ever since as we've bounced up and down waiting for a breakout one way or the other.

As we close out the quarter the economy and earnings are on the forefront of most investors’ minds. However, we have another force pushing stocks that only shows up at the end of the quarter. You see, there are requirements for all mutual funds to disclose their holdings on a quarterly basis. This is done in an effort to increase the fund’s transparency so as to protect the average investor like ourselves. As a result, fund managers are exposed to the possibility of being found to hold certain poorly performing equities or have some outstanding performers noticeably missing from their portfolios.

To get around this, certain fund managers have resorted to the practice known as window dressing. This refers to the act of altering a fund’s holdings just before the end of a reporting period. Great performers will be purchased while the dogs will be sold. Window dressing isn't illegal, but it certainly is can be seen as deceptive.

Regardless of the ethics of the practice, the fact is, it's out there working in the market. The question is how can the regular investor profit from this practice?

To see how you can use window dressing to improve your portfolio, read on

As the second quarter winds down, we can expect the usual flurry of activity as traders place their bets on what sectors and stocks will do well and which will do poorly in the months ahead. This window dressing can sometimes cause markets to move in sudden and inexplicable ways.

Adding to the fun, the Russell 2000 Small Cap stock index will also undergo its annual reconstitution with some stocks removed and others added. That will only enhance the perception of increased activity. Yet at the end of the day, the markets have barely budged from recent levels.

We have seen cash finally come off of the sidelines, but making up for missed performance will be critical. Window dressing is about owning what worked, even if you missed the run. Sectors including nursing homes and gaming hotels and resorts were among the more robust performers during the second quarter with both groups moving up nicely.

Emeritus Corp. (ESC), a Seattle-based provider of assisted living and other alternatives for the elderly, started April with its shares at $6.56, rising more than 100% to above $13 by the end of the quarter. Retirement-center operator Brookdale Senior Living Inc. (BKD) has had its shares climb 90% during the quarter.

Its stock up over 160% since April began, gambling giant MGM Mirage (MGM) said in a regulatory filing that bankruptcy is no longer on its near-term horizon.  Even more dramatic is the huge climb higher made by casino rival Las Vegas Sands Corp. (LVS).

Another outperformer is Wyndham Worldwide Corp. (WYN) Shares of the hotel operator have gained roughly 170% since the start of April. The lodging company, which recently affirmed its second-quarter guidance, is slated to report those results on July 29.

For the most part these stocks were completely beaten down and are now seeing a return of capital largely based on valuation. Oversold stocks can see this type of whipsaw action as capital finds its way to what could turn out to be great bargains. This capital has to come from somewhere and the companies who have been flat or only up slightly in the second quarter could be the big winners in the third quarter.

With earning right around the corner we will be able to better evaluate various sectors and place some cash to work for the third quarter. For the most part index buying has ruled second quarter and the performance of individual stocks has been washed away as a factor as machine trading has yanked the broader market up and down on a daily basis.

It used to matter how International Business Machines (IBM) or Intel (INTC) was doing as an individual company, now the entire Nasdaq can fly to the moon and take Palm (PALM), Apple (AAPL) and Research In Motion (RIMM) with it, even though it's not very likely that all can do well in the same space for very long. We are no longer deluding ourselves that 2 billion people in Asia and Africa will be sporting the newest smart phones on the beach next summer yet the pie in the sky valuations persist, as if there is infinite room for all competitors to sell in the global marketplace.

Left behind in the second quarter window dressing were many energy stocks. During the second quarter Exxon Mobil Corp. (XOM) managed an anemic 2.7% increase while Chevron Corp. (CVX) even lost a bit during the quarter. The third quarter means driving and driving means gas prices will be going up.

Another company to look at would be Hess Corporation (HES). HES's upstream cost position has improved, with its three year average costs below the peer average. Further, increased spending has improved the company's exploration success.

For a hedged trade on HES, consider the August 45/40 Bull Put spread for a 75 cent credit. That's a 17.6% return and the stock has to fall over 15% to cause a problem.

Window dressing is an arguably shady practice employed by many mutual fund managers. For many investors who don’t do their homework, that’s what they’re getting a majority of the time: window dressings of a variety of sorts. Ask questions, do your homework, and know for yourself if any investment is right for you. That goes for any and every investment, regardless of who introduces you to it.

f you have had any additional thoughts, ideas or windows dressed to sell in the market please e-mail me at vwisemann@InvestorsObserver.com.