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Monday Value Overview

Up day in the markets to start off the week. The Nasdaq surged more than 1% with the Dow and S&P 500 not far behind. Microsoft (MSFT) and Amazon (AMZN) led the way, while Yahoo (YHOO) trailed.

Next is a great article by Joel Greenblatt with some great advice. Then is a look at a few Bruce Berkowitz financial holdings, including Bank of America (BAC), Goldman Sachs (GS), and AIG. I also take a look at GDP estimates for the rest of the year. Finally, a note about Accenture’s (ACN) addition to the S&P 500 because of Marshall & Ilsley’s (MI) merger with Bank of Montreal (BMO).

Microsoft (MSFT) was up nearly 4%. Could this be a form of flight to safety considering the rest of the market has so much uncertainty or is this a reaction to their announcement of Microsoft Office 365? I'm skeptical about the profitability of Microsoft entering the cloud, but with shares already (incorrectly, in my opinion) discounting Windows and Office, this just might be the long awaited catalyst to move shares. Amazon (AMZN) was also up more than 4% itself. It's not a bad idea to hide out in cash-rich companies, but Amazon seems pricey, as usual. Amazon did see an upgrade, which explains some of that bounce. Of course, Yahoo (YHOO) was down, so it wasn't just investor movement into the tech space.

This one is a few weeks old, but it showed up in my inbox this weekend courtesy of Steven Friedman. Check out Joel Greenblatt’s article, Anyone - Even the Little Guy - Can Beat the Market. The gist of it is this: Look for mis-pricing in small caps, utilize a focused portfolio, and have a small sum of money. As Warren Buffett has said, “I think I could make 50 percent a year on a million; no, I know I could. I guarantee that.”

On GuruFocus there is a feature about Bruce Berkowitz’s holdings by Humberto Fosado, Is It Time to Invest in Financials? Fosado notes Berkowitz’s heavy concentration in names such as Bank of America (BAC), Goldman Sachs (GS), and AIG (AIG). Berkowitz has been early in these names, but I don’t think he’s wrong. This isn’t Bill Miller blindly going into financials in 2007. Berkowitz has a well thought out thesis and a time arbitrage play in these names.

Economists seem to agree that the second half of 2011 will see improvements, both in GDP and jobs. Of course all of this agreement makes most contrarians nervous. This group thinks GDP will rise at an annualized 3.2% in the second half, not exactly a barn-burner, but better than the first half. A combination of improved supply chain issues and lower gas prices should help the economy. My contention is that gas over $4 severely crimps consumer spending and is a real downer psychologically. Now that the price at the pump has dropped significantly below that level, I think we’ll see a bit of a return to the slow and steady recovery. Leading economic indicators seem to be confirming that. What it will do for stocks, though, who knows.

For your arbitragers out there, Accenture (ACN) is being added to the S&P 500 effective at the close on July 5, and Marshall & Ilsley (MI) will be removed after being acquired by the Bank of Montreal (BMO). Now all of those S&P 500 index funds will have to buy Accenture and drive up its price. Of course it’s already up after hours. If you believe this study, though, and think it’s still relevant, Accenture still has some room to run.

Disclosure: Long BAC

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

Visit Steven Kiel's Website


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