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Tuesday, February 27, 2007

 

Market's Bottom Falls Out

Today was one of those days when you undo 6 weeks of a hard slogging bull trend in one miserable session. People are blaming the reduction in trades handled by specialists, and the absence of their role in providing liquidity, but I think that's nonsense. No matter how buyers and sellers are matched up, there are two sides to every trade and they ultimately agree on a price. You're not going to tell me that all those sophisticated hedge fund managers and money runners are using market orders to sell shares in lots of 10,000! No, downdrafts are typical of bull markets, and whether you call them corrections or reversals depends on what happens next.

One thing for sure is that the technical damage caused by a day like this hangs around for a while. So technical rebounds, involving short covering, are usually brief and limited. Meanwhile, we could have an aftershock tomorrow in the way of a downdraft due to margin calls. Those poor fellows who buy and own stocks on credit are going to have to sell something tomorrow to satisfy their broker/lenders. So while the commentators tonight were automatically calling this a buying opportunity, it's not time to go "all in" based on my experience.

No investor emerges unscathed from a day like this (I don't consider short sellers to be true investors, they are traders) so the redwavemusings portfolio took a pretty good shellacking. However, a day like this serves as a great reminder how important the discipline of a system is and in particular, asset allocation. Keeping 20% in cash was wotth about a savings of $12,000 or so today. Unless the market rebounds right away, I should be nibbling at the market starting next week.

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Since the Bush Administration's communication skills are so lousy, it is up to Senator Lieberman to explain to people why it is so important not to cut and run in Iraq and what the logic of the troop surge is. He did so very persuasively in an op ed in yesterday's WSJ. To think that the Dems were so ready to throw him over the side last fall is scary.

Meanwhile a report from Iraq today about a bombing that killed a bunch of kids on a soccer field just makes you wonder about the mentality of what we're facing, and how anyone can dispute the moral imperative of the war against terror. Whether it's possible to bring democracy to the Middle East is something intelligent people can debate. Whether you can turn your back and allow violent atrocities to continue unabated and unchallenged is not really subject to debate, in my opinion.

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The Oscars predictably hit us with the usual high dose of political correctness, but the fawning over Al Gore, who looks more like Herman Munster every day, got a bit nauseating. The fix was in for Best Song, since Melissa Etheridge's global warming dirge was up against not two but THREE songs from Dream Girls, any one of which could have won if nominated by itself. Aside from those criticisms was the unrelenting boredom of the show where no awards of any consequence were given in the first hour, and all the major awards were crammed in to the last very late half hour. And I still can't underfstand what's funny about Ellen.

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On 2/26, I sold 900 shares of WLVT out of my IRA at 2.49. 500 of these were purchased at 4.36 on 3/8/06 and 400 @ 3.44 on 6/7/06. So we took a nominal loss, but one needs to consider that it was only 4 weeks ago that we bought a bunch of these shares for the taxable account at 0.81.

Thursday, February 22, 2007

 

Thoughts on Cramer

Anyone who does an over the top show like Mad Money is going to take a lot of heat and criticism, and Jim Cramer certainly absorbs it with very good humor. Actually, the show is not so much chair throwing and weird sound effects as it is homespun investment advice of varying quality. I find I agree philosophically with quite a bit of what Cramer advocates, and disagee with much of it too. As with most things educational, the discerning viewer who watches critically is going to profit.

Some of Cramer's real good points for average investors:

Buy "best of breed stocks." For long term investors with a million or less to invest, (or maybe it's 5 million or less), this is Jim's most consistent and profitable mantra. Not that you can't find a second tier player where the stock will outperform, but if you can buy SLB, why buyPKD or HAL? Now I own a lot of stocks, what Jim would disparagingly call a mutual fund, and it has companies from all tiers. But if you are going to own only 5 stocks as Cramer recommends, or even say ten or less, why not pick the best company in each sector you are going to play? Now intelligent folks can disagree about which company is best at any given time, but basically there is usually a consensus that is correct over the long haul.

Buy a little at a time - Don't establish your entire position immediately. I do this. I also sell the same way, unless I no longer want to own the stock at all, at which poiint I'll pull the trigger on the whole load. Buying a little at a time allows me to dollar cost average or average down by making purchases on weakness. This is one your full service broker will never recommend. Because their commissions are so high, it makes economic sense to limit the number of transactions. They tell you to establish your whole position, since if you expect to get a better price later, you shouldn't be buying at all yet. But stocks never go one way only.

Take profits. The sell discipline is the hardest for amateur investors. They always worry that if they sell, the stock will continue to go up, and they'll leave money on the table. They also worry too much about taxes. Since I sell the way I buy, a little at a time, I have a sell discipline that allows me to pull the trigger, and to absorb the taxable income a little at a time. This has been explained in a prior post.

Do your homework. If you do, there is no reason an individual can't outperform a fund manager. Cramer gets a little crazy about this, claiming you need to spend an hour a week per stock you own. Including reading (WSJ, Forbes and Barrons), checking Yahoo for prices and headlines, and entering my transactions into Microsoft Money, I spend about 13 -15 hours per week, most of it on the WSJ (and a lot of that on general news and op eds). There are about 70 stocks in my portfolios. Believe me, you don't need to spend an hour per stock, unless your focus is shorter term, which Cramer's is. So he lives and dies on every earnings call. I stopped listening to them. The only useful part for me is the Q&A, and when I listen to that, I am only trying to hear what the analysts are worried about and how the company handles the question. Otherwise, the calls are a waste of time.

This is where we get into some areas where I think Cramer's advice is not so good.

You should only own 5 stocks. Baloney. That's not enough diversification, I don't care if they are in five different industries, market sectors, etc. If your portfolio is so small you can only own five stocks, you should be investing in funds. Cramer thinks the average investor can't handle more names because he can't spend more than five hours. Let me tell you, if I owned only five stocks, I'd be hanging on every Yahoo headline, every earnings report, every update, downgrade, upgrade and conference call. Can you imagine living with the possibility of a sickening plunge for 20% of your portfolio at any time? Not me.

Trade on a bad quarter, a moderate move up or down, etc. All this trading, recommending, getting on and off stocks reeks of too short a time horizon for the average investor. Especially if you are working with a full service broker, you can't trade at all. With a discount broker, you can do almost anything, and especially, the gradual ins and outs. Redwavemusings readers know I do about two transactions a week. My average commission with the discount broker is about $6 and about 98% of my transactions are with the discount broker. My full service portfolio hardly chnges at all. So my 600+ dollars in annual costs works out to about 5% of what a low cost mutual fund's implicit and explicit charges would cost for the size portfolio I have. Compared to what a hedge fund charges, it's not even a meaningful cost. That's why I have a chance to outperform fund managers (not saying I outperform them, only that I should).

But overall, I give Cramer high marks for both entertainment and education. With "Wall Street Week" a thing of the past, there has to be some show that spreads the gospel of responsible investing.

And now it's disclaimer time - despite the above, redwavemusings is not an investment advisory source, not is its author an investment advisor. Securities and strategies referenced here may not be suitable for anyone but me, and there is some question about whether they are suitable EVEN for me.

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On 2/21, I bought 50 shares of UIC for the taxable account at 53.01. Today KMX announced a 2-1 stock split, which in theory, does nothing for the value of the stock, but it does put full lots within reach of more investors. In practice, it means that the Company is fat, dumb and happy. Nobody splits their stock expecting it to go down. So it's a welcome event when a stock in my portfolio gets a split.

Tuesday, February 20, 2007

 

New Blogger replaces Old Blogger Format (So What?)

We're on new blogger, which I think doesn't matter much, but maybe comments will now appear in a pop-up window as they are supposed to. Hopefully, nothing much else has really changed. If so, please let me know. Possibly, I have messed up everything technologically - e-mail, the blog, my stock program, etc. etc. I'll know soon enough.

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A great letter writer in today's WSJ pointed out that the House resolution proves once and for all that the country is not really at war, only our armed forces. He cleverly quoted Churchill regarding our "sheep in sheep's clothing." No one should be surprised at the cowardice of our Congressional leaders, including by the way the Senate where barely over 40 votes were mustered to sustain the filibuster. I have blogged previously about the defeatism and lack of character of our baby boom generation, in striking contrast to their parents' greatest generation.

Interestingly, an op ed column in the WSJ that also appeared today posited that if we pulled our forces from Iraq, the situation would get no worse, and I kind of find myself agreeing. That doesn't make it the right thing to do, by the way.

And by the way, I was amused by the trials and tribulations of Hilary Clinton campaigning for democratic primary votes in New Hampshire, taken to task for her 2002 vote authorizing the war. She says that the vote was not a mistake (presumably given what we knew then) , but that the priority now is to "end the war as quickly as possible." Presumably, she will repeat the mantra that the Bush administration was mistaken to "rush into" war based on the same information she had, and isn't it horrible that Bush can't admit a mistake. Well if he was mistaken, so was she, and why can't she admit a mistake? Of course, I think they both did the right thing.

----------------------------------------------------------------------------------------------- The merger of Sirius and XM was predicted by about 120% of the analysts and if it somehow passes anti-trust muster, it has to be a good thing for stockholders to end the ludicrous bidding war for talent between the two. It will be crucial to rein in expenses if satellite radio is to maintain an affordable pricing structure and repeat the success of cable TV. Otherwise, it's a lot of investors' money down the drain (including mine).

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On 2/14, with love in the air, I shed 100 shares of B at 22.16, not because I love it less, simply to gain ground against my target cash allocation. The rising market has continued to move that target "elusively" away. Anyway, those shares were getting moldy, since I bought them 9/28/97 (that's right, last century) at 14.40625. Today, I sold 700 shares of SFE at 2.97, originally purchased on 10/14/02 at 0.97. Sadly, both transactions hit the taxable account.

Tuesday, February 13, 2007

 

Stuff in the News

Item: North Korea Deal - So the 6 way talks actually produce a deal, though there seems to be quite a bit of confusion over what exactly the deal is. The administration needed a deal to begin restoring its image, the Chinese wanted a deal because they can't handle all the Korean escapees coming over the border, and the Koreans need a deal because they're broke, freezing, and starving. What the deal actually is is less important than whether the Bush administration and its successor can actually enforce it and incentivize the Koreans to keep their end of whatever it is they've agreed to. That was the failure of the Clinton deal with them, not the terms themselves. No matter what, it puts the lie to the need for two-way talks - just another anti-Bush sound bite. Frankly, there is no meaningful deal unless the Chinese are involved anyway.

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Item: New York politics never stops being New York politics - Just when you thought that the arrogant Tom Suozzi deservedly got his comeuppance from the crusading Elliot Spitzer in the Dems primary, the new Governor comes out of the box setting new vistas in arrogance. He has actually managed to make Speaker Silver seem humble, and may yet turn Joe Bruno, Dean Skelos and their republican senate colleagues into sympathetic figures. If the case against Mr. Grasso collapses, as it well might, the Spitzer juggernaut may also go into reverse. On the other hand, it is not too late for the new governor to receive and take some very good advice and stop undermining his own party's assembly majority. Sure the legislator has been run as Silver and Bruno's private fiefdom for too long, but that doesn't mean that it can't be fixed in a respectful and collegial manner.

As for Tom DeNapoli, the former assemblyman whose election (by the legislature) as Comptroller precipitated the latest flak, let's see how he performs in the job before determining that he can't do it. We'll stipulate that he lacks the accounting and investment background that people seeking the job generally bring to it, but that's why he'll have a staff of folks expert in those disciplines. Mr. DeNapoli brings to the job a precious commodity in politics - integrity. He also has class and intelligence. I don't see why he can't succeed.

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The Bush budget, of course, is dead on arrival, certainly nothing unusual for a 7th year Presidency. That doesn't change the fact that the administration and Congress have some important issues to deal with that really shouldn't be allowed to sit on the back burner for two more years. Here's a partial list:

The AMT and other Income Tax Issues
Permanent Estate Tax legislation
Unfunded entitlements
Cost of Health Insurance (and health care)
Energy Policy
Defense and Weapons Strategy
Rethink Campaign Financing (Junk McCain Feingold)
Rethink Corporate Ethics (Junk Sarbanes Oxley)

If none of these issues have been advanced by the end of 2008, they will simply be that much more difficult for the next administration to deal with.

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On 2/5, I sold 700 SFE at 2.86 (purchased on 11/5/01 for 2.11). On 2/7, I sold 300 HAUP at 8.95 (200 purchased on 8/6/01 for 1.66 and 100 purchased on 8/27/01 for 1.54). And on 2/12, I sold 400 CNRD for 6.10 (purchased on 10/4/04 for 1.95). All of these transactions were out of the taxable account, I'm sorry to say. Remember, these sales don't indicate that I am bearish, only that my cash allocation fell quite a bit below my target in the recent run-up, particularly after the rally in WLVT (which has paused, if not ended).

Regarding today's "news," I can't really conceive that AA will be taken out, and I think the regulators might be concerned about a foreign purchase of our leading aluminum producer. Nevertheless, it's nice to get a little pop in an otherwise pretty boring market.

Sunday, February 04, 2007

 

Super Bowl Sunday

I don't have much to say about this game except that I think Indianapolis will win. I don't know if they will cover and am not betting the game so I don't really care. I am an AFC fan so I hope Indie does win. Mainly I am looking forward to the commercials.

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Since every senator, governor, and former governor believes they are Presidential timber, it is not surprising to see everyone in the pool already. It's also not surprising to see perennials like Senator Biden immediately self destruct. Unfortunately, the current system, in which almost all of the delegates are chosen in primaries, forces candidates to raise a lot of early money and fight for those delegate slates.

This seemed a much more democratic approach than that of the old days when the few primaries that existed were considered mainly beauty contests and most of the delegates were party regulars, designated and chosen by the local and state party bosses. After the disastrous Democratic convention of 1964 which the party regulars secured for Hubert Humphrey, a candidate sadly guilty by association with the hacks, primaries supplanted the smoke filled convention back room. The result was the disastrous McGovern candidacy of 1968, but since that resulted in a left wing candidate, the media blessed the new primary system and it remains in place.

Since then, with a few exceptions, both parties have nominated less than their best. Usually, this has resulted in a candidate too extreme, or one too inscrutable, but in either case, a poor performer in the general election, and a worse President when elected (Reagan, of course, being the exception).

All of this is a run-up to a discussion of whether Governor Bill Richardson of New Mexico can actually win the Democratic nomination. I would say that if the old pre-primary system was in place, he would have a very good chance to come out of a brokered convention, since the bosses would probably consider him more electable than Hillary, Obama and all the rest. Whether he can get to the convention with a reasonable number of delegates won in primaries, and whether the leading candidates can split the others up in such a way that no one has a near-majority, is a very fair question. That is the only scenario that leads to a brokered convention currently. If so, the dems might well consider him their safest bet in a year they should win easily, as opposed to a more polarizing candidate.

This is a very unlikely scenario on the republican side, where I expect Senator McCain to take charge fairly early in the process, and if not him, Rudy Guiliani.

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Is it possible that WSJ editorial page editor Paul Gigot has become a redwavemusings reader? Reviewing the December 6 lead editorial (The AMT Reckoning) one reads the following:

"The AMT is gradually evolving into the de facto U.S. tax system and the regular tax code with its Byzantine rules and carve-outs is becoming less relevant each year...For a growing number of Americans, the first page of the IRS 1040 instruction manual might as well read: Go directly to the AMT...So here's a possible deal between the Bush Administration and the Pelosi Democrats: Junk the IRS code and use the AMT as the basis for tax reform...The AMT provides at least the crude framework for a much simpler tax code, because it eliminates almost all deductions and special carve-outs...It has a broad tax base and only two tax rates, 26% and 28%."

Sound familiar? In my October 31, 2004 post, I noted that everyone earning 200,000 or more was likely to be paying taxes at AMT rates. Also, in my "predictions" post of January 11, 2005, August predictions included the expectation that Congress would require everyone to file on the AMT basis in lieu of the standard tax basis. In fact, my flat tax proposals have been exactly in accord with the WSJ's new suggestion - scrap the code and use the AMT as a proxy for a flat tax without the deductions. Of course, I would also lower the rates. But this would take most lower and lower middle income people off the roles for everything but payroll and local taxes. (All prior posts can be easily accessed by clicking on the archives of this blog.)

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No, I had no information concerning WLVT. And my position is still under water even after the doubling of the stock price last week. Much less water, but still under it. Actually, it was my standard average down, and I did not have a good feeling about it. That's because I expected a prepackaged bankruptcy, with the usual watering down of current holders' equity via a reverse split, not a pure private equity investment in which the current holders actually get treated fairly. This surprising but welcome development, coupled with retreating copper prices caused the double + on Thursday, with only a slight retreat on Friday (when one might have expected a more significant pull back). So last Monday's purchase at 0.81 wasn't genius and it wasn't cheating. Just the good luck you can have when the money folks amazingly do the right thing.

On 1/31, I bought another 200 shares of PWI for my IRA at 19.21.

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