Stock Market Gone Wild, Will There Ever Be Stability Again?

Today was Day 7 of the rally in financials, which I will call Orgasm of Subprime Past.  Today was an unusual day…nearly every analyst came out on CNBC and said financials rallied too hard too fast.  Every technical indicator is showing them beyond overbought, right at the 50 day moving average resistance and so forth.  But does any of that matter?  They were all ripping all day, celebrating the 8 billion dollar loss from Wachovia yesterday.  No humans actually believe that the financial crisis is over, no humans believe that anything has really changed since last week.  There are no signs of home prices going up, there are no signs of job growth, there are no signs govt deficits faling and for good measure the dollar didn’t even spike all that much.  And there was no real reason for oil to drop 20% in a week, people didn’t die in mass, war in Iraq and problems with Iran didn’t end.  Enter the era of Quant Trading.

The problem with the markets these days is the proliferation of quant funds, which uses highly leveraged funds to trade the market in one simple direction.

It’s no secret that energy and financials trade against each other…which by the way historically doesn’t have much correlation at all.  Financial stocks were all ripping until 2006 and so were energy stocks.

So these funds will put billions of dollars to work using incredible leverage with a simple trade.  Short Financials, Short Airlines, Long Energy, Long Ag….and off it goes in both directions whcich was the case in June and Early July.  Then comes the feds stopping  the short financials trade.  So what do they do?  Flip the trade…Short Energy, Short Ag, Long Financials and Long Energy and off she goes even quicker, forcing margin calls, busting through hedges.

Bank of America added some 70 billion dollars of market cap within a matter of 5 days.  United Airlines went from 30 to 3 in 2 mos, only to rally to 9 in 3 days.  It took 4 months for Chesapeake Energy to go from 45 to 75…it went down in 2 weeks.  Understand these are behemoth companies that are being toyed like they are penny stocks.

The little guys profits have been wiped out on both sides of the aisle while these quants go full blast taking everyone’s money.  This market has had a monster run…but have my mutual funds even gone up?  No, because they own very little financials.

I have been trading for 8 years and I know people trading for 20 years.  Nobody has seen anything close what we are seeing now.  Yes I remember the dot com bubble…you didn’t see stocks diverge against each other so severely.  You had stocks that kept going up for years and then crashed and burned over months.  These companies were never profitable to begin with, so it was just a classic bubble.  You never had a 170 billion dollar company become a 100 billion dollar company only to become a 180 billion dollar company…all in 1 week like you do now.

Each so called “sector rotation” becomes more drastic.  Yes I know 20 cents options have become $10 in a few days.  Those on the right side are making incredible money.  But let’s think about the investors out there…how in the world can you go from “financials are toast, invest in commodities” then to “commodities are toast, financials are the growth story” and then in a few days once again “financials are toast, invest in commodities”.

If the SEC had any brains…they would stop all naked short selling and bring back the uptick rule.  That would prevent these incredible short covering rallies along with the equally incredible bear raids that just keeps repeating itself over and over.  The Federal Reserve can increase Reg T which will make things more difficult for leveraged traders both long and short.  Congress can pass legislation to restrict the leverage that speculators have.

Stocks moving 30% after earnings one way or other seems to be an everyday occurence now…but it never used to be.  Again the leveraged shorting and short covering is wreaking havoc out there.  Apple went down $14 yesterday on a phenomenal quarter and great guidance, only to recover all but $4 of the initial drop and it went up $4 today.  We are back to exactly where the stock was before earnings.  What kind of nonsense is that?

Let people short, Let people go long, Let people invest, Let people trade…but the game is not fair with these massive quant funds who can toy the markets and behemoth blue chip stocks like a rigged casino using leverage and power that nobody else can compete against.

Weekend Update: Gambling, Investing and Poker

More and more I am beginning to think that investing and trading, is more and more becoming high stakes gambling. I am a big fan of gambling myself, but I always wanted to believe that swing trading and investing was not exactly like gambling at a casino.

How else do you explain 30-40% falls in energy stocks and the 30-40% gains in financials in a period 48 hours? This week was perhaps the most grotesque and egregious example of “sector rotation” that I have ever seen. So energy was so great last week and financials so horrible…then everything just flips on a dime? Sure a correction was to be expected but not everyone in the market should be trading together, there should be some kind of balancing act which keeps the market somewhat sane I am beginning to think the stock market has organized criminals involved, but it could be just Goldman Sachs reigning havoc on us all.

I don’t think any stock or sector is really investable right now. Financials have gone up too much too quick…backing of Fannie and Freddie by the feds and less than dire news from Wells Fargo and Citi doesn’t take us out of the woods yet. Tech? It has been one of the worst sectors this year and bad news from Apple and Sandisk…with continued bad news from VMWare and EMC can send us to the abyss.

I’ve been through wild swings before, but this past week was the most disgusting manipulation by the market I have ever seen. Unless you engage in rapid fire daytrading, nobody can make any money…the bulls and bears both get taken to the cleaners together. If you shorted financials a month ago, you are even. If you bought energy 3 months ago, you are even. All gains made by casual investors have been wiped clean.

On the other hand if you sold financial stocks last week, I feel your pain…same goes with those who didn’t sell energy 2 weeks ago. Fannie and Freddie is the best example of how our markets have been hijacked…these stocks fluctuate 20-100% daily…which is just not supposed to happen but nowadays we accept the fact that it does.

The World Series of Poker returns to ESPN starting this week on Tuesdays. In a quirky arrangement, the WSOP Main Event was paused last week and all the final table players return in November to complete it. ESPN didn’t like the fact that people knew the winners 3 months before it aired.

The top prize is 9.2 million dollars…and all final table players were given an advance of $900,000 which was 9th place money. There are no well known pros who survived, which assures for the 8th year or so a no namer will follow the footsteps of Chris Moneymaker, Joe Hachem, Jaime Gold and Jerry Yang.

The best poker program on TV, the World Poker Tour is returning for its 7th season. They will leave their home on the Game Show Network (GSN) and move to Fox Sports Net. It is unclear if the hosts (Mike Sexton and Vince Van Patten) will return or if it will continue to same format that it always had.

Hostess Layla Kayleigh will not be returning which makes her the third straight hostess to be one and done since the 3 year reign of Shana Hiatt. Courtney Freel and Sabina Gadecki were the last two one and done. The favorite of many WPT fans including myself is Kimberly Lansing to take over the post.

Season 6 Hostess Layla Kayleigh and former G4 and Maxim personality.

Seasons 1~3 Hostess Shana Hiatt, former hostess of Poker After Dark and Playboy Cover Model

Season 4 Hostess Courtney Friel, now an entertainment reporter and contributor for Fox News

Season 5 hostess Sabina Gadecki, currently the girlfriend of New York Knicks player David Lee

Season 6 Supporting Hostess Kimberly Lansing…the girl I would like to see takeover the duties for Season 7 and one of the top 5 ladies on tv I have a crush on.

I am NOT looking forward to the stock market tomorrow…no matter what happens I am likely to lose. I am in the process of winding down my positions, taking what little profits I have left and cutting losses…but as long as financials keep rallying while tech and energy tank…I am trapped. A lot of depend on earnings reports from Bank of America (before the bell) and Apple Inc (after the bell). Good luck to all investors out there!

Run On Banks, Buy Gold Part II

It looks like the Indymac seizure by the FDIC has caused bank runs across the country. I am not sure if there are runs on deposits, but I’m sure deposit holders and shareholders do not want to be holding the bag on the next Indymac.

So the federal government gave unprecedented assistance to Fannie Mae and Freddie Mac. They opened the discount window, agreed to extend a credit line and also even buy equity in the companies if need be. How did the market react? They took it down and beat it down further.

Self-fulfilling prophecy is the name of the game. When everyone thinks a bank is going bankrupt, everyone sells the stock and pulls deposits out, they do end up going bankrupt. The banks that are most likely doomed are FirstFed Financial of California, Downey Savings of California, Corus Bankshares of Illinois, BankUnited Financial of Florida, BankAtlantic of Florida, Sterling Financial of Washington and Provident Financial of California. These banks are too small for the federal government to bother save and won’t mind them becoming the next Indymac. If you own their stock or have more than the FDIC limits in those banks, it’s still not too late to bail.

The “too big to fail but doesn’t mean stock won’t fail” banks include Washington Mutual, National City, Regions Financial, Marshall & Ilsey and Wachovia. These banks are in serious trouble, but I don’t think it’ll result in a FDIC takeover.

Well I can list every financial stock in wallstreet and they are all in trouble. If you have every bank and brokerage in the country teetering on possible failure…what does this mean? FDIC and the US Treasury doesn’t have enough money to bailout everyone.

So what will we have? We will have anywhere between 50-100 banks fail in the next year. Lehman Bros may be taken under by Goldman Sachs or JP Morgan. Citigroup and AIG may have to break up into little pieces to survive.

I already described before that the Pension and Deficit issues plaguing the United States and Europe will be serious issues that will plague both the Dollar and the Euro. Japan and their Yen has had this problem for nearly 20 years now and there is no end in sight. Emerging Markets and their currencies with 10% annual inflation is plain scary.

So how can you invest your money? You can take a shot through puts on an implosion of a bank, brokerage, insurance company, etc. So far nobody has lost money shorting regional banks and there are many that will likely go down further and implode. But that’s not a viable long-term investment and is just a speculative trade.

The best way to play this environment is Gold. As people continue to flee the dollar, the euro, the yen, the loonie and all world currencies plagued by pension issues, deficits and inflation…Gold is the currency that everyone wants. I think you play gold by owning GLD (the iShares Gold Bullion Trust ETF) and the GDX (MarketVectors Gold Miners ETF). I would avoid oil but own Natural Gas instead. Natural Gas generally follows oil, is easier and cheaper to find and is currently undervalued compared to oil. Easiest way to own Natural Gas is via the UNG (US Natural Gas Trust ETF) and CHK (Chesapeake Energy).

Stocks in the Ag space like Potash, Monsanto and Agrium are too volatile and their charts look exactly like how Yahoo was in the late 90s. Solar stocks have 50% quarterly moves and are not for any moderate investor.

So stick with Gold, stick with Natural Gas, avoid Financials and avoid any strong dollar dependent stocks (retailers, food producers, automakers, airlines, transports) and you can ride this out.

And for those who think Obama will save us from this mess…there really isn’t anything he can do. The energy and financial crisis created by Bush with the Iraq War on the side is too great for anyone to solve, without declaring a dictatorship or something.

The Subprime Misery Index

Since the Bear Stearns report saying that the subprime bonds held by two of their hedge funds have become virtually worthless as they attempt to perform a mark-to-market writedown, I feel more strongly than ever that there will indeed be a meltdown in housing, subprime/alt-a mortgages and other high yield securities.

I would like to emphasize that this weakness in housing will NOT harm our economy, it will simply be a needed correction of the froth that has accumulated in this sector.  I am creating a barebones index of 12 stocks that will be used for a daily calculation of the progress or unprogress.  Each of the stocks will be valued at $100 dollars for calculation purposes to start and will be adjusted daily based on daily percentage increase or decline.  Here are the 12 stocks that I have vetted for this index.

Subprime (4 out of 12 or 33% weighting)

H&R Block (parent company of subprime lender OptionOne, sale to Cerberus is uncertain)
Novastar Financial (in midst of a “death spiral” financing and 1 for 4 reverse split)
Fremont General Corp (the strongest performing subprime company as of late)
Impac Mortgage (the worst performing subprime company as of late, gives balance to Fremont)

Regional Banks (3 out of 12 or 25% weighting)

IndyMac Bancorp (The largest lender in the country focusing on Alt-A loans)
Downey Financial Corporation (A California S&L with massive Alt-A holdings)
BankUnited Financial Corporation (A Florida S&L with massive Alt-A holdings)

Homebuilders (3 out of 12 or 25% weighting)

Hovnanian Enterprises (the most speculative play, with rumors of Warren Buffet buying)
Beazer Homes (with a scandal involving CFO shredding documents, could be first to blow up)
KB Homes (Arizona and California are its two biggest states of building, which also are two of the most volatile in this downturn)

Others

Bear Stearns Companies (although subprime related operations amount to a tiny portion of the company, this company has been plagued with trouble from its two hedge funds specializing in securities backed by leveraged subprime mortgages)
Home Depot (retailer with most to lose from housing slowdown)

All companies will have equal weighting at 1/12 at 100 points each and index will start on 7/18 at 1200.  Each stock will be adjusted each day (based on starting value of 100) up or down based on % increase or decrease.  The 12 added together will constitute the full index.

This will be fun for me, let’s see how it goes.

Mutual Fund Investing and More

Although investing in stocks is a lot more fun than mutual funds, the latter does have a place in everyone’s portfolio. A good mutual fund with low expenses can be the best way to play a sector or a market, tapping into the brains of a brilliant fund manager. Here are a few rules that I follow for investing in mutual funds:

• No market index funds please. If you want to invest in an index fund buy an ETF like QQQQ or SPY instead. Those gives you the flexibility of playing the broad indexes and allows you to get in and out anytime you want to time the bullish and bearish signals. I feel the whole purpose of a mutual fund is to give a fund manager the flexibility to beat the market and manage risk (high alpha, low beta). Fund managers do not have any flexibility in an index fund and the only thing the manager would do is to rebalance the portfolio to match the corresponding index. Of course broad market index funds are the mantra and creation of Vanguard and no slap in the face to them, but I don’t like them. However, I do bless Lifecycle funds that allow you to put your investment on cruise control, allowing it reduce risk as you get closer to retirement. Those funds are diversified well, and do more than follow an index.
• No-load funds only! I don’t believe in paying an advisor loads and 12-b1 fees just for recommending funds to you. Everyone can pick their own funds without that extra cost. And advisors tend to steer their clients into funds that generate higher fees for them rather than the best returns for you. Why pay the huge fees involved in REIT limited partnerships, when you buy into a no-load REIT mutual fund like FRESX or buy a diversified REIT ETF like ICF? Well investing in no-load funds forces you to exclude funds offered by American Funds (which are exclusively loaded) but there are plenty of no-load fund families that beat their performance.
• Low expense ratio. 1.5% is the max I will pay for an annual expense ratio. Every basis point of an expense ratio is a basis point less for your return. Every 10 basis points compounded over several years can amount to hundreds if not thousands of dollars (depending on size of your portfolio). There are plenty of good mutual funds out there with expenses of less than 1% so there is no need to pay 1.7 or 2% expense ratios.
• Use sector funds to play a bull market and actively managed funds in all markets. Funds that have invested in Latin America, China, Korea/Japan, Metals/Minerals and even Europe have grossly outperformed its broad-based American counterparts for the past 3 years and longer. If you haven’t had a horse in these overseas markets and sectors, you’ve really missed out. In addition, a good fund manager should have had no problem in beating the S&P 500 these days (although legendary fund manager Bill Miller failed to beat the S&P 500 for his Legg Mason Value Trust Fund) as long as the fund allows for flexibility.
• Open-Ended Funds rather than Closed-Ended funds. Closed-Ended funds like The India Fund or The Korea Fund and the formerly traded The Brazil Fund once served as the only vehicle for investing in an emerging market or even in a particular sector. But with the advent of ETFs and Emerging Market/Sector Open-Ended mutual funds, closed-end funds have become irrelevant. They tend to fluctuate wildly due to low volumes, have high fees and tend to underperform its ETF counterparts (ex KF vs EWY). I do recommend one closed-end fund Morgan Stanley A China Fund which has easily outperformed its ETF counterparts (FXI & PGJ)
• Invest only in funds that have outperformed most of its peers for the past year and 3 years. As you know mutual funds always disclaim “Past performance is not a guarantee of future performance” but the truth is funds that have outperformed its averages (and managed by solid managers of great fund families) tend to continue to outperform.

The fund families that I highly recommend for their excellent performance and low fees are: Fidelity, TRowePrice, Vanguard, Janus, Invesco and Oakmark.

Here are a few specific mutual funds that I have personally invested in and highly recommend meeting all of my 5 rules.

• Janus Contrarian – This no-load fund has had an outstanding 5 year annualized performance of 24.17%, including 20.44% YTD and a jaw dropping 46.27% for the past 1 year. This fund has a low expense ratio of 0.90% and a 5-star Morningstar Rating for 3 years, 5 years and overall. This fund gives its manager flexibility to invest in any stock worldwide and balance the portfolio with up to 20% in bonds. Its manager David Decker is putting together a streak that is reminiscent of Peter Lynch’s Fidelity Contrafund and Warren Buffet’s Berkshire Hathaway.
• Janus Global Technology – This flexible technology fund is global in nature and is a great way to play the new tech boom that has started in March of this year. This fund has returned a solid 18.91% for the year and a terrifc 41.61% for the past year. Although the fund manager has only been managing this fund for 1 year…he definitely knows what he’s doing.
• Jacob Internet – This fund is legendary for starting in 1999 with massive returns (60% return in 3 mos) to suffer the biggest crash in all of mutual fund history (60% crash in a 3 mos period). But this fund has rebounded very nicely with a 5 year annualized return of a whopping 38.04% and a respectable 11.44% return for the year (coupled with a 5 start Morningstar rating). However this is a mutual fund that must be coupled with a technology fund (like JSVAX) to fully take advantage of this newborn tech rally, which have and will continue to outperform the NASDAQ index has a whole.
• Fidelity Southeast Asia and Fidelity Latin America – I personally don’t feel it is too late to start investing in Latin America (Brazil & Mexico) and Southeast Asia (China & Korea) [too late for Russia now though]. Although I and many others have missed out on a massive bull market (rivaling that of the 1995-1999 NASDAQ) this sector has room to run as its stocks are growing at an enormous rate and unlike the NASDAQ of old, they still have relatively low P/E ratios (mostly under 30) even after this massive rally. FLATX has had a YTD return of 34.7%, 1 year of 77.12%, 3 year return 61.46 and 5 year of 45.29% (all annualized). YIKES! And there is no end in sight. FSEAX has had similar returns including 40.33% YTD. Those two funds are no-load, have relatively low expense ratios and are managed very professionally, giving most of its peers a whooping.
• Oakmark Equity and Income & Oakmark Global Select – They are the two of the best performing Oakmark funds for the year. OAKBX which invests in both bonds and stocks is famous for having virtually no-risk. This is a fund that would have no problem putting my elderly parents in. Even during the 2000-2002 crashes, the fund returned positive gains due to its excellent bond performance. Oakmark emphasizes long-term view for investing so while they may miss out on sector rallies (they don’t offer any sector funds) they will generally outperform its indexes in the long-run. Its fund managers have been with the company for a long time and invest their own money heavily into them. OAKWX while it is a new fund, it is managed by legendary domestic manager Bill Nygren and soon to be a legend international manager David Herro. They oversee a portfolio of about 20 stocks which they are free to hold domestic and international equities.

There are plenty of other good mutual funds out there to play this current ongoing bull market. Look for a rally in Gold to be upcoming (Fidelity Select Gold or StreetTracks Gold Trust (actual gold bullion)) are ways to play it. As for metals I wouldn’t want to invest in a whole sector mutual fund, as I like individual players. I recommend CVRD, Reliance Steel, Lundin Mining, Sterlite and Cameco. Don’t miss out in the current rally in maritime stocks…General Maritime, Frontline, Genco, Dryships and Danaos are excellent plays.

For now I am rescinding my bearish recommendation on Homebuilders. There is a swift rally that has begun on Thursday triggered by a rumor of a Warren Buffet purchase of shares in Hovnanian. I covered my shorts and will not short again until the rally ends in this sector. I however am still bearish on Alt-A lenders as I don’t feel the downfall in subprime has bottomed just yet.

The Biggest One Day Rally since 2005

We saw the stock market have its biggest one day rally since 2005.  Lead by great earnings reports from retailers and restaurant companies coupled with a huge buyout of Alcan by mining giant Rio Tinto.

Again I reiterate that gives a great opportunity for people to take some profits and that the same time redeploying money in growth sectors that haven’t rallied so hard.

Right now I think it’s time to take some money off the table from stocks like Baidu and Research in Motion…then redeploy them in stocks like ConocoPhillips, Garmin and Monsanto.  I will give more guidance tomorrow as I am getting real sleepy right now.

Time to Ring the Register?

As the stock market his a new all-time high, it is time reassess everyone’s portfolio.  It’s time ring the register in certain sectors and pump new money into others.

SELL ON WEAKNESS / HOLD

Research in Motion – This stock has had an incredible run, outpacing Apple for all of the past year.  It has announced a 3-1 split and I think all positive benefits from the split and the quarter has been priced in.  There is going to be downward pressure from shorts and profit-taking longs.  It’s going to have great quarters ahead but the expectations are a bit on the highside.  Time to take some off the table and take the gains. 

Taser – This stock has had an incredible and quiet 100% run in the past 3 mos.  This stock is and always have been a pure speculative play.  It’s time to ring the register and wait for a pullback.  Remember this stock was once a $30 darling and plummetted to $6.  We could see it back to $12 range soon…time to take some off the table now. 

Nvidia – This stock has had a surging run from 30 to 45 and the history shows it’s time sell.  Every sharp rise in NVDA has been followed with a sharp fall.  There are a lot of insiders selling and no near term catalyst for the stock.   I am suspicious of this stock and expect it to fall back into the 30s soon. 

Terra Nitrogen & First Solar – I would not start dumping these two stocks just yet, but they are raising flags of a supply and demand imbalance.  No way these two stocks deserve the type of multiples they are getting.  There is too much demand for shares and too little supply.  I would hold and keep a close eye, and will start selling on any sign of weakness.

Baidu.com – This company has gone up a ridiculous amount in such a short amount of time.  People were saying how overpriced this stock was at 120, now it’s at 193.  It could be indeed have a Googleesqe run and go to 300 or we can be seeing 150.  The current levels are not a safe place to be, and I’d hate to see people lose their gains.

SELL SELL SELL

I am reiterating my SELL recommendation on all housing and mortgage stocks, there is no reason to be long and much reason to be short.  I would focus on stocks that have a close tie to the California market.  The CA market has been insulated from much of the recent downturn, but that just gives people more time to make money on the way down.

First Fed Financial, Indymac Bank and Downey Savings – These 3 lenders nearly exclusive deal with California Alt-A loans which will soon be revealed is as bad subprime ever was.  I can expect 10-30% fall on these stocks in the next 3 months.

KB Home and Hovnanian Enterprise – These 2 homebuilders have especially close ties to the Californian market.  KB on the low end, and Hovnanian on the high end.  These two are currently a falling knife and instead of trying to catch it, one should let it keep falling down.  We may see one day pops along the way (like Friday) but the long term trend is extremely bearish.

H&R Block – As mentioned before this company is in dire straits with the sale of its Option One subsidiary hanging in the balance. 

Buy Buy Buy

All the stocks I’ve previously recommended, I am still reiterating buys.  GOOG, GRMN, MON, AXP, VE, HMC and HOT are all still screaming buys in my opinion.  I am adding two new Buy recommendations.

National Bank of Greece – There is not many ways to invest in ADRs in Greek stocks, but this is definitely the best way to play it.  Paying a 2.17% dividend and trading at just 15.1x forward P/E, this stock is on an upwards climb that is not stopping anytime soon.  Greece is a country that doesn’t have an ETF yet, but once one is created this stock will be one of the largest holdings and we will see a strong pop. 

Manulife Financial – This Canadian life insurance company play does not follow the trend of brokerage/financial firms (which is good rigth now).  Because it has limited US-based operations (just John Hancock) and is very diversified internationally without any exposure to the subprime loan debacle…it strikes me as a correct balance between risk and reward.  I expect consolidation in this arena and Manulife is best of breed. 

 **At the time writing John is LONG on GOOG, GRMN, HOT…and SHORT on HRB, KBH, HOV, DSL, FED**

Rules for Investing in a Changing World and More…

A simple philosophy for momentum investing is the following. Follow the money. When the money piles on, pile your money on with it. When the money starts sinking and piling on to bonds, move your money with it. If you invested heavily from 1993-1999 in tech stocks you would have been rich. Then when it started to dive in 2000, you would have still locked in profits while you sell and move into bonds (which then would have a huge rally, as yields plummet). Even if you started selling 2001, you would have not been too late. There really was no reason to buy back until 2003 because money continued to fall off. Then when markets started rallying in 2003 you jump back in…then you would be here today sitting pretty with 50-100% gains today. Also following the money would have lead you to emerging markets, which has seen 500-1000% gains over the past 5 years. The thing is that you do not have to be a visionary or ahead of the pack. If you started piling in money in emerging markets in 2003 or 2004 or 2005 or even 2006, you still would have fared nicely. Even in 2007 it’s continuing. During the tech boom, 1995 or 96 or 97 or 98…all wasn’t too late. And this rally could continue well in to 2010.

I don’t believe in buying and holding…that’s not how the big boys make money typically (holding on to AT&T, Lucent, Pfizer, Microsoft, General Electric like old people do…have lead to returns flatter than Keira Knightley’s chest over the past 8 years).

Flat no good. . Bigger better.

As Jim Cramer says…buy and homework. And as John says…trendy investing is the best investing.

When it comes to investing, I have 10 rules:

1. Follow the money (on the way up and way down, follow what the big boys and market are doing)
2. Better late than never (emerging markets 03-present, tech and dot com 93-99, never too late to buy or sell…look at Brazil and China…you get dips along the way….but they are going straight up with no end in sight)
3. Flat is no good, Bigger is better
   
   (5 year charts of Playboy vs Hansen (maker of Monster Energy Drinks))
4. Don’t try and catch a falling knife (2000-2003, if your stock keeps dropping get out, look at homebuilder stocks now)
5. Buy and homework (Jim Cramer….would lead you to stocks such as CROX and MA)
6. Trendy investing is the best investing (rich get richer, poor get poorer…what do you do? Buy Goldman Sachs, Buy Tiffany & Co, Buy Sothebys Buy MGM… Sell Wal-Mart, Sell Capital One, Sell H&R Block … Housing bubble bursting what do you do? Sell or Short Indymac, Hovnanian, H&R Block … Buy Portfolio Recovery Associates and Buy Landamerica)
7. Don’t listen to analysts (I remember that Enron and Worldcom were the most heavily recommended stocks in 2000. They will upgrade a stock for a false rally in order to bail out their struggling holdings. They will upgrade a stock at the peak so they could starting shorting the stock. They will downgrade a value stock so they can start buying. They are only out for the interest of their trading and investment banking division)
8. Shorting and Options are for everyone, not for just advanced investors. Options contracts allow investors to control 100 shares of a stock, usually for the price of 10 shares. Calls allow you to make money on the way up, Puts allow you to make money on the way down. And covered calls allow to you to make money on flat stocks. Shorting stocks is a great hedge tool and if used properly can really get the max out of “trendy investing”. (Go long on emerging markets, short on US housing & mortgage stocks)
9. Don’t care about dividends (high dividend yield often means slow growth, dividends don’t matter either way…if it pays one, it doesn’t hurt…if it doesn’t pay one…it doesn’t hurt). But if it does pay one, reinvest it (option not available at all brokerage firms…like Scottrade).
10. Invest for a changing world. (We’re facing global warming and we are doing something about it. We’re moving towards a cashless society. There are a lot of old people now, and they are living longer. World is beginning to tackle the hunger and AIDS epidemic. The separation between rich and poor, growing exponentially. Need for waste and water treatment has never been greater. Just thinking about this should bring up at least 10 ticker symbols in your head)

Let me dole out two buy and sell recommendations.

BUY BUY BUY

American Express – This is an investment for a cashless society, separation between rich and poor and also people being older and living longer…all rolled into one. AMEX is the #3 credit card processing company after Visa and Mastercard. And you’ve seen how Mastercard stock has been doing. I however do not recommend the newly IPOed Discover Financial because that is a card poor people tend to have and also nobody accepts it. It also is a leader and the premier provider of upscale travel services. If it had not spun off Ameriprise it would have been even better…but just buy AXP and AMP separately to get best of both worlds.

Veoilia Environnment – This French company is the world leader in water treatment/distribution, waste management, energy services and transportation. This stock is what Vivendi used to be before they took on Universal Studios (was a cancer to the old Seagram, cancer to Vivendi, now a cancer to General Electric). To boot, this company owns SuperShuttle (the blue van airport shuttle company) which is a trendy investment for the boom in travel. Buy both American Express and Veolia…you pretty much have half of the changing world covered.

SELL SELL SELL

FirstFed Financial, Downey Savings, IndyMac Bank, BankUnited, Regional Bank HOLDRS – There’s 4 stocks that are really one and the same. FirstFed/Downey Savings/IndyMac Bank are the three largest producers of Alt-A home loans in the state of California. BankUnited is a large player in state of Florida. Regional Bank HOLDRS gives you all the regional players rolled into one. Alt-A loans are basically nonconforming loans given to people with decent credit scores. They really aren’t much better than Subprime loans. Lenders aren’t really selling subprime products anymore, they’ve pretty much renamed it Alt-A. The knife will fall, but it’s just getting sharper at this moment. If you look at the charts of this stock, they are on a bearish trend, although they haven’t fallen hard. They are being upgraded by analysts. And CEOs are giving out misleading information. I would SELL SELL SELL or SHORT.

H&R Block – Look at the 5 year chart, the stock has been completely flat. Look at the 10 year chart you’ll see that the stock roared from 2000-2002? Why? This company made tremendous money with its subprime mortgage lender OptionOne. Now that division is counted as a discontinued operation and a tentative agreement has been reached with Cerberus Capital to sell it for book value minus 300 million. The operations are continuing to flounder and could be worthless soon (book value might be negative 1 billion soon, who knows). I think with the problems Cerberus is having with GMAC already…I think they will take a pass. And while this stock has been in the rut, we see analysts upgrading…activist investors making noise (which if you been investing for awhile is not always a good sign, as explained before). The CEO has been giving out misleading information for a couple of years now (once saying he was confident he could sell OptionOne for 1.3 billion dollars). On top of that…it’s core business of tax preparation is growing but struggling. It’s crooked tax refund anticipation loan business had to be curtailed due to regulators, it’s facing sharp competition from Liberty, Intuit and Jackson Hewitt. And it often pays rent for 12 mos, for a business that only is open for 3 mos. Is this a good company? You do the math.

I will update this blog entry tomorrow. Hope this helps investors out a little, it comes from my 8 years of investing experience.

***Note that John is currently short on HRB, FED, DSL, BKUNA, HOV. No long positions are held in any stocks mentioned at this time***

Stock Market Update

This week was a positive week for most momentum stocks (like Google, Apple and Research in Motion) and the market in whole. The market continues to however have a dark cloud over it from the subprime crisis. I personally feel the subprime/housing downfall will inevitably be far greater than what we are seeing now. Housing prices even after the slowdown are way too high and the loans that many homebuilders are in are still a disaster waiting to happen. Does that matter? Not really…the stock market acts on its own, it seems like logic is just as relevant as the color of the sky or the record of the Yankees when it comes to rallies and falls. I personally think the market needs a cooling off, but when private equity continue to buyout companies, that cooling off would have to wait until interest rates go up.

I reiterate my buy ratings on Google, Monsanto and Garmin. Here are 3 new recommendations…

Honda Motor – I believe this is the best run automotive company in the world. Every segment that it is in (at least the US) it has a very strong offering and is the most fuel efficient auto manufacturer. Let’s not forget that they are also one of the world’s largest producers of gasoline powered engines, motorcycles and lawn mowers. They are not suffering from overcapacity issues that Toyota has and will benefit most as Americans move from gas guzzlers to fuel efficient and smaller cars.

Starwood Resorts – I think this is only the beginning of the run for Hotel and Travel related stocks, the Blackstone buyout of Hilton only started it. As the baby boomers retire in masses they will be heading to various resorts worldwide, and this firm has they in all the exotic locations. Marriott is also a good pick, but I see better growth in Starwood.

All Momentum Stocks – I see another bubble in the market. Stocks that have rallied tremendously…continue to go up each day and will for the forseeable future. I recommend Terra Nitrogen and its parent company Terra Industries, CF Holdings, Chipotle, Deckers, Crox, First Solar, Freeport McMoRan Copper & Gold, CVRD, Mittal Arcelor and Priceline. There are so many more…just pick stocks at random out of Brazil and China. What do these companies do? It really doesn’t matter. Once a stock is “in favor” they will continue to roar until they become “out of favor”. That’s how the market works in bull markets. Once you experience a 10% drop, then dump and head for the hills. But keep enjoying this huge run while it lasts.

There are a lot of momentum plays in the oil sector…but I do not recommend them at this time.  They are a “hold” for me, not a “buy”.  Oil stocks always have their biggest run from March to July….and start going down in August.  I dollar cost average into an energy mutual fund like FSENX in the meantime.  Right now the sectors that are “in favor” are metals & minerals, agriculture chemicals, brazil/china stocks, all travel related (online travel agencies, airlines, hotels, timeshare resorts, etc), restaurant, shoes, solar companies and heavy-duty equipment manufacturers.  “Out of Favor” are homebuilders, mortgage lenders, regional banks, consumer staples and Russian stocks.

***At time of writing, John is long FSENX, HOT, TRA, DECK and FCX***