Research Rec.: Matthews Corp. (MATW) at $29.04

WARNING: The consideration of this stock can only be done with an understanding that we're in a bear market. Please carefully consider the downside risks mentioned in this research recommendation before taking any actions. Despite the possible qualitative attributes of this company, the purchase of this stock should be considered speculative at this point in time.

According to MergentOnline, Matthews International (MATW) is, "a designer, manufacturer and marketer principally of memorialization products and brand products and services. Memorialization products consist primarily of bronze memorials and other memorialization products, caskets and cremation equipment for the cemetery and funeral home industries. Brand products and services include graphics imaging products and services, marking products, as well as merchandising products and services. Co.'s products and operations are comprised of six business segments: Bronze, Casket, Cremation, Graphics Imaging, Marking Products and Merchandising Solutions." Some would think that this business is a "no-brainer" to make money in. However, my experience is that companies in the funeral services industry have a hard time retaining their focus on their core competencies and profitability.

As a Dividend Achiever, MATW has increased its dividend every year for 14 years in a row according to MergentOnline. Yesterday March 30th, MATW eased to a new low after reaching a peak of $58.55 in September 2008. The fact that MATW was able to reach a new high in the middle of September 2008 is an astounding feat. However, the following decline has resulted in a near 50% decline as of March 30th.

According to Dow's theory, MATW has the following upside and downside targets:

Upside targets:

• $31.87
• $40.77
• $49.66

Downside targets:

• $26.19
• $ 10
• $5
  

Again, considerable attention must be directed at the prospect for the downside risk since we are in a bear market. Anyone buying this stock should be willing to accept that this company can easily go down to the $10 or $5 level or a loss of 64% and 82% respectively.

The fundamentals about this company are fair. However, of particular importance is the fact that MATW has an 11% dividend payout ratio. This is instrumental to the success of the company getting through the deepening recession.

Your own research of the funeral services industry will reveal that while death is certain only a few companies have managed to succeed at making money on a consistent basis. It is hoped that MATW is the right company for an otherwise difficult business. Touc.

Research Rec.: Meridian Bioscience (VIVO) at $18.21

WARNING: The consideration of this stock can only be done with an understanding that we're in a bear market. Please carefully consider the downside risks mentioned in this research recommendation before taking any actions. Despite the qualitative nature of this company, the purchase of this stock should be considered speculative at this point in time.

As I mentioned in my sell recommendation of Helmerich and Payne (HP), I have been anticipating the opportunity to buy Meridian Biosciences (VIVO) for over 3 years now. According to Morningstar.com, VIVO, "...manufactures disposable immunodiagnostic test kits used for the rapid diagnosis of infectious diseases. Its products aid in the diagnosis of gastrointestinal infections, mononucleosis, ulcers, urinary-tract infections, respiratory infections, and strep throat."

As a Dividend Achiever, VIVO has increased its dividend every year for 16 years in a row according to MergentOnline. Yesterday March 25th, VIVO plumbed a new low after reaching a peak of $37 in April 2008. According to Dow's theory, VIVO has the following upside and downside targets:

Upside-

• $23.33
• $30.16
• $37.00

Downside-

• $11.29
• $ 5.65

Again, considerable attention must be directed at the prospect for the downside risk since we are in a bear market. Anyone buying this stock should be willing to accept that this company can easily go down to the $11.29 or $5.65 level or a loss of 38% and 69% respectively.

The fundamentals about this company are exceptional like little debt, double digit return on equity and return on assets and an astounding dividend growth rate. Your research of this stock might convince you to buy right away. However, the biggest red flag warning about this company is that the dividend payout ratio is very high at 91%. At some point this has to start going lower or the company may have to dip into it's cash reserves, borrow or cut the dividend altogether.

Aside from all the homework that you have to do before you consider this stock, I would like to draw your attention to the comparison chart below of VIVO's stock price to that of Google (GOOG). While these companies are in unrelated industries both GOOG and VIVO appeal to investors as demonstrated by the eerily similar stock price movement. From the IPO of GOOG back in August 19, 2004 to the most recent peak, GOOG and VIVO appreciated 639% and 665% respectively. However, when the downturn came GOOG fell hard and fast down 67% at the low while VIVO is down 56% from the high. The distinction, of course, is that VIVO will pay a portion of earnings to you the shareholder while it struggles through this economy and GOOG will only promise that things are going to get better as the shareholders hope that the price will go up.

I have bought shares of this company for the long term if the stock falls. While you're doing your research of this company, it is hoped that this stock continues to fall so that you can get a better price than mine. As with my purchase of HP, if VIVO miraculously increases in value, I will consider selling only if my gain has been exceptional and a better alternative presents itself at the same time. If you're unclear about my investment philosophy and approach please review my "About This Site" section. Touc.

SELL Helmerich and Payne (HP) at the Market

The time has finally come to issue a SELL recommendation for Helmerich and Payne (HP.) The stock has performed moderately since the research recommendation was issued on March 10, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. From the current level of $26.13, HP is poised to reach the $30 level with no effort. However, the returns that this stock has provided in the last 16 days say that it is worthwhile considering alternatives. Later today I will present an alternative Dividend Achiever that I have personally been anticipating for over 3 years.

HP was recommended when it was trading at $22.55. As of Thursday March 26th, HP was quoted at $26.13. This equals a return of 15.88%. Conservatively, on an annualized basis this would equal approximately 380% return. Selling this stock now also generates a return 17.6 times the amount of the dividend yield if the stock was held for a whole year.

It is always recommended that when selling a stock, one should not place an order after hours or when the market is closed. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers. Touc.

Diversification Doesn't Matter

The idea of a diversified holding of stocks is often said to save many investors from losing large amounts of money. However, the concept of diversification often is misunderstood in its most basic context. Diversification only matters when an investor is spread among completely different asset classes such as real estate (real property and not in the form of primary residence), business ownership, gold and silver (bullion), and stocks. All other notions of diversification are often just that…notions.

For do-it-yourself investors who wish to buy stocks, the mantra has been to diversify your risk. I guess this means, the more stocks you hold the less you’ll lose. Along these lines, diversification is supposed to reduce downside movements while participating in upside action. The fewer stocks you have the more you’ll lose. The more stocks you have the less you’ll lose. Unfortunately real life suggests that the more stocks a person holds the greater the risk of loss. How is this possible? I have my suspicions as to the reasons. However, I would like to provide the evidence for my claim that diversification isn’t all that its cracked up to be.

Many people who follow the stock market know that the Dow Jones Industrials Average is the most widely quoted index. However, most people “know” that the best index to follow for a broader understanding of how the entire stock market performed rely upon the Standard and Poor’s 500 (S&P 500) index. After all, the S&P 500 contains 500 diversified companies in many different industries. This is contrasted by the Dow Jones Industrials, which only contains 30 companies.

However, did you know that the top 43 companies in the S&P 500 comprise 50% of the movement of the index? The top 131 companies comprise 75% of the movement of the index. By the time you get to company number 258, you have reached 90% of the movement of the entire S&P 500 index. This means that the remaining 242 companies in the index only contribute 10% to the movement of the index. It’s as if those companies on the bottom half don’t even exist.

How is it possible that the S&P is so strongly influenced by the top 258 companies? The answer is that the S&P 500 is considered a market value weighted index. This means that, “…movements in price of companies whose total market valuation (share price times the number of outstanding shares) is larger will have a greater effect on the index than companies whose market valuation is smaller.” Basically, larger companies have more influence on the index. For this reason, most people who invest in an S&P 500 index fund or ETF are really investing in companies that have the largest valuation rather than a “well diversified” portfolio.

It wouldn’t be enough to simply say that the S&P 500 index isn’t as diversified as most people think. We need better evidence to show that the concept of diversification can’t stand on its own. Using the Morningstar.com database of various domestic indices, I compared the 1-year, 3-year, and 5-year performances to see if there are any distinguishing characteristics. Because this has been a declining market of the last 2 years we should see the indices with fewer stocks with the greatest losses. If there were any gains then the least diversified index should have the highest percentage gains.

Unfortunately, the reality is quite sobering. When comparing Morningstar’s 37 domestic indices in the 1-year category:

• Ranked #1 was the healthcare index with a –20.55% loss with 178 companies
• Dow 30 was ranked #17 with a loss of -35.05%
• Russell 2000 (2000 companies) was ranked #20 with a loss of -35.27%
• S&P 500 was ranked #23 with a loss of -36.47%

In the 3-year comparison:

• Ranked #1 was the energy index with a 11.92% gain with 121 companies
• Dow 30 was ranked #8 with a loss of -9.3%
• S&P 500 was ranked #21 with a loss of -12.31%
• Russell 2000 was ranked #29 with a loss of -15.44%

In the 5-year comparison:

• Ranked #1 was the energy index with a 11.92% gain with 121 companies
• Dow 30 was ranked #14 with a loss of -2.66%
• S&P 500 was ranked #23 with a loss of -3.61%
• Russell 2000 was ranked #27 with a loss of –3.78%

It seems as if the more diversified the index, the worse it performed. The only time the Dow 30 came at the bottom of the list was when we compared the 1-week, YTD, 4-week and 13-week ranges. Remember, a truly diversified index is supposed to overperform other indices on the downside (go down less) and underperform on the upside (go up less). If you’re investing for the “long haul” then the data tells us that you shouldn’t be invested in the S&P 500 or any other index that is “truly diversified.”

Another way to test this assumption of diversification on your own is to eyeball the different periods of time using the interactive comparison chart at Yahoo!Finance.com. First, pick the S&P 500 or any other “diversified” index and compare it to the Dow Jones Industrial Average. Then select the timeframe that you’d like to compare (5 years or more is best). Once the timeframe has been selected you can slide the timeframe backwards to any period you want. You’ll see that the Dow frequently overperforms on the upside and overperforms on the downside from 1980 onward. Prior to 1980, The Dow and S&P go back and forth in either underperforming or overperforming. The point being, diversification really doesn’t matter when it comes to spreading your risk. Touc.

Sources:

• IndexArb. Index Component Weights of Stocks in the S&P 500. accessed online March 24, 2009.
• EDinformatics. Investor Education: S&P 500 Index. Accessed online March 24, 2009.

Fannie and Freddie Break the Buck

Both Fannie and Freddie finally made it to the big leagues. What is it that both of these companies have managed to do? They both have closed above the fabled $1 a share mark. as I mentioned in my February 21st article the threat of delisting was upon the companies and that something had to happen. Either the companies get delisted or the miraculously go above $1.

Regular reader Ron wondered aloud whether or not some sort of trickery would the explanation for the continued propping of these otherwise dead companies. As I said in my comments following in the article, this is "one of the biggest speculations in history." No sooner said than done, the stocks fell promptly by 40% and bottomed on March 6th. From that ridiculously low level the stocks rose at least 185%.

We finally got the answer that I suspected but only time could tell. The government, lacking the barest sense of fiscal responsibility, has triumphed again. It is well worth watching Fannie Mae and Freddie Mac for a sense of what is to come next. I find it interesting that both companies bottomed on March 6th while the Industrials and Transports bottomed on March 9th. Maybe, just maybe, these government entities are on the inside track. I'll be following them as you could imagine. Touc.

The Common Refrain, To Our Detriment

The problem with our markets and economy, as a "capitalistic" society, boils down to the fact that every mechanism set up to avoid failure and disruption (counter to a capitalistic system) has failed. Not only has failure remained in the system, the very features that have been instituted to save us have actually contributed to a slow and methodical breakdown of a system that is supposed to thrive on change. The following is a short list of ideas, institutions or laws previously thought to bring stability to our financial system:

• 
  
  Fannie Mae
• 
  
  Freddie Mac
• 
  
  Circuits breakers
• 
  
  Federal Deposit Insurance Commission
• 
  
  Government seizure of AIG
• 
  
  National Association of Securities Dealers
• 
  
  FINRA
• 
  
  Securities and Exchange Commission
• 
  
  Generally Accepted Accounting Principles
• 
  
  Uptick Rule
• 
  
  Ban on Short Selling
• 
  
  Sarbanes-Oxley (Sarbox)

After all, look at some of these concepts and see what their impact has been. Circuit breaks were instituted after the stock market crash of 1987 to prevent a similar one-day decline of 20%. Since then the only circuit breakers to ever kick in are those that happened during the largest rise in stock market history from 1990 to 2007. On the way down however there is not a peep of a circuit breaker being tripped. The most recent orderly declines have contributed to the largest singular decline in stock market history. Worse still, we don't even know if the carnage is over.

How about the Securities Exchange Commission and FINRA? Out of all the crimes that have been committed on Wall Street the only person to go to jail was Bernard Madoff and his associates. Come on!!! The guy turned himself in...and if it wasn't for the market decline who knows how long the scheme could have gone on. Do you want financial security? Don't rely on the SEC or FINRA to provide it.

As quiet as its kept, one law that keeps being violated but hasn't landed anyone in jail is Sarbanes-Oxley (Sarbox). What is Sarbox? Oh, that's the law that came out after the Enron and WorldCom accounting and executive frauds of the 1990's. One provision of Sarbox says that executives can't publicly say that their company is financially safe and sound when they knew otherwise. This was a tactic that Enron executives used to prop their price up while they were selling at the same time. I have heard too many executive from Fannie, Freddie, Lehman, Merrill, B of A, Citi and others do what is a clear violation of the letter and intent of the law. Any of those guys in jail yet? Naw, no one is likely to go to jail for outright lying because if the executive says something to prop the company stock between the quarterly reports but not specifically on the audited quarterly report itself then it's cool. The Sarbox legislation reads like a "how to guide" on ways to avoid getting caught. Either let Skilling and Ebbers go or back the intent of the law and put the most recent offenders in jail.

After the Enron and WorldCom debacle Sarbox was supposed to address the issue of off-balance sheet items. Among other things Sarbox says that it's purpose is:

"...to identify areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management, such as revenue recognition and the accounting treatment of off-balance sheet special purpose entities." (emphasis mine)

What about Fannie, Freddie, Citi, and Merrill using off balance sheet entities or GE using earnings management to cover their losses or produce profits? Is anyone going to stand tall and call these Enronesque tactics out?· Not likely, whoever has the guts to bringing these issues up would be accused of kicking an opponent while they're down. Unsportsman like conduct would be the charge.

Alright, so what's my beef with FDIC? It sounds like a wholesome institution. After all, it protects the deposits of everyday citizens like you and me, right? Thanks to James Grant's book Mr. Market Miscalculates, here is what National City Bank (today's Citigroup) had to say about the legislation bringing FDIC into being:

"The element of character in the choice of bank is eliminated, and the competitive appeal is shifted to other and lower standards, such as liberality in making loans. The natural result is that the standards of management are lowered, bankers may take greater risks for the sake of larger profits and the economic loss which accompanies bad bank management increases."

Now, don't get me wrong, I like keeping my money in an institution that passes on the cost of deposit insurance. However, it is the FDIC protection that allows the banking institutions to run amok when times are good and the public has to pay when times aren’t so exciting. Is there any coincidence that we had the S&L crisis (FSLIC backed) to begin with? Is it any wonder that the costs associated with the S&L crisis are still part of our government's off-budget items. At the same time we're still paying for the S&L debts, the Resolution Trust Corporation (RTC) is called a success. Prophetically, Citigroup is among the largest offenders of the very system that their forerunner was against and for the very same reasons. There is little wonder the FDIC is petitioning congress for an additional $500 billion backstop "just in case." The FDIC is moral hazard reincarnated. After all, a bank can put a FDIC sticker on their door and have instant credibility as a business and if it fails the FDIC swoops in to legitimize the sticker.

The government seizure of AIG is now a hornets nest. But it never had to be. If we didn't bail out AIG we wouldn't have to worry about bonuses being paid in the first place. The near $10 trillion of bailout money could have gone to better uses like bailing out the FDIC, something that people have expected to be there for over 60 years. Or buying up 90% of all mortgages in the nation...no, no... better still, insuring against any defaulted mortgages up to $10 trillion. By insuring against loss, no money has to go out at all until there is a real, honest to goodness foreclosure. And like every good insurance company, the government could selectively decide to pay up.

The outlandishness of getting rid of these organizations certainly gets folks riled up. How could a simple two-year decline in the stock market and economy call for the dissolution to such important entities? To which I say, show me the evidence that these rules and organizations have done their job. What good comes from letting a company like AIG stay around when so many well run insurance companies are waiting to take their place. Ah, but the common refrain is, "if we let AIG go then the alternative could be worse." Touc.

Sources:

• 
  
  Department of Justice. “Former Enron chairman and chief executive officer Kenneth L. Lay charged with conspiracy, fraud, false statements.” July, 8, 2002. accessed online March 22, 2009.
• 
  
  Colvin, Geoffrey and Benner, Kathy. “GE Under Siege.” Fortune Magazine. October 15, 2008. accessed online March 22, 2009.
• 
  
  Grant, James. Mr. Market Miscalculates. Axios Press. 2008. page 202.
• 
  
  DioGuardi, Joseph. “Enron Fraud Small Change Next to U.S. Accounting Gimmicks.” World Tribune.com. May 4, 2003. accessed online March 22, 2009.

Book Review: Trouncing the Dow

The results are in on my 8-year survey of the investment method that is in the book Trouncing the Dow by Kenneth Lee. As with most investment books, there is the promise of rich rewards if you follow the author's secret to investment success. The only problem is that in order to really know if an approach is useful you need to see how the process would work over an extended period of time. Upon buying any investment book, it is impossible to find meaning in what the book contains. After years of passive study Trouncing the Dow proves to be a book that is worth examining.

Naturally, this book drew my attention because of its focus on the Dow Jones Industrial Average. By choosing stocks that are in the Dow Industrial average, Lee is trying to convey the idea that quality should be a priority when deciding which stocks to buy. However, the strength of this investment approach is found in the author's ability to recognize that stocks cannot and should not be held for the "long run." Instead, Lee says that, after determining the price range for a particular stock, you would consider buying at the low and selling at the high end of the range.

In theory an investment approach either works or doesn't. However, there is the real world to bear upon the actual outcome of any investment style. In the case of Trouncing the Dow, I have the benefit of starting my analysis in the middle of major bull market correction in May of 2001. This starting point takes away the illusion that all stock will go up forever as demonstrated by the Dow Industrials falling 37% and the NASDAQ falling 70% during the period from January 2000 to September 2002.

This review was done as a real-time experiment rather than an investigation based on looking back (backtesting) on what the performance would have been. From May to December 2001, I started my investigation of the benchmark investing method using 19 companies that were on my list for possible investments. As mentioned earlier, the benchmark method indicates what the range of a stock price should be in order to buy or sell. Trouncing the Dow uses Value Line Investment Survey as the sole source for deriving the data necessary to come to a conclusion.

Because there is no such thing as a perfect approach to investing, I consider a successful approach one that gets me close to the high and the low price but above the range on the downside and below the range on the upside. If a stock was predicted to reach a high of $45 but peaked at $40 then there is no value in that prediction since I would have been waiting for a price that never materialized. Conversely, if the prediction was that the stock was supposed to reach a low of $10 but only went as low as $12 then I would have never considered buying the stock until it reached $10 therefore this would have been considered a false or inaccurate prediction. Some stocks that had a predicted low of $10 but actually hit bottom at $8 were considered accurate and an acceptable trade-off given the fact that the selected stock paid a dividend compensating for the wait on the way down and up. In general my findings about this investing approach are as follows:

First, the accurate observations (11/19):

• The average decline after the predicted low was 22%
• The largest decline after the predicted low was 47%
• The smallest decline after the predicted low was 12%
• All 11 stocks exceeded the predicted high price, in some cased by 3 times
• Prior to 2001, 9 of 11 stocks had a history of increasing the dividend every year for the last 10 years

The inaccurate predictions (8/19):

• 1 company filed bankruptcy
• 1 company was bought
• Prior to 2001, 2 0f 8 stocks had a history of increased dividends
• Benchmarking was way off the mark when predicting transportation companies
  
  

In a proposition that is 50/50 in terms of the outcome, Trouncing the Dow method seems to be an effective way to increase the odds in your favor. Again, I only considered the benchmark approach to be effective if the stock price went below the predicted low. Why? Because we're only interested in what the worst case scenario is or might be. The upside will always take care of itself.

Combining the benchmark method, in Trouncing the Dow, with the non-banking companies in the Dividend Achievers Index may be an effective way to increase the quality of the stocks you choose to buy as well as when you decide to buy the stocks. I recommend that you at least check the book out at your local library and apply the approach to the non-financial components of the Dow Jones Industrial Average. Keyword search the title of the book and you'll find plenty of backtested analysis for this investing approach all over the internet. Touc.

Financial Panic Chronicles

After the most recent banking drama that we've been having, I thought it would be interesting for us to turn back the clock and revisit a bygone era of prior financial panics. This will be the beginning of a series of posts from various news sources. The purpose of this exercise is to see, that despite the passage of time, how we make some fundamental mistakes over and over again.

The first financial panic that I'm examining is the failure of Bodenkreditanstalt which later became CreditAnstalt. The following excerpt is from the New York Times dated November 15, 1929:

"The president of the bank employes' association demanded that the fortune of $7,000,000 which Herr Sieghart is alleged to have obtained, despite the collapse of the bank be confiscated for partial reparation of the losses of employes and shareholders in accordance with the bank's articles of incorporation."

Wow, leaving aside the way they spelled 'employee' back in 1929, you'd think this was straight from an article on the bonuses being doled out by AIG. By the way, $7 million in 1929 is the equivalent of $84 million in 2007. The more things change the more they stay the same. Touc.

Source:

• "Austria Bank Head Scored In Failure." New York Times. November 15, 1929.

Industrial Production Index Fence Sitting

The news just keeps coming in. Today the Federal Reserve announced the Industrial Production Index (IPI) figures for the month of February. The IPI fell to the level of 99.7298. This is 1.93% above the December 2001 level of 97.8399. Falling below the Dec. 2001 level would bring economic activity to the dark ages for all intents and purposes.

Warning: the following charts may cause severe and/or permanent eye damage. Avert your eyes if you start to feel the signs of fatigue, drowsiness, or nausea.This blog is being featured on www.condron.us, I hope you find this useful.

For all I know this is do or die for the U.S. economy. Because the IPI is a lagging indicator as part of Dow's Theory, we can only guess that as the Dow Industrials and Dow Transports have bottomed on March 9th we might be in the midst of a temporary bottom. How do I know? I don't know. However, the economic data that is coming out recently isn't worse than what would be expected as the "experts" have baked in much of what is known to be on the horizon.

My opinion is that we aren't out of the woods but we are well on our way to a natural reaction to the oversold conditions in the market and the economy. However, be prepared for new and unforeseen realities that the market has to offer. As an example, what would happen if a medium sized holder of treasuries decides to sell all of their holdings? The shock to the financial system would be profound and unexpected since everyone is waiting on pins and needles for China or Japan to pull the trigger.

Usually it is the unexpected and smaller players that can disrupt an entire system like what occurred in Thailand in 1997 or Austria in 1931. As the prevailing logic goes, China and Japan have too much at stake to actually sell their U.S. treasuries, therefore it is fitting that they wouldn't engage in the activity as readily as, say, ______________________(fill in the blank).

As with every snowball, all it takes is a small player to get things started. The rest becomes a matter of flooding the exits. The last thing we need in this economy is rising interest rates due to the forced selling of treasuries. This would be the final blow to the perception that the economic "crisis" can be contained. However, it is this scenario that has the highest probability of occurring as a sort of "black swan" event. Touc.

Uptick Rule and Short Selling Ban

Many market commentators and participants have extolled the virtues of the uptick rule for short selling of stocks. Nothing bores me more than someone who blithely suggests something that actually has little or no impact in today's stock market. My goal is to hammer down the notion that re-instituting the uptick rule will somehow avoid "bear raids" or short sellers taking advantage of a stock that is already in a declining trend. I will also demonstrate the impact of the elimination of short selling on Taiwan stock exchange and compare its performance with that of the Dow Industrials during the same time frame.

Insight on the Uptick Rule

As a person who started my investing career as a short seller, I can say that the uptick rule was a saving grace for me. According to Investopedia.com, the uptick rule is:

A former rule established by the SEC that requires that every short sale transaction be entered at a price that is higher than the price of the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and was implemented in 1938. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.

What this meant for me is that I could get the benefit of the stock price rising before my order to sell short was executed by my broker. As a short seller this is exactly what you want as a means of avoiding the common mistake of selling low and buying high.

As the current bear market had gathered its most steam, critics have been saying that the lack of an uptick rule is responsible for the markets free fall decline from October 2007 until the most recent low of March 9th. What these critics fail to recognized is that with stock prices being traded in pennies rather than eighths it almost doesn't matter whether there is an uptick rule or not.

When stocks were traded in eighths a short seller could gain $0.125 on every uptick. Assuming that the stock was going to fall anyway, that actually increases the profitability of the trade. If, on the other hand, the stock trades up by a penny, and then falls, the uptick rule really does more harm than good, for the short seller that is.

Imagine the harm that the uptick rule does to short sellers. With stocks trading on a penny basis, if a stock is in a free fall there is no telling when the stock's price will turn resolutely to the upside. This essentially puts the power in the hands of the big institutional traders to manipulate the market. Notice that when Jim Cramer describes manipulating a stock's price, he mentions doing the manipulation in the options market and not with the actual shares. Cramer only uses the actual shares after pushing up or pushing down the stock price in the futures market. Clearly, this is where the regulation is needed, not with the short selling of actual shares. If, as a short seller, I'm discouraged about participating in the markets because the rules are stacked against me then I will stay away. Surprisingly, this is actually harmful for the markets as will be demonstrated in my second piece about the Taiwan stock exchange's ban on short sellers.

With the uptick rule and stocks trading in eighths, as a short seller, at least you get the protection of seeing the price move "significantly" higher before continuing to go lower. At which point the short seller could more accurately decide if they want to hold on to the position. Without the uptick rule the short seller gets no real-time "heads up" as to a possible reversal of the trend as the trade is being placed. This is how money is lost in short selling without an uptick rule. This may also explain why so many people lose money buying stocks without a "down tick" rule. If only I could place an order to buy and it would only be executed after the stock price traded down...I would be so happy.

Short Selling Ban

Finally, I'd like to revisit the idea of whether short selling drives down the stock market. As I mentioned in my November 22, 2008 article, banning short selling would have no impact on the decline of stocks. As my only way to demonstrate this fact I compared the performance of the Taiwan's TSEC Weighted Index to the Dow Jones Industrial Average.

Starting on October 1, 2008 the regulator for the TSEC banned all forms of short selling in an effort to stop the decline in the stocks. On November 28, 2008 the ban on short selling was lifted with orders for short sales only allowed based on the end of day closing price. In the chart below, Oct. 1, 2008 to Nov. 28, 2008, I have compared the performance of the TSEC and the Dow Jones Industrial Average to see if there was any material difference between the two indices. As expected, there was no difference in the amount of the decline in either index. Furthermore, when the global stock markets started going higher on November 20th the TSEC index lagged the performance of the Dow by nearly 5%.

The following is a critical observation, both indices experienced equal declines but unequal increases. Had short sellers been pressured to buy back stocks at the November 20 low the Taiwanese index would have likely had an equal or better increase than the Dow Industrials. Based on this evidence we should be moving away from the regulatory effort to take away this critically important feature to a liquid and healthy financial market.

Learn more about short selling by reading Bear Markets by Harry Schultz. Touc.

Sources:

• "Taiwan to Partially Resume Short Selling of Stocks Today." AsiaPulse News. Nov 28, 2008.
• "Uptick Rule." Investopedia. Accessed March 15, 2009.

Research Rec.: Helmerich & Payne (HP) at $22.55

Today I bought the oil driller Helmerich and Payne (HP) at the price of $22.58. If you remember, I recommended this stock on September 29, 2006 at the price of $23.03. After the recommendation, I issued a sell recommendation of the stock on August 12, 2008 when the stock was selling around $53.95. I missed calling a sell recommendation at or near the top when the stock was selling for $77.24 in June of 2008.

Keep in mind that my current purchase is strictly speculation due to the fact that we're still in a severe bear market. This means that when, and if, the market and economy continue to go lower, the demand for oil and its price will go down further. However, according to Dow's theory the following upside targets for HP's stock price are:

• $37.08
• $47.12 (50% principal)
• $57.15
• $77.24

We can expect that a bear market rally would bring the stock price at least to the $37.08 level. However, we should never forget the downside risks this stock is likely to face. My expectations of the downside are based on the earnings falling by 50% which would not impact the dividend at all. A decline of earnings should bring a decline in the price of the stock. It is safest for us to assume that the price would fall at least half of the most recent low of $17.01. If you're willing to accept a decline of 62% then this is a great speculation (as opposed to investment) in a quality dividend paying stock. According to MergentOnline, HP has increased the dividend for 31 years in a row.

Some would argue that I should highlight the relevance of peak oil, future inflation due to the government stimulus, increased aggregate demand, and other assorted factors that affect oil. While these matters are important the reality is that the markets rule the day. What I do know about inflation is based on the chart below. I pulled from BigCharts.com the price movement of Helmerich and Payne (HP), Coure D'Alene (CDE), Agnico-Eagle (AEM) and the Dow Jones Industrial Average from the period of 1973 to 1983.

Notice how HP was able to beat out the traditional favorites during inflation like Agnico-Eagle, a gold mining company. Also notice how HP hammered the best precious metal bet on inflation, silver, as represented by CDE. As expected the Dow Jones Industrial Average was a none factor as an investment but was used as a point of reference. If we're headed towards massive levels of inflation, after the wipe out of assets in the current deflation, then HP might be the best of the best when that time comes. Touc.

Various Notes on the Market

The Utility Average

Today the Dow Jones Utility Average had wicked downside action to the tune of 3.18%. It is said that the DJ Utility Average leads the market due to its more sophisticated investors seeking safety and income. This is especially reflected in the October 10, 2008 bottom that was reached in the index which was well ahead of the November 20, 2008 bottom experienced in the general stock market.

Today's action was significant because the Utility Average fell below the closing low of October 10, 2008. If this is any indication, with any follow through in the coming weeks, then we've got lots more to go on the downside.

Market Forecast

On November 21, 2008 I said:

Another factor that is of concern for this market is that the Dow Industrials broke through its 4% yield to finish Thursday November 20th at a yield of 4.12%. We can only guess that the Dow is headed to a yield of 5% or a closing price of 6226.

It looks increasingly like we're going to reach that 5% dividend yield on the Dow Jones Industrial Average. Currently, we're within 500 points of reaching the 5% yield on the index. The only problem is that the yield will have to go back down (4.99% to 4.01%) as the dividend cuts in the index take place. This would result in a lower price on the Dow in order to achieve the same dividend yield.

Bailout Watchlist

If you've been reading this blog for any amount of time you know that the current bailout of the financial system has failed miserably. Over $8.5 trillion has been distributed to various institutions with little or no impact. As the Dow Jones Industrial Average reaches new lows, I want to point out the other bailouts that have passed into history but are not being counted as failures as they should be since they only provided temporary reprieves that would ultimately come back to haunt us in bigger and broader reaching fashion. So far, our stock market, as indicated by the Dow Jones Industrial Average, has managed to fall back to 1996 levels. This means that the following bailouts have been a waste of "market stabilizing" money:

• Airlines (2001) $3.171 billion
• Brazil (1998) $30 billion
• Long Term Capital Management (1998) $3.5 billion
• Thailand, S. Korea, Russia, Indonesia (1998) $141 billion

As we go back in time, I'll add more " market stabilizing" bailout to the tally. Next up is the Mexican Peso bailout of 1994. Unfortunately, we'd have to fall to the high 3000 level in order for that to occur. Please feel free to add to the list of items that were supposed to support or stabilize the markets but so far have been wiped out. Touc.