A Worrisome Sign...

A factor that needs to be considered when looking at the Dow Jones Industrial Average is the Dow Jones Transportation Average. When someone says "how'd the market do today?" most people are referring to the Dow Jones Industrial Average. However, the Transportation Average is also a key element to determining the health of the stock market and the economy. In fact, the Industrial and Transportation Averages are a critical components of Dow’s Theory.

Right now the Transportation Average is at the level of 3416.16 while the more widely known Industrial Average is at the level of 8253.58. Although these indices are far from former highs there is an alarming characteristic about both market barometers that must be pointed out.

According to Dow’s Theory, a new major market upturn is signaled when both the Industrials and the Transports have bottomed and are both moving higher. As long as both indices go above the high of a previous peak in the market then the “bull” market is in place.

In the chart below, from the period of Oct. 1995 to Oct. 2004, you will see that the Industrials (blue line) reached a new low (green circles) on September 30, 2002. The Transportation Average (red line) reached a new low on March 3, 2003. Even though the Industrials were already moving higher in late 2002 it didn’t mean a new “bull” market was in place. Only when both the Industrials and the Transportation Average have hit [a] bottom and move higher together does it confirm a possible reversal of the trend.


As I mentioned before, both indices hitting a bottom is only the first indication of a possible bull (rising) market. The next step is that the indices needs to go above the previous market peaks (purple dashed lines) in the order of lowest peak to highest peak. Initially, the Industrials didn’t go over the 2nd market peak but ultimately did. On the other hand, the Transports went above the previous peaks without any problem.

The dilemma that we’re faced with in this market is the opposite of what happens during a bull market. In a bull market the indices will have to go back to the last and highest prior peak to confirm the strength of the move upwards. In a bear (falling) market, prices will (or need to) fall to prior lows in order to confirm the trend.

In the chart below you see the current state of the market and how much the market rose from the bottom in 2002/2003 (green circles.) On the chart below the Industrials (blue line) are currently near the low of 7528.39 back in 2002. Also notice that the Transports (red line) are very far from the low level of 2042.48.


My concern with this picture is that in order for the Transportation Average to fall back to the prior low it would have to decline a total of 41% from the current level of 3462.67. This is a tremendous amount for any index to lose in a market where losses have been to the tune of 30% or more. Even more alarming is the fact that the Dow Industrials have fallen a total 10 points for every 3.5 points for the Dow Transports.

If in fact the Dow Industrials were to fall to the equivalent of the decline of the Dow Transports then the Industrials would have to fall and additional 5344 points based on the 10:3.5 ratio. This is a phenomenal amount to consider given that we’ve seen so much destruction of wealth so far. Touc.

Nassim Taleb tells it like it is...

Please follow the imbedded link to an abbreviated interview with Nassim Taleb author of the book Black Swan. Touc.




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  • Brutal upside movement

    Today the Dow Jones Industrial Average has jumped over 900 points during the trading day. While this is very exciting, we have to be aware that the Dow will face significant difficulty in getting to 10,000 and staying above that level.

    As mentioned before on this blog, The Dow will trade in a range slightly above or below the 9531.11 level or fall back down to the 7773.71 level. A decline to the most recent low would equal a decline of 18%. If you can stomach the downside risk then hold your position. On the way up to the 9500-10,000 level, rather than take additional risk, consider this a good time to research the best and safest alternatives. This market will continue to provide gut wrenching moves, so prepare yourself now for what is to come.

    If you have an interest in the nature and extent of the banking crisis then I strongly recommend that you read the Bloomberg article titled, "Banks on the Edge." So much information is in this article that you'd probably come away with a license as a bank examiner once you're done. A hard copy version of this article is strongly recommended. Touc.


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  • Get ready to be fleeced again!

    In my October 1st article, I pointed out how ineffective the Federal Reserve Bank's $1.8 trillion has been on the economy and the banking system since December of 2007. The point of the article was to show that bailouts don't work, never have and never will.

    Well, today I look at the news headlines and I see that General Motors (GM) is interested in buying Chrysler but it doesn't have enough cash. But wait, wasn't it just this past Thursday that GM hit a new 58-year low in the stock price and was thought to be under threat of filing bankruptcy. Hmmm, how could a near-bankrupt company acquire another money losing car company when it is also in the throes of death?

    Wait a minute! Didn't they just pass a bill in Congress on September 25th granting the auto makers a $25 billion bailout loan intended to prolong or save the industry? What hasn't happened in the 16 days since the passage of the bill? What in the world is going on with this system that money can be easily drummed up for an industry on a moments notice and then it is lost or proven ineffective?

    I'll tell you what I think will happen to the money though I can't prove it yet. I suspect that Cerberus Capital Management LP, majority owner of Chrysler, took whatever money is available from the gov't and kept it for themselves. Then, they get GM to merge the bad assets into the newly combined entity. Only problem is that even with some portion of a $25 billion bailout loan, GM doesn't have enough money to complete the deal.

    This transaction has all the characteristics of the PG&E bankruptcy in 2002, whereby the company "ring-fenced" it's assets so that bankruptcy courts couldn't or wouldn't include this wealth in the bankruptcy proceedings.

    The Federal Energy Regulatory Commission (FERC) on Wednesday upheld a plan by utility PG&E Corp. to shield assets of its unregulated subsidiaries from creditors, denying objections raised by California state officials and by other companies.

    "FERC Upholds PG&E Plan." The Oil Daily (Feb 22, 2001)

    What's worse in this case is the fact that Cerberus Capital exploits the taxpayer and then keeps the valuable stuff while either merging into GM or filing bankruptcy. The process of bankruptcy or merging with GM would be the final step in fleecing the taxpayer. Touc.

    Sources:
    • Simon, Richard. "House OKs aid plan for automakers." Los Angeles Times. September 25, 2008. C-1.
    • Strumpf, Dan. "GM shares tumble 31 percent to 58-year low." Associated Press. October 9, 2008.
    • Krisher, Tom. "Analysts: GM would need cash to acquire Chrysler." Associated Press. October 11, 2008.
    • "FERC Upholds PG&E Plan." The Oil Daily. Feb 22, 2001.
    • Lazarus, David. "PG&E Can Spin Off Profitable Assets." San Francisco Chronicle. February 22, 2001.

    Big Money Exit

    Many people are confused as to the reason why the markets are falling day after day without any real relief. Why are the declines in the market so orderly and smooth? Why hasn't there been a crash, which in theory would mean that there might be an actual bottom?

    The reason might be as simple as a strange rule that was set up as a result of the stock market crash in 1987. The rule know as the "circuit breaker rule" which says that if the stock market was to fall by 10% before 2pm EST the stock exchange would be closed for one hour. If the stock market was to fall by 10% after 2pm but before 3:3opm EST, then the market would be closed for 30 minutes. A similar rule exists if the stock market were to fall by 20% before a specified time.

    So you see, if the market were to fall by 10% then there would be an outright panic in the stock market. The big institutions don't want the public to see a halt in the market at a time when the public already didn't want the bailout bill to begin with. Imagine what would happen to the markets if the average mutual fund investor said, "forget it, once the market reopens I'm outta here."

    The solution to this problem is to program the big institution computers to avoid the selling if the market gets within 2.5% of a 10% down day. If you look at the stock market movement at the end of the day today, you'll see a concerted effort by the big money to conceal their effort to get out without disrupting the "orderly" nature of the overall decline.

    Essentially what the "circuit breaker rule" has done is to provide every incentive by the institutions to make the market not hit the 10% decline which would halt the market and spark a panic. Since the Big Money has all the tools at their disposals to offset a true panic we get declines in the 3% to 7% range. It was quoted on Fox Business Network that of the approximately 2 billion shares traded today 4 million took place after the New York Stock Exchange closed bringing the index down 100 points after the official close of the day.


    Clearly this is an effort by the Big Money players to get their money out while not inspiring a panic and at the same time getting the taxpayer to pay for the reckless mismanagement of our money in the Big Money institutions. This is a truly sad day for capitalism and the free markets. Touc.




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  • The Battle Lines May Have Been Drawn




    The above chart shows what the Dow Industrials have done since hitting the 9525.32 level. Yesterday, the Dow attempted to go above the 9525.32 level and didn't succeed...so far. I don't think many traders or investors are intentionally targeting this level. However, it appears as though there is a battle for control of this price level on the index. What are the implications of this "battle line?" My guess is that we'll see this level revisited after falling to a extreme (albeit temporary) low or high in the market. At which point the index would wander around this level for what would seem like a long period of time (3 weeks to 4 months.)

    Note:

    On the right hand column please take a look at the Dow Yield Watch indicator. This indicator follows the current yield of the Dow Jones Industrial Average and places it in the context of the historical yields of the index. Traditionally, whenever the Dow had a yield of 6% the index would start a new bull market towards a yield of 3%. Likewise, when yielding 3% the Dow would embark on a new bear market towards a yield of 6%.

    At the current yield of 3.50%, the Dow is slightly overvalued and, if continuing on its trend, is headed to the undervalued level of 6%. To put this concept into perspective, if the Dow were yielding 4% then the index would be at the 8,107.75 level. Touc.


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  • Book Recommendation: Crisis Investing


    Because of the extraordinary circumstances that we are faced with in the financial markets, I am compelled to ask that everyone buy the book Crisis Investing by Douglas Casey. Are you wondering what the safest place to invest in markets like this? Do you want to know what happens to your money during inflation, disinflation or deflation? What happens to government bonds when the government can't pay?

    You have questions and Crisis Investing has a perspective that you won't hear about on any cable television station. Crisis Investing helps you to look ahead of the current problems and see things from an angle that is both unique and useful. Good Luck. Touc.


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  • Review: Stock Research Using Dow’s Theory


    Today I will review the dividend paying stocks that I did research recommendations on using Dow’s Theory. The reason I am selectively choosing these stocks to follow up on is that they, like the Dow Jones Industrial Average, have shown the ability to go to or near the levels that I calculated in earlier postings. For the time being we’ll have to assume the price movement in the stocks is merely a coincidence. With that in mind, let’s follow up on what I said and what the stocks have done so far.

    Air Products and Chemicals
    • On September 29, 2008, I said: “Air Products and Chemicals Inc. is estimated to fall between the $61.84 and $53 levels.”
    • On October 6, 2008 APD actually went as low as the $57.69 level before closing at $61.93 the very same day. $57.69 is $0.27 away from the exact middle of the range between $61.84 and $53.

    Walgreen

    • On September 24, 2008, I said: “With all the drama that we’re seeing in the stock market I’d assume that the [Walgreen] price will go as far as the $26.91 level.”
    • On October 6, 2008, WAG went as low as $26.17, a difference of $0.74 from the estimated low and closed at $27.54 the same day.

    Archer Daniels Midland

    • On September 5, 2008, I said: “The next stop for the 3rd and final support level before total collapse is $20.95.”
    • On October 6, 2008 ADM fell to the $16.55 level and closed at $18.37 the same day.

    Nucor

    • On September 3, 2008, I said: “Dow Theory says that NUE may fall to the $38 or $32 level.”
    • On October 6, 2008 NUE fell to the $$28.97 level and closed at $33.75 the same day.

    Personally, I believe all of these stocks are poised to increase in value from this point until the Dow Jones Industrial Average reaches the first of the three resistance levels at 11,734. After reaching the 11,734 level it is strongly recommended that you consider your exit strategy if you end up purchasing any of these stocks. Good Luck. Touc.

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  • A Key Point for the market

    Today the Dow Jones Industrial Average has fallen to the minimum of 9525.32. This exceeds the Dow Theory projection of 9531.11 posted on this blog on September 17, 2008 by 0.0006%. Nothing that has happened thus far is surprising according to Dow's Theory.

    It becomes academic at this point to suggest that we are either going to the 7197.60 level or either of the next three points on the upside:
    • 11,734 (23.18%)
    • 12,969 (36.15%)
    • 13,727 (44.11%)

    Like today's action, the move will be violent on either side up or down in a very short period of time. Touc.

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  • The Fed's $1.816 Trillion Lifeline Didn't Work

    The figure in the title of this site is the amount of money committed by the Federal Reserve Bank since December 17, 2007 until September 23, 2008 in an effort to boost confidence in the financial system. Since December 17, 2007 we've had the failure of Bear Stearns, Fannie Mae, Freddie Mac, IndyMac Bank, WaMu, Wachovia, Merrill Lynch, and various other financial institutions which would have failed but were sheltered in some way or another.

    The above figure of $1.816 trillion is the amount that the Federal Reserve has committed to no avail. This does not include the many decreases in the discount rate and Fed Funds rates. These rates have fallen as dramatically as the Fed's tab has increased.

    Sure, not all of the money went out at the same time and not all of it was evaporated into nothingness. However, $1.816 trillion is the amount that has been holding the hands of weak or hobbling financial companies. Did it stop the bleeding? Of course not. Which is the reason why the Treasury now feels the need to step in and bail out AIG and ask for $700 billion as the first of many more requests for funds to "save" the financial markets.

    As a market historian and participant, I know that no amount of action like restrictions on short selling or throwing money at the problem will solve anything. Notice that the ban on short selling didn't stop WaMu and Wachovia from falling 95% after the ban was put in place.

    We cannot seek solace in the fact that our Congress feels compelled to commit an additional amount of $700 billion to the problem. Not only that, giving the Treasury Secretary immunity from criminal charges while handling the nation's purse strings seems troubling to say the least.

    The markets cannot correct themselves until the bailout efforts stop and the market resolves the problems that we're experiencing. We as investors can only hope that we're better than Japan in resolving the exact same problem that they experienced over the last 2 decades. If we're not equal to the task at hand then we might be fated to experience a similar 18 year recession (depression) which included Japan's stock market falling from 38,000 level in 1989 to the current level of 11,000.


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  • Research: Air Products and Chemicals Inc. (APD) at $71.43

    In my previous research recommendation of Walgreen’s, I reviewed 3 periods that should have demonstrated, according to Dow’s Theory, the most opportune time to buy the stock (the stock is up 5.58% since that Research Recommendation.) At this point, an investor could feel comfortable about considering the sale of this stock. However, I suspect that my own Sell Recommendation will not materialize for a while.

    Today’s Research recommendation is Air Products and Chemicals Inc. (APD.) APD has increased its dividend every year for 25 years in a row. According to Dow’s Theory, APD went through a total of 9 cycles from trough to trough or peak to peak since 1980. This means that the stock has a tendency to take a very short time to reach it’s previous high. I will review only the most recent cycle to determine the projected point that the stock should fall to its ultimate bottom.

    From the bottom in October of 2005, APD went from $53 to $106.06 in May of 2008. According to Dow’s Theory, the price of APD was expected to fall from $106.06 to any of the following three levels:


    • $88.37
    • $70.68
    • $53.00

    Thus far, APD has fallen to the $71.43 level but not before reaching a low of $69.22 during Friday’s trading session. In prior cycles from 1982 to 1998, whenever APD was declining from its peak it would fall between the 1st and 2nd price levels (i.e. $88.37-$70.68). However, in the last five cycles APD has fallen, on average, to the level between the 2nd and 3rd levels (i.e. $70.68-$$53).

    Air Products and Chemicals Inc. is estimated to fall between the $61.84 and $53 levels. However, if an investor were to take the risk of buying the stock right now then the potential downside is between 13.42% and 25.8% respectively. Considering that this stock has a cycle that averages 4 years from trough to trough you could consider this a stock that will reach the previous high in 1½ to 2 years.

    Below is the worst case scenario if the Dow Jones Industrial Average were to fall dramatically. The chart below shows how APD performed compared to the Dow from May 26, 1972 to October 4, 1974. During this period the Dow fell 39.8%, a period which was considered the worst bear market since the crash of 1929. Notice that APD actually went higher to the tune of 65% at the high. Good luck on your research of this stock. Touc

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  • The Ultimate Dividend Playbook

    Now more than ever investors need to understand the reasons why investing in stocks is worthwhile. The primary reason for investing in stocks, as with any other investment, is the income you should be receiving on your investment. When it comes to income investing with stocks, a handy book to have at your side is The Ultimate Dividend Playbook.

    Written by Josh Peters, The Ultimate Dividend Playbook offers insights and strategies for investing in stocks that...well, pay dividends. The best parts of this book are the end of chapter "Rules and Plays" and "DividendInvestor Case Study." The "Rules and Plays" section summarizes the chapter in a clear and succinct fashion. If you're the kind of person that gets bored with non-fiction books then this section would be all that you need to know...for the time being. The "DividendInvestor Case Study" provides a closer examination of ideas or assumptions that are either confirmed or shown to be exceptions rather than rules. For those who love to "run the numbers," this book provides ample formulas to run on each stock that you're interested in.

    No matter your level of understanding, you will benefit greatly from having this book on hand as you decide which stocks to buy and why.



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  • Research: Walgreens (WAG) at $31

    Today’s Research recommendation is Walgreen’s (WAG), which is trading at a low of $31 today. Let’s get straight to the numbers. Below I will list the Dow Theory interpretation of the price movement of prior periods (which is supposed to assist us with finding the final low in the price) and contrast that with the actual low for the stock.

    From the bottom in July of 1994, WAG went from $4.22 to $33.94 in February of 1999. According to Dow’s Theory, the price of WAG was expected to fall from $33.94 to any of the following three levels:

    · $24.04
    · $14.12
    · $4.21

    WAG actually bottomed at $22.06 in March of 2000.

    From the bottom in March of 2000, WAG went from $22.06 to $45.75 in October of 2000. Dow’s Theory says that the stock should fall to the following levels:

    · $37.85
    · $29.95
    · $22.05

    WAG actually stopped falling at $26.90 in February of 2003.

    From the bottom in February of 2003, WAG went from $26.90 to $51.60 in September 2006. Dow’s Theory says that the stock should fall to the following levels:

    · $43.37
    · $35.14
    · $26.91

    WAG is currently selling at around the $31 level.

    Walgreen’s has shown from previous periods that the stock price tends to overshoot the second price level on the downside. The current price movement is no exception. With all the drama that we’re seeing in the stock market I’d assume that the price will go as far as the $26.91 level. However, even at the current price this stock is a bargain and would warrant taking the risk of holding with the potential for a 13% decline in the short run. Good luck on your research of this stock. Touc.



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  • Henry Paulson: Our man at the helm

    CEO Paulson was definitely living it up as head of Goldman Sachs back in August of 2005. However, it seems that my favorite magazine Bloomberg was worried about such a firm deviating so far from the tried true revenue model from years past.
    The October 2008 issue of Bloomberg shows Secretary Paulson with less of a shine. Don't worry though, at least we know that, no matter what happens, Goldman Sachs has its back covered in case some large losses magically pop up. Almost makes me feel like a can't miss bet is in the offing. Touc











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  • SELL Briggs and Stratton (BGG) at the Market

    The time has finally come to issue a SELL recommendation for Briggs and Stratton (BGG.) The stock has performed moderately since the Research recommendation was issued on April 16, 2008. This company is poised to go beyond the $20.70 level. However, we seek returns that exceed guaranteed funds in the shortest period of time.

    BGG was recommended when it was trading at $17.52. As of Monday September 18, 2008 BGG was quoted at $19.00. This equals a return of 8.44% in five months. Conservatively, on an annualized basis this would equal approximately 20.25% return. Selling this stock now also generates a return 65% above the amount of the dividend yield if the stock was held for a whole year. This stock will definitely be purchased again down the road.

    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.

  • Dow Theory on the Dow Industrials

    Summary
    • A brief background on Charles H. Dow
    • Dow will now go to 9,531.11 before heading higher
    • If falling below the 9,531.11 level, the Dow will go to the 7,197.60 level
    Article Details

    Charles H. Dow came up with a perspective about the direction of the stock market that was codified in S.A. Nelson's 1903 book The ABC of Stock Speculation. Although Dow never claimed to actually have a theory, Nelson felt that Dow's contribution to economics and finance was so important that it was worthy of being considered a "theory."

    In order for Dow to gauge the health of the market and the economy it became necessary to build and index of stocks. This index resulted in the formation of the Dow Jones Industrial Average (Index.) Initially, the Dow Index composed of 12 railroad companies and now composes of 30 companies. Most modern market watchers consider the Dow Index less of an indication of the stock market and economy due the lack of companies in the index. In reality, Dow only wanted the best indicator or barometer of the stock market and the economy not the most diverse mix of stocks.

    Dow's theory was later developed by individuals like William Peter Hamilton, Robert Rhea, E. George Schaefer and most recently Richard Russell. As important as the Dow Jones Industrial Average is for the world in determining the current health of the U.S. stock market so too should Dow's Theory be used for determining the future direction of the stock market.

    After today's stock market action the Dow Jones Industrial Average closed at the level of 10,609.66. This is below the 50% Principal as devised by E. George Schaefer. The 50% principal indicates that if a stock or index falls below this level it will fall, at minimum to the 2/3 level of Dow's Theory. Right now the 2/3 level for the Dow Jones Industrial Average is 9531.11. If the Dow falls below the 2/3 level the next stop will be 7,197.60.Touc.



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  • Today's Visuals...











    Just imagine, TheStreet.com charges people from $50 to $80 for these stock recommendations. Only my most recent recommendation of SuperValu (SVU) offered any income over the period of time that a "buy" rating and a "hold" rating was issued for the stock.

    This is a sample of how the institutional rating agencies (Cramer claims to represent the "blue collar" investor) that charge a fee for their (inaccurate) ratings get it wrong more often than not.

    SELL Carlisle Companies (CSL) at the Market

    The time has finally come to issue a SELL recommendation for Carlisle Companies (CSL). The stock has performed moderately since the Research recommendation was issued on May 17, 2008. This company is poised to reach the $51 level. However, the returns that this stock has provided in the last four months say that it is worthwhile considering alternatives.

    CSL was recommended when it was trading at $32.06. As of Monday September 15, 2008 CSL was quoted at $34.45. This equals a return of 7.45% in four months. Conservatively, on an annualized basis this would equal approximately 22.35% return. Selling this stock now also generates a return 3 times the amount of the dividend yield if the stock was held for a whole year. This stock will definitely be purchased again down the road.

    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.

  • What does Dow's Theory say about Bank of America?

    Today Bank of America (BAC) completed their announcement of the purchase of Merrill Lynch (MER). Although I have stayed out of the banking sector overall I was curious to see what Dow's Theory says about Bank of America. I will examine four cycles for BAC and see if there have been any predictive trends.

    Starting with the period from August of 1982 to the top at June 1986 we see that BAC went from $2.94 to $13.88. According to Dow's Theory the price of BAC was expected to fall from $13.88 to any of the following three support levels:
    • $10.23
    • $6.58
    • $2.93
    BAC actually bottomed at $3.88 in December of 1987.
    Next we have the period from December 1987 to the top at August of 1989. The price rose from the $3.88 level and peaked at $13.75. According to Dow's Theory the price of BAC was expected to fall to the following three levels:
    • $10.46
    • $7.17
    • $3.88
    BAC actually bottomed at $4.22 in October of 1990.
    Next we have the period from October 1990 to the top at July of 1998. The price rose from the $4.22 level and peaked at $44.22. According to Dow's Theory the price of BAC was expected to fall to the following three levels:
    • $30.89
    • $17.56
    • $4.22
    BAC actually bottomed at $18.16 in December 2000.
    Finally we have the period from December 2000 to the top at November 2006. The price rose from the $18.16 level and peaked at $55.08. According to Dow's Theory the price of BAC was expected to fall to the following three levels:
    • $42.78
    • $30.48
    • $18.16
    BAC actually bottomed at $18.44 on July 15, 2008.
    The next question becomes, are there any noticeable patterns that Dow's Theory provides us? Generally, each period from peak to trough (3 out of 4 times) BAC's price fell to the previous low level. What does this mean for Bank of America stock? It means that the $18.44, plus or minus 5%, is the lowest this stock will go.
    As hard as it is for me to believe that the bottom is in on this stock, I have to defer to Dow's Theory for some sort of guidance. Since Bank of America is now a bellwether stock for the banking industry, Dow's Theory is saying that either this banking crisis has hit bottom (for now) and might trade up from here (possibly in a range) or that anything below $18.44 is going to be chaotic.
    Let's watch and see how well BAC holds above the $18.44 level. I suspect that this price will be revisited in the near term. However, given all the wild moves in the market I can't be certain of what is to come after that. Did I mention that BAC has increased its dividend for over 30 years in a row? This should be interesting. Touc.

  • The Real Reason Lehman Failed

    In a story published on Friday September 12, 2008 titled "Lehman Workers an Unhappy bunch" this excerpt found on Yahoo!Finance and CNNMoney.com.





    From this statement, I can only infer that, if Lehman staff are considered top tier bankers then Bank of America must really be in trouble, especially with the purchase of failed Merrill Lynch. Furthermore, with statements like these it is no wonder why Lehman Brothers failed. Touc.

    "One investment-banking analyst spoke with confidence about his job security.

    'In banking, we're pretty sure we're going to get bought and if it's by Bank of America, they're going to value bankers highly,' he said. 'They've got C level bankers, and Lehman has A bankers.'"

    Ruminations on Fannie and Freddie

    The following is my response to an article that appears on the Motley Fool Website.
    Greetings Editor,

    You wrote a very interesting article titled "How Did Freddie and Fannie Fall?" However, I would like to add some information that I found to be missing or inaccurate from your piece.

    First, you stated that, "The two giants could borrow with the strength of the U.S. government…" This statement implies what everyone believed about Fannie and Freddie but was never true until recently and that is the government guarantee of the agencies. Everyone always stated as a fact that the agencies had implicit guarantees when referencing the company’s financial strength. Again, the actual guarantee never existed until this week.

    The next matter of concern in your article is the statement "Who's to blame for creating this Frankenstein? 'Blame' is a strong word. This isn't Enron. 'Who was ignorant enough?' is probably a better way to put it." The matters faced by Fannie and Freddie is eerily similar to the tactics used by Enron minus the offshore entities. In 2003, Freddie Mac was forced to restate 3 years of earnings results that led the company to stop reporting earnings for a brief period of time.[i] This after the company was found to have been speculating in the interest rate derivatives market to pad their earnings.[ii] Shortly after Fannie Mae's accounting troubles, 0n September 23, 2004, USA Today quoted Standard & Poor’s as warning investors that, “the sheer complexity of Fannie Mae's activities, together with complex (accounting) rules for derivatives, reduce the overall clarity of financial reporting."[iii] The complexity of the activities was intended to falsify their financial status to ensure that management met quarterly earnings guidance. Meeting their (Fannie’s) guidance ensured that the executives were able to obtain the maximum incentives offered by the board of directors. In retrospect, these strategies are not similar to what Enron did; instead it was exactly what Enron did.

    Finally, your article claims that a level of hype was created about Fannie and Freddie that somehow was unwarranted. Unfortunately, a majority of investors and politicians had every right to believe that the “hype” was real. How is this possible? Because when the regulator of Fannie Mae and Freddie Mac, Office of Federal Housing Enterprise Oversight (OFHEO), in response to the failure of Long Term Capital Management, spent two years researching and on February 4, 2003 generated a report title, “Systemic Risk: Fannie, Freddie and the role of OFHEO” the head of the agency was fired the next day. This report was intended to prepare the government, regulators and the banking system for whatever the worst-case scenario might be. Instead, it was treated with the regard of a tabloid magazine and relegate to the conspiracy file. It is a wonder that OFHEO still allows the public to access this document. It is clear that the Congress, Treasury and Federal Reserve aren’t reading the section on how to remedy the current dilemma we’re in.

    For the reasons stated above, in the minds of many, the hype was real and therefore ensured the loss of what appears to be, at least, $200 billion in a matter of days and much more down the road.


    Sources:

    [i] Muolo, Paul. "Analyst: Fannie Might Halt Earnings." National Mortgage News . Oct 4, 2004.[ii] Collins, Brian. "Did Freddie Speculate on Rates?." National Mortgage News . Jan 5, 2004.[iii] "Critics call for 'urgent action' by regulators." USA Today .Sept 23, 2004.



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  • SELL CenturyTel (CTL) at the Market

    The time has finally come to issue a SELL recommendation for CenturyTel (CTL). The stock has performed moderately since the Research recommendation was issued on March 31, 2008. This company may be poised to reach the $41 level or Valueline’s cashflow mean of 5x. However, the returns that this stock has provided in the last five months say that it is worthwhile considering alternatives.

    CTL was recommended when it was trading at $33.47. As of the close of market on Monday September 8, 2008 CTL was quoted at $39.45. This equals a return of 17.87% in five months. Conservatively, on an annualized basis this would equal approximately 42.88% return. Selling this stock now also generates a return 2.5 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.

    If you’re curious about the rational behind such short-term transactions then please visit the About This Blog section. Touc.



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  • SELL Clorox (CLX) at Market Open

    The time has finally come to issue a SELL recommendation for Clorox (CLX). The stock has performed moderately since the Research recommendation was issued on March 31, 2008. This company may be poised to reach the $72.80 level or Valueline’s cashflow mean of 16x. However, the returns that this stock has provided in the last six months say that it is worthwhile considering alternatives.

    CLX was recommended when it was trading at $56.64. As of the close of market on Friday September 5, 2008 CLX was quoted at $62.55. This equals a return of 10.43% in five or six months. Conservatively, on an annualized basis this would equal approximately 20% return. Selling this stock now also generates a return twice 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.

  • Research: Archer Daniels-Midland (ADM) at $22.97

    Summary

    • ADM is at a new 52-week low
    • ADM is burdened by the commodity cycle
    • Was world population the reason for the stocks growth from ‘82 to ‘97?
    • Watch the market price
    • Dow’s Theory might assist us
    • 33 years of dividend increases


    ADM Details

    Hitting a 52-week low yesterday is Archer Daniels-Midland Company (ADM). According to Standard & Poor’s ADM is, “one of the world's leading agribusiness companies, with major market positions in agricultural processing and merchandising.” ADM is the largest processor of corn, oilseed and wheat and other grains.

    Like yesterday’s Research recommendation on Nucor, this company is heavily associated with the commodity cycle which has either seen it’s peak and has a long way to fall or is mercilessly punishing traders and bandwagoners as it goes through a primary bull market correction. If you’re interested in learning about commodity cycles then read Jim Rogers books Hot Commodities or A Bull in China. Personally, I watched this stock go through the wringer during the period from September ’97 to September 2000 all the while debating whether to buy the stock.

    What is most fascinating about this stock is the fact that it went up from July ’82 until the peak of September 2000. Why would this be so unusual? Well, for one thing interest rates were experiencing their great migration to their 40-year lows. The fact that commodities in general and corn producing companies stock moved up during this period is amazing. Many attribute the rise in price with the increase in population. However, the population estimates were nothing exceptional. After all, a 1967 estimate cited in Aramco World showed that population was expected to be 5.7 billion by 1990.1 Of course the actual year this was reached was 1995. Well that must explain everything. It was the population growth that allowed for the increase in the stock of ADM from ’82 to ‘97.

    Actually, population growth doesn't quite explain the rise in ADM stock. In January of 1982, the CBOT futures price of corn stood around 271 and declined to the level of 162 in 1986. Corn then vacillated between 270 and 375 with a spike to just above the 500 level in 1996 before sliding to the 256 level throughout much of 1997. Corn only crossed the 500 level in January 2008 a period of 12 years since the last spike in that direction.2 Basically what I have described is a trading range since 1982 with a spike in 1996 and 2008. As recently as June/July of 2008 the price of corn peaked at a high of 775 and has since fallen to the current 539 level.3 Nothing that I have shown would indicate that ADM should have had such a run-up in price from the 1982 bottom of $1.48 to the high of $19.69 in 1997.

    When applying Dow Theory to ADM we find that there is interesting precedent for what might happen to the current stock price. As mentioned earlier in the period from July 1982 until September 1997 the stock increased 1,262%. Dow’s Theory states that the ADM should retrace either 1/3 or 2/3 before recovering to new highs. In the case of ADM, it retraced 2/3 of the increase by falling to the level of $8.21 or $0.66 above the exact 2/3 level.

    Applying this approach to ADM’s rise from the low in September 2000 until December 2007 we find that there are four critical support levels. The first support level was $33.69, which the stock broke through with some hesitation back in June. The 2nd support level, according to the 50% Principal, at $27.32 was grudgingly broken through in the month of August. The next stop for the 3rd and final support level before total collapse is $20.95. It is the $20.95 level that corresponds to the 2/3 retracement from 1997 to 2000. This would lead me to believe that with the stock at $22.97 we are near either the end of this downturn or headed back to the September 2000 low of $7.80.

    Considering that corn has a cyclical pattern to it the month of September should mark the reversal of this stock. With ADM increasing it’s dividend every year for at least 33 years I feel this stock will be worth the risk at or around $20. Put this on your watchlist, do your research and be ready to buy. Touc.

    1 Carmicheal, Keith. Oil in 1990. Aramco World. July/August 1967.
    2TFC Commodity Charts. http://futures.tradingcharts.com/old_hist_CN20084.html
    3 www.cmegroup.com






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  • Research: Nucor (NUE) at $48.84

    Summary
    • NUE is within 3% of 52-week low
    • Dow Theory says that NUE may fall to the $38 or $32 level
    • Standard technical analysis says next levels are $40 or $32
    • Commodity cycle (steel) could drop further
    • Drastic increases in earnings and dividends could revert to long term mean
    • 35 years of dividend increases
    Nucor Details

    Just on the horizon with a declining price trendline is Nucor (NUE). NUE is described by Mergent Online as a company that, "...produces and sells steel and steel products via its steel mills and steel products segments."

    As of today, NUE is within 2.35% of the one year low. On the technical side, according to Dow Theory, NUE potentially could fall from 22% to 33%. The 22% represents a price of $38.09 which is part of Dow Theorist E. George Schaefer’s 50% Concept.[1] The 33% represents a price of $32.78, which is derived from the standard Dow Theory 3-phase analysis.

    Using standard technical analysis we see that the fact that NUE has fallen below the $50 level could spell disaster for this stock. The next meaningful support level is at $40 and is followed up at the $32 levels. Considering the fact that Dow Theory and standard technical analysis converge at the $40 and $32 levels we can conclude that $40 is the next stop for this stock with a $32 not far behind.

    According to Valueline, NUE typically trades at or near the 10x cash flow level. Interestingly, the last time this stock broke resoundingly above the 10x cash flow level was in 2002. It appears that NUE has the pattern of trading up to the 10x level but not going too far above for a long period of time. 10x cash flow means that this stock is expected to trade up to the $65.10 level based on Valueline’s 2007 full year numbers. Currently, NUE is 25% below Valueline’s cashflow figures. If we took NUE’s average low price/cashflow over the last 11 years then we arrive at a $36.65. This would be the most ideal purchase price.


    According to Geraldine Weiss, editor of IQTrends, NUE is considered undervalued when the stock is yielding 1.4%. Currently, NUE is yielding 2.6%. NUE has sported double digit return on equity and return on assets in the low twenties and high thirties. While these are exceptional numbers we have yet to determine whether or not this is a new standard for the company. If nothing else, NUE is a candidate for takeover by the likes of Acelor Mittal.

    NUE’s earnings have been relatively smooth until 2004. After 2004 the earning figures jumped 17 times the 2003 numbers. Likewise, the dividend jumped dramatically from $0.24 to $0.93 to $2.15 in 2004, 2005 and 2006 respectively. Such drastic changes may have to be pared back when and if the commodity boom completely falls flat (if it hasn’t done so already.) However, NUE’s ability to remain lean and mean along with its 35 years of consistently increasing its dividend bode well for the stock price. Put this on your watchlist, do your research and be ready to buy. Touc.


    [1] Schaefer, E. George. How I Helped More Than 10,000 Investors To Profit In Stocks. Prentice-Hall. 1960. p. 73.

  • If a picture is worth a thousand words then...

    I have been a stock market observer and participant for almost 13 years now. However, in all those years I have never seen what I saw in yesterday's (Thursday August 28, 2008) market.

    Thursday's regular market trading session and after-market action was unprecedented in it's scope and range. What happened is that most large cap stocks that had a higher closing price at the end of the day closed down by exactly the same dollar amount in after-hours trading.

    At first I thought it was some sort of quirk or error by the website or quote provider. However, when I typed in random large-cap stock symbols, the answer turned out the same most of the time. Here are the examples that I found on the internet from Google Finance, Yahoo!Finance and CNNMoney:





    In all of the visual examples that I have provided, you should be able to find the source, date, closing price, and the after-hours price. Air Products (APD) was the company in the first three examples and General Dynamics (GD) was in the last two. I cross referenced the data with the New York Stock Exchange after hour system (Arca) and the NASDAQ after hour system and arrived at the same prices.
    What I have just shown in the above examples could be found in so many stocks that I got tired of chronicling them all. The anomaly can be found in the following (although incomplete) list of stocks:
    • UTX
    • HON
    • PH
    • MU
    • PG
    • CL
    • ECL
    • TGT
    • COST
    • HD
    • LOW
    • NOC
    • GD
    • RTN
    • COL
    • VZ
    • CAG
    • WWY
    • BDK
    • GIS
    • GPC
    • GT
    • PKI
    • ED
    • ABT
    • MKC

    Never before have I seen such broad based market activity that glaringly highlights "management" of the stock market. The scale of such an endeavor, if proven to be "managed," would point to an organization(s) with unlimited resources at its disposal. My only conclusion is that something is brewing and it is beyond the scope of most "average" market participants. Touc.


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  • SELL Helmerich and Payne at Market Open

    The time has finally come to issue a SELL recommendation for Helmerich and Payne (HP). The stock has performed wonderfully since the Research recommendation was issued on September 29, 2006. While this company and the oil services industry can go higher than the previous peak our funds could be better employed in other areas.




    HP was recommended when it was trading at $23.03. According to the most recently available data from Morningstar.com, as of the close of market on Tuesday 8/5/2008, the stock closed at $53.95. This stock has provide a total return (price appreciation plus dividend income) of 141.50% or approximately 70.75% annually. If we considered this stock without using total return this stock would have returned 134% or approximately 67.12% annually.


    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.

    Disclosures: None

  • 2009 Research Recommendations


    2008 Research Recommendations 2006 Research Recommendations

      Research: Supervalu Inc. (SVU) at $25.97

      Today's Research recommendation is on Supervalu Inc. (SVU). According to Yahoo!Finance SVU, "operates as a grocery retailer in the United States. The company operates combination stores, food stores, and limited assortment food stores. Its stores offer various grocery products, general merchandise, health and beauty care products, pharmacy products, fuel, and other items and services." According to Mergent's, SVU has increased it's dividend 35 consecutive years in a row.

      The above table illustrates the perspective that I have on Supervalu Inc. (SVU) as compared to the other Dividend Achievers that are ranked by price closest to their 52-week low. As you can see (when you click on the image) SVU is the only company that is within it's 1 year low and selling below book value. Click on the following link to get a reasonable breakdown by message board poster GOOFERB who does a great job with an industry peer review on SVU.

      The most alarming matter for SVU is the issue of the amount of long-term debt held by this company. Just to reiterate, from the Yahoo!Finance message board post by GOOFERB, the debt situation is as follows:


      "The debt load: SVU’s long term debt is bloated due to its Albertsons acquisition. The company has pared its debt, but with long term debt topping out at about $8.8 billion, it’s significantly higher than KR’s $7.7 billion and SWY’s $6 billion. All three company's have about $250 million in cash. It's apparent that SVU's debt service is eating into the bottom line and it’s the probable reasoning behind Wall Street’s relatively low valuation of its share price."


      With the debt situation in mind, I have to say that when reviewing Valueline Investment Survey's report on SVU over the last 20 years I find that the company has consistently maintained a mean price-to-cashflow of 5 times. According to Valueline, SVU registered a cashflow per share of $7.59 in 2007 which implies a mean price of $37.95.

      According to Valueline, the book value for SVU in 2007 was indicated to be $28.08 in 2007 and is expected to reach $30 and $32 in 2008 and 2009 respectively. Currently, Yahoo!Finance has SVU with a trailing twelve month (ttm) book value of $28.83. This implies a discount of around 9% of book value.

      From a technical perspective, the stock has moved upward from an important support level of $24 back to 1999. If the $24 level holds up this stock will likely trade in a range and/or move higher. SVU must trade above $26.25 and exceed $27.55 in order to give the investor the green light in terms of going back to the $35 level.

      SVU's ability to increase the dividend over the last 35 years along with it's well protected dividend, due to the low payout ratio, suggests that this stock is a great opportunity with limited downside risk. Touc.

    • Is Owning a Home an Investment?

      Many times I get into a conversation with someone about what is the best investment to make. More often than not the topic turns towards housing and homeownership. When someone talks to me about owning a home I hesitate to mention that owning a home isn't exactly an "investment," not in the same way that owning an apartment building, a dividend paying stock or your own business is an investment. A home is only an investment if it isn't your primary residence. A home is an investment only if it will generate income beyond the cost of holding the property, typically this takes place in the form of a second property that does not act as a primary residence. The cost of holding the property includes taxes, utilities, repairs, interest minus government incentives.

      To be sure that we're in agreement of the term investment, I went online to the Oxford English Dictionary. I typed in the word investment and was pleasantly referred to the word income. It is no surprise that the first attempt to gain the definition of the word investment should refer us to income. But we need to focus on what exactly the definition of investment is. According to the Oxford English Dictionary, the term investment is characterized as:

      b. gen. The conversion of money or circulating capital into some species of property from which an income or profit is expected to be derived in the ordinary course of trade or business. Distinguished from speculation, in which the object is the chance of reaping a rapid advantage by a sudden rise in the market price of something which is bought merely in order to be held till it can be thus advantageously sold again. (Second Edition.1989.)
      Let's take a look at this definition and see if this fits with what many people often call "investments." As we can see, we first need to convert our available capital (cash) into some other form of property. This property is then supposed to generate INCOME or PROFIT in the ordinary course of trade or business. What this means is that while going about your daily activities (work and family life) you need to derive first income and possibly a profit will follow.


      Does owning a home that you are currently living in derive income for you? Absolutely not. It should be stated that if you're not deriving income from your "investment" then you're not investing. Instead, you're probably speculating or gambling. In fact, it is costing you to retain this "ownership" interest in the property. Therefore, a home that you live in isn't an investment. It is merely a forced savings account at best and a liability at worst.

      To further the idea of what an investment isn't, the definition goes on to describe what speculation is. Speculation is the attempt to benefit from the (rapid) rise in the price at which point the item would be sold. This is hardly the case with a home. Rational individuals don't decide to move simply because the price of the property has gone up in value.

      Some homeowners might rationalize that owning is better than renting and the potential rise in the value of the property when they decide to sell will reward them for their decision. History has proven that if you bought at the right time and live in the right region of the country and have the ideal location then you'll be rewarded handsomely for your patience. This, however, becomes problematic if you bought at the wrong time and wrong location.

      This does not mean that I wouldn't advocate buying a home. Instead, I'd rather suggest that those who are interested in buying a first home put the purchase into perspective. The view that should be taken is that buying the first home is a method to avoid paying rent and passively saving money through the buildup of equity over time. Touc

      Oil market commentary...

      There is a lot of concern regarding the current price of oil and it's related impact on the price of gasoline. While there is a general relationship between the two I would like to provide some insight as to a possible explanation of why the price of oil is going up. I hope this explanation is clear enough to see the relationship between the decline in the dollar and the increase in oil.

      The following is an excerpt from Richard Russell's Dow Theory Letters*. The concept that one needs to come away with after reading this piece is that as the dollar has sunk to new lows, the value of dollars traded for the same amount of oil has decreased. Keep in mind that oil is traded on the international markets in US dollars.

      "THE PICTURE: The eyes of the financial world have been riveted on the economic disease of 1974, the 'energy crisis.' And why not? The oil (gasoline) shortage is aggravating, it’s visible, it’s caused by “foreigners,” It’s something we don’t have to feel guilty about, and it’s all so easy to comprehend.

      My answer to this approach (as it has been all along) is that it’s bunk, pure bunk! The real economic disease which has been eating away at this nation (and the world) is inflation, the systematic destruction of the Free World’s currencies. It started in the1950’s, increased during the 1960’s, and is now reaching crescendo proportions. Gold is the real value by which paper (fiat) money is measured, and the increasing number of dollars, pasetas, francs, marks, etc. which it takes each month to purchase an ounce of gold testify to the demise of the world’s paper currencies,

      What has the oil crisis got to do with that? Not very much. True, the oil crisis did intensify the interest in gold but for one main reason. And the reason is the same inflation.

      The Arabs are taking in (and holding) billions of dollars, dollars received for their oil. Those dollars have been hit by two devaluations and a steady torrent of inflation. So the Arabs said, “less oil and at higher prices." And they dovetailed with the Israel-Arab War into their 'inflation solution' with consummate skill. Meanwhile, the various governments continue to pour gasoline on the inflationary flames and it continues to take more dollars or pounds or marks or yens to purchase an ounce of gold."

      *Russell, Richard. Dow Theory Letters. February 27, 1974. Issue 590. page 1.


      Now, in order to offset the loss associated with the decline in dollars, oil producing nations need to reduce the amount of oil they sell on the open market in order to receive the equivalent worth that their product normally sells for. Another possibility, however unlikely, would be that the US dollar increases in value in an extraordinarily short period of time to blunt the effect of dollars for oil.

      With all the global demand that currently exists, Saudi Arabia and other oil producing nations don't really need to decrease production as much as they just need to keep output at a lower rate of increase. This also explains why President Bush's request for increased production was rebuffed by the Saudi government. The Saudis want their money's worth and aren't going to placate the demands of a lame duck administration. Touc.




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