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Buying When There’s Blood In The Street…

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…and Oil in the water.

Purchased two Oil services stocks today, both which earn their keep primarily by servicing the oil drilling operations in the Gulf of Mexico.  They have been beaten down along with BP and more recently due to the moratorium on deepwater drilling in the Gulf.  One of them – Hornbeck Offshore Services (HOS) – led the group of firms who successfully overturned the moratorium last week.  HOS operates offshore support and logistics vessels and specialty services to the offshore oil and gas exploration and production industry primarily in the Gulf of Mexico.  The other – Geokinetics (GOK) – provides 2D and 3D seismic data processing and interpretation services to oil and natural gas firms in the Gulf and around the world.

This New York Times article has a good discussion of the Gulf moratorium and Hornbeck.  You’d have to believe that we’ll never drill in the deep waters of the Gulf again to avoid these stocks.  I think it could go another way – we’ll begin requiring a relief well to be drilled with every new deep water well (2 wells instead of one), which would mean even more work for these two oil services firms.

Both firms are selling near their March 2009 panic lows.  I bought HOS at $14.43 per share and GOK at $4.12 per share.  Each has a 3% weight in my portfolio.

Financials:

(I’ll come back and further describe the valuations – I’m not at the right computer at the moment.  Suffice it to say that both GOK and HOS would have to more than triple from here to reach my calculated Intrinsic Value for them.).  One of them I recall has about 70% cash on hand.  Both have been able to grow Free Cash Flow very well over the last 10 years.  Below is a screenshot I saved of the spreadsheet showing Hornbeck’s last 10 years of free cash flow (Owner Earnings).  This is the type of company I’m looking for – positive, growing free cash flow.  I put the phrase “Can you Predict the Future” above the chart to remind myself to pass on any company that doesn’t look like I could make an educated guess about where it’s going – and that’s most companies.  I’d estimate that only about 1 in 20 companies I review have a chart that looks like this.

*HOS, Hornbeck Offshore

Most stocks display negative and inconsistent cash flows, and I simply avoid them.

Insider Buying:

Both HOS and GOK have had recent, significant insider buying.  Even better, these insiders have shown an ability in the past to purchase at very opportune times.

Technicals:

I’m now trying to use Demark Indicators to better time my entry into stock purchases.  Neither stock here is at a perfect buy point, but they’re close enough and I don’t want them to get away from me.

HOS, Hornbeck
GOK, Geokinetics

These are somewhat volatile small-cap stocks.  In a panic they could go lower.  GOK went as low as $2 per share in March 2009.  But within 1 to 2 years I believe they will be significantly higher.  Plus I’m buying with company insiders and I know what the stocks are intrinsically worth.   I’ll wait until the market reflects that.

Rockefeller once explained the secret of success. “Get up early, work late – and strike oil.”

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Return Of The Bear

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My excerpts from the Hussman Funds’ Weekly Market Comment (6/28/10):

[bold emphasis mine]

Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.

..the U.S. economy is most probably either in, or immediately entering a second phase of contraction. Of course, the evidence could be incorrect in this instance, but the broader economic context provides no strong basis for ignoring the present warning in the hope of a contrary outcome. Indeed, if anything, credit conditions suggest that we should allow for outcomes that are more challenging than we have typically observed in the post-war period.

..following systemic banking crises, the duration of housing price declines has averaged roughly six years, while the downturn in equity prices has averaged about 3.4 years. On average, unemployment rises for almost 5 years. If we mark the beginning of this crisis in early 2008 with the collapse of Bear Stearns, it seems rather hopeful to view the March 2009 market low as a durable “V” bottom for the stock market, and to expect a sustained economic expansion to happily pick up where last year’s massive dose of “stimulus” spending now trails off. The average adjustment periods following major credit strains would place a stock market low closer to mid-2011, a peak in unemployment near the end of 2012 and a trough in housing perhaps by 2014. Given currently elevated equity valuations, widening credit spreads, deteriorating market internals, and the rapidly increasing risk of fresh economic weakness, there is little in the current data to rule out these extended time frames.

In recent months, I have finessed this issue by encouraging investors to carefully examine their risk exposures. I’m not sure that finesse is helpful any longer. The probabilities are becoming too high to use gentle wording. Though I usually confine my views to statements about probability and “average” behavior, this becomes fruitless when every outcome associated with the data is negative, with no counterexamples. Put bluntly, I believe that the economy is again turning lower, and that there is a reasonable likelihood that the U.S. stock market will ultimately violate its March 2009 lows before the current adjustment cycle is complete. At present, the best argument against this outcome is that it is unthinkable. Unfortunately, once policy makers have squandered public confidence, the market does not care whether the outcomes it produces are unthinkable. Unthinkability is not evidence.

Based on our standard valuation methods, the S&P 500 Index would have to drop to about 500 to match historical post-war points of secular undervaluation, such as June 1950, September 1974, and July 1982. We do not have to contemplate outcomes such as April 1932 (when the S&P 500 dropped to just 2.8 times its pre-Depression earnings peak) to allow for the possibility of further market difficulty in the coming years. Even strictly post-war data is sufficient to establish that the lows we observed in March 2009 did not represent anything close to generational undervaluation. We face real, structural economic problems that will not go away easily, and it is important to avoid the delusion that the average valuations typical of the recent bubble period represent sustainable norms.

{comments on holding Gold right now}

From an inflation standpoint, is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That’s an economist’s way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller-coaster shortly.

In bonds, the Market Climate last week was characterized by moderately unfavorable yield levels and favorable yield pressures. Credit spreads continue to widen, and we’ve observed a flattening of the yield curve due to a flight-to-safety in default free instruments. This may seem like an odd outcome, given that the growing issuance of Treasury and Fed liabilities is gradually setting us up for a difficult inflationary period beginning in the second half of this decade, but it is a strong regularity that “default-free” beats “inflation prone” during periods of crisis. For that same reason, we have to be careful about concluding that the growth of government liabilities will quickly translate into continued appreciation in precious metals and other commodities. Again, the historical regularity is for commodities to decline, though with a lag, once credit difficulties emerge. My weekly comments on this front might be less redundant if there were more subtlety to the issue, but it is subtle enough to recognize that the long-term inflationary implications of current monetary and fiscal policies will not necessarily translate into negative short-term outcomes for the Treasury market, nor persistently positive short-term outcomes for commodities.

[Commentary]
I currently own no stocks, and the momentum system has me in long-term treasury bonds, which agrees with above.  Also agrees with my commentary on Gold.

I do plan on purchasing two new stocks tomorrow, which are too cheap to ignore and are already visiting their March 2009 lows.

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Dave’s Complete Guide to Value Investing

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I’ve been studying this for 20 years, and believe the following to be the shortest path to understanding and implementing a value approach to investing.

1) Begin with Buffet’s definition of Free Cash Flow, aka ‘Owner Earnings’:  Read the analysis of Appendix A to Buffet’s 1986 Shareholder Letter – Printed below is the formula:

“If we think through these questions, we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume.”

2)  Read Buffet’s early Partnership Letters:  Between 1959 and 1969, Buffet managed money thru several partnerships for friends, family and other investors.  These year’s were Buffet at his very best, achieving a 29.4% annual average return over more than a decade.  Buffet in effect ran a long-only hedge fund, using little diversification.  Each quarter during these years, he wrote a letter to the Partners, summarizing the partnership returns and his thoughts on investing. These letters are short, 1 to 5 pages each, a pleasure to read.  Through the decade you can see Buffet turn from a Ben Graham ‘Net Assets’ type investor into searching for predictable, undervalued firms with good management.  Although he gives little in these letters as far as number-crunching, the insights gained by reading his thoughts are invaluable.  There is no better way to learn than from the Master himself.

3) Read Chapters 8 and 20 of The Intelligent Investor, by Benjamin Graham.  Since it was first published in 1949, Graham’s investment guide has sold over a million copies and has been praised by such luminaries as Warren E. Buffet as “the best book on investing ever written.”  Considered the Bible of investing, Buffett is very particular in giving special mention to Chapters 8 (The Investor and Market Fluctuations) and 20 (Margin of Safety as the Central Concept of Investment). The common theme between them is that they explain how an investor should think, behave and act as would an intelligent businessperson. In Chapter 8, Graham’s gives his famous parable of ‘Mr Market’, the investor’s manic depressive, but very accommodating, business partner:  ‘Every day he [Mr Market] tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.’  If you are a ‘prudent investor or a sensible businessman’, you will not let Mr Market’s daily mutterings influence your view of an investment’s worth. Instead, you’ll simply take advantage of him when he’s getting it wrong. But here’s the hard part—Mr Market might go for a long time without offering you an attractive deal and you will have to wait patiently for opportunities to arise.  Having established that stocks should be valued according to business principles, Graham takes the idea further in Chapter 20, where he explains that they should only be bought when they are priced substantially below their intrinsic value. Indeed he considers this principle to be rather important, as you can tell from the grand opening to Chapter 20:  ‘In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass”. Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.’  The idea is that a sensible businessperson, when making investments, will have a margin of safety available ‘for absorbing the effect of miscalculations or worse than average luck’—and so too should the prudent investor.

4) Read the original Buffetology, by Mary Buffet.  Written by Buffet’s former daughter-in-law, the book is an excellent outline of Buffet’s thinking, his focus on predictable companies, and more importantly, introduces the concept of forecasting future cash flows and discounting them to the present.  Here’s an important caveat: while reading the book – each time you read the word ‘earnings’, think ‘free cash flow’ – as explained in this Gurufocus article.  Buffet would never use Wall-street-type reported earnings when valuing a company.

5) Read all of the blog articles on the F Wall Street website.  After reading Buffet’s early Partnership letters yourself, you’ll be well-prepared to more fully understand value investing with Joe Ponzio as your guide.  Joe takes actual Buffet quotes and shows how they are applied to value investing.  He’s written over a hundred articles on the subject.  You could buy his book, but it doesn’t replace all the wonderful articles.  Read ALL of them.  No cheating yourself, read them all.

6) Study Aswath Damodoran’s website for a more complete definition of how to calculate Free Cash Flow (FCF).  Dr. Damodoran is a professor at NYU Stern School of Business.  He publishes much of his work online.  It is a confusing website to navigate, but worth the trouble, with many pdf docs, presentations and downloadable spreadsheets.  At this point you will develop a deeper understanding of Free Cash Flow.  Supplement this with Warren Buffet’s descriptions of ‘Owner Earnings’ as mentioned in his annual letters, notably his 1987 letter.  Buffet calculates what he calls ‘Owner Earnings’ as his estimate of FCF.

7)  Choose stocks from any of your favorite Value-based screens.

8) Calculate the prior 10-years worth of FCF, ROIC, profit margin, Book Value and other important financial metrics for your stock.  If 10-years of data is not available – move on.   There are thousands of companies out there, we’re looking for ‘Great companies at Good Prices’ – those who have shown the ability to grow FCF over the past 10 years.  We can’t predict the future if we cannot see the past.

9) Using Warren Buffet’s concept of the ‘3 Pillars of Value’, analyze Pillar #3: Management Effectiveness.  This is the more qualitative pillar to judge whether you’re looking at a ‘Great’ company.  Review 10 years of FCF growth, ROIC, proft margins, growth in book value, use of debt, etc. Also visit the company website or other sources to form an educated opinion.  Only move on to the other Pillars of Value if you are dealing with a great company.

10) Pillar #1: Cash on Hand:  Calculate the Cash, Cash Equivalent, and Marketable Securities per Share.  This gives you the current cash balance of the stock.

11) Pillar #2: Discounted Value of future Cash:
a) Project your stock’s FCF out 10 years into the future
b) Discount all future cash flows back to the present at the desired investment return (I use 15% per Buffet 1994).  Include an allowance for the Terminal Value.
c) Divide the Present Value of the future FCF’s by the number of shares outstanding.  ‘
i) double-check your ‘number of shares outstanding’.  Make sure the stock has not recently split – and is not yet accounted for in most recent financial statement.

12) Sum together the per share values of Pillar #1 and Pillar #2.  This is your ‘Intrinsic Value’ of the stock.  We don’t want to buy at this price though.

13)  Before purchasing:
1) check footnoted.com and Citron Research for signs of any really bad behavior by management; and
2) check secform4 for any positive insider buying.

14) If your stock is selling at a reasonable discount to it’s Intrinsic Value (say 25 – 50%), buy it.  The 25-50% discount is your ‘Margin of Safety’

14) Now ignore the stock market.  Hold your stock until the market reaches Intrinsic Value, then sell.

I’ll add more into this as time permits.  I use an Excel spreadsheet I created to download data via the SMF Add-In.  One day I may offer this spreadsheet for sale, but I consider it the most important work I’ve ever done, and want to keep it private for now.

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The Long Term Dow/Gold Ratio

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The Long-term Dow/Gold Ratio

If you bought GLD as a longer term investor in precious metals, or are holding on to gold bullion coins, I can give you a good inference on when to sell:

The Dow/Gold ratio contrasts economic growth and prosperity with inflation and an undermined currency.  Despite some commentators opining that the US economy is recovering, the fixed income holdings of the US Government and its on and off-balance sheet liabilities (such as Social Security and Medicare) will prevent the Federal Reserve from tightening monetary policy enough to control inflation.   As a result, we will have negative real interest rates, and inflation hedges will outperform economic growth which will lead to a decline in the Dow/gold ratio, providing significant upside for gold relative to stocks.

Whether stocks fall as gold rises, gold soars as stocks stagnate, or both stocks and gold go up or down together, the ratio will inevitably bottom somewhere between 1.0 and 5.0 much  just as it did in 1932 and 1980.  A safe bet is that this ratio ends at around 5.0 (see lower trend line in chart below).  If the Dow stood still from here, that would mean a gold price of around $2,000 per oz.  Many gold bulls of course are calling for an even higher gold price, but 5.0 seems to be a safe call at the least.

via Sharelynx.com

Dow Gold ratio

With the financial and fiscal imbalances of the US what they are today, a decline in the Dow/Gold ratio to that level is logical.

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Momentum Optimization Using Tom Demark Signals

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or “Why the first week of May was so bad in the Markets.”

Since last summer I’ve been successfully trading  a new momentum system.  5 of first 6 trades were profitable, trouncing the S&P 500 return – even from the bottom of last year’s bear market.  These trades can be seen (and followed) in the spreadsheet I keep at the bottom of my home page.  On April 22nd of this year the momentum system switched into IWN – the Russell 2000 Small Cap Value.  Over the next month (which included the fateful first week of May) IWN proceeded to fall straight down by 9%, before the momentum system switched into another ETF.

That’s the danger of momentum – it cuts both ways.  Or as they say, “The trend is your friend – except when it ends.”

Despite this unprofitable trade I am still well ahead of the market with my momentum trades, and I expect this will be a successful system for the future.  But the loss got me researching ways to determine when Momentum is slowing – which led me into the trend exhaustion studies of Tom Demark.

Tom Demark has served as a consultant to such high-powered hedge fund managers as George Soros, Paul Tudor Jones, and Steven A. Cohen.  The Demark indicators are sophisticated market-timing tools, designed specifically to anticipate trend reversals.  And unlike much of technical analysis, they are mechanical, with less debate on whether a buy/sell signal has been sent.  On this site I’ve devoted a lot of posts to Tom Demark where I am capturing as much as I can find of his work, along with my notes.

Two of Demark’s most popular public indicators are TD-Sequential and TD-Combo.  Both indicators include a ‘Setup’ phase, and a ‘Countdown’ phase.  Setups are the shortest in duration, lasting for exactly nine price bars when completed. For example, a buy Setup exists when there have been nine consecutive price bars in which each bar’s close is lower than the close four price bars earlier. When a price bar closes below that of four price bars previously a ‘1’ appears below the bar.  If the next price bar also closes below that of four bars earlier a ‘2’ appears and so on. If before price bar 9 is reached a price bar fails to  close below that of four bars previously then the Setup is abandoned and the numbers are automatically deleted. Once nine consecutive price bars have been completed the trader will be looking for a “perfected”  Setup; one that is now valid for trading. A buy Setup is perfected when the low of either price bar 8 or 9 (or one that follows) is less than the lows of both price bars 6 and 7. Perfected sell Setups look for a high of either price bar 8 or 9 (or one that follows) that is greater than the highs of both price bars 6 and 7.

The ‘Countdown’ occurs after a completed Setup.  A sell Countdown consists of 13 price bars whose close is higher than or equal to the high two price bars earlier.  Unlike the Setup, the Countdown doesn’t have to consist of consecutive days.  The Countdown is a bigger pattern than the Setup in that it can take months for a Countdown to form and often signifies a larger market move once the trend changes.  Like the Setup, the Countdown also has a “perfection” criteria.  For a sell Countdown this requires that the high of price bar 13 be greater than or equal to the close of price bar 8 (reverse is true for Buy Countdowns).  There is also ‘Perfection’ criteria for the Countdown, where high of bar 13 is above the high of bar 8 for Sells (13 low below 8 low for Buys).

The only difference between TD-Combo and TD-Sequential is where you begin the Countdown.  TD-Combo begins the Countdown on bar 1 of the Setup, whereas TD-Sequential begins the Countdown only after a completed Setup (no sooner than bar 9).

One pattern that is not often seen, but sends a powerful message, is the TD-Sequential 9-13-9.  This is a standard TD-Sequential signal which is then followed by a price flip and then another 9-bar Setup phase.

I am no expert on Demark, but I wanted to share a study I’ve done on IWN in the chart below.  If I had been looking at this chart on April 22nd, I would have known to avoid this fund -with extreme prejudice.  I could have saved myself an unprofitable trade, and conserved cash for the new top fund once the momentum system switched.

The End of the Trend
2 Years of the Russell 2000 Value Fund below.

Demark Combo, Sequential

That terrible first week of May was what’s known as a ‘Price Flip’, where the trend changes direction and closes below the close 4 bars earlier.  After such a long 1-year development of the TD-Sequential 9-13-9, in particular one that did not break thru resistance, it is not surprising that we had such a significant turn.

One could have used these systems to buy exactly at the March 2009 low, and sell at the April 2010 peak.  Maybe that’s why the likes of George Soros and Steven Cohen keep Demark on retainer!

The last 2 years of the S&P 500 and several other indices look similar to above.  This gives quite a bit of technical support to arguments a new leg of the bear market has begun.  Using other Demark tools such as his TD-Retracement and Range Projections, we can forecast where we can expect the next lows to be.

I plan on continuing to study Demark and apply his principles to my momentum portfolio, so I’ll have notice next time it is clear that the trend is at the end.

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Living And Learning With Tom Demark Indicators

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“The trend is your friend – except when it’s about to end!”

I sold my 3 remaining stocks today, CCL, JCOM and WDC.  Two were sold at a profit (CCL and JCOM), while WDC was sold at a loss.  On average the three stocks beat the return of the S&P 500.  I did not hold these positions long (4 to 7 months), and all 3 were still below my estimate of Intrinsic Value.

So what made me sell?

For one, some of the smartest market minds I know (ie. John Hussman, Richard Russell, Eric Janszen, John Mauldin, Mohammed el-Arian) are saying that the Bear is back – and stocks in general are headed much lower.  I’ve posted several of their articles on this site, and here’s a link to a recent Hussman article Don’t Mess with Aunt Minnie  where he gives a warning similar to his December 2007 call just before the last bear market.

But market forecasts are often wrong.  People will always be forecasting both bull and bear markets.  My intention with my individual stock holdings was to ignore these calls, and hold good stocks thru thick and thin, bear and bull alike – until one day the market recognizes their intrinsic value.

The reason I sold the remaining 3 stocks was that I’ve been reading the work of Tom Demark.  Tom Demark is a technical advisor to some of the largest trading operations in the world, including Tudor Group and SAC Capital.  His most popular public model is called TD-Sequential, and is designed to “Buy on Weakness” and “Sell on Strength” by identifying what he calls ‘trend exhaustion’.  It can be applied to any time interval, from intra-day, to daily/weekly/monthly.  It is said to be more than 70 – 90% accurate, whereas most technical analysis indicators are less than 50% accurate.

In the ‘Wealthy’ section of the site you’ll see I’ve devoted a page to Tom Demark in order to capture everything I can find about his systems.

The TD-Sequential indicator

Setups

The TD Sequential Indicator consists of two patterns, a TD Setup and a TD Countdown. Setups are the shortest in duration, lasting for exactly nine price bars when completed. For example, a buy Setup exists when there have been nine consecutive price bars in which each bar’s close is lower than the close four price bars earlier. When a price bar closes below that of four price bars previously a ‘1’ appears below the bar.  If the next price bar also closes below that of four bars earlier a ‘2’ appears and so on. If before price bar 9 is reached a price bar fails to  close below that of four bars previously then the Setup is abandoned and the numbers are automatically deleted. Once nine consecutive price bars have been completed the trader will be looking for a “perfected”  Setup; one that is now valid for trading. A buy Setup is perfected when the low of either price bar 8 or 9 is less than the lows of both price bars 6 and 7. Perfected sell Setups look for a high of either price bar 8 or 9 (or one that follows) that is greater than the highs of both price bars 6 and 7.

When looking at a Weekly time frame, The TD Setup is often the only pattern you need to follow.  Looking at my purchase of CCL (Carnival Cruise Lines) – which I bought last fall at $31.29, you can see it completed a TD-Setup pattern this spring (week of April 19th, 2010).   Based on this indicator I should have sold the following week, which would have been at the 52-week high.  I would then sit in cash and wait for the next TD-Setup pattern (this time for a Buy) on this stock.  Nevertheless, this was a profitable trade for me, though not at the yearly high.

CCL, Demark

The second stock I sold today was JCOM (j2 Global Communications).  JCOM was purchased on February 1st, 2010, during what turned out to be Week 2 of a TD-Setup.  It was good – if lucky – timing.  The Setup was completed the week of March 22nd.  One method of assuring the trend is over is by waiting for a Trend reversal, or Flip Week, where in my case the price closes lower (for a Sell Setup) than the price 4 bars earlier.  This occurred the week of May 3rd and is indicated on the chart below.

jcom, demark

My third and final stock sale of the day was WDC (Western Digital Corp.)  It was sold at a loss, and according to Tom Demark Indicators, it never should have been purchased in the first place.  To see why, we need to learn about the second half of TD-Sequential, called ‘Countdown’.

Countdown

A TD Countdown occurs after a completed Setup.  A sell Countdown consists of 13 price bars whose close is higher than or equal to the high two price bars earlier.  Unlike the Setup, the Countdown doesn’t have to consist of consecutive days.  The Countdown is a bigger pattern than the Setup in that it can take months for a Countdown to form and often signifies a larger market move once the trend changes.  Like the Setup, the Countdown also has a “perfection” criteria.  For a sell Countdown this requires that the high of price bar 13 be greater than or equal to the close of price bar 8.

As seen in the chart below, prior to my purchase on February 1st, 2010, WDC had completed a full TD-Sequential Sell signal in the prior year – ending the week of November 9, 2009.  According to Demark, this is a powerful sell signal and we should not purchase this stock until the current situation is cleared by a new TD-Sequential Buy signal.  My purchase on February 1st, 2010, violated this rule, and not unexpectedly I suffered a slight loss with the sale today.

demark sequential

 

[Note to Self]  If Countdown is counted High vs High 2 bars ago (instead of Close-High), then WDC actually completed a TD-Sequential 9-13-9 signal on Dec. 31, 2009, which remains the high for past year.  (This is not shown on chart)  The 9-13-9 signal is a very powerful trend exhaustion signal.

Many analysts calculate the Intrinsic Value of WDC to be above $100 per share.  So it would seem that buying  (or holding) today at $33 is a bargain.  But Tom Demark would say that a better entry point lies in the future for this stock.

The Future
Do I plan on following these Demark Indicators all year long with each stock, trading in and out?  No, not exactly.  These 3 stocks were sold today based on my readings of the market environment, in addition to the Demark Indicators.  I don’t wish to do too much trading, I’d rather buy and hold for a 1-2 year period until the value is recognized by the market.

My plan is to use the TD-Sequential (and other Tom Demark Indicators) to find low-risk entry points for new stocks (and avoid High Risk entries like WDC).  In addition to these 3 stocks, I have several other stocks which have recently fallen below Intrinsic Value – but I’m watching and waiting for the Demark Indicators to tell me when to enter.

Live and Learn.

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Mr. Market Beats the Bailouts (Why there’s no fixing this financial fight)

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Well, the fans are getting their money’s worth. After staggering through the last four or five rounds, the Dow suddenly came back to life yesterday.

It got up off the mat. Straightened its shorts. Did a little dance. And then wham… By the time the bell sounded, it was up 284 points.

Gold ended the session almost unchanged.

So what do you think? Who’s gonna win this match? Mr. Market? Or the fixers?

We’ll tell you: Mr. Market.

We don’t know how. We don’t know when. But we know two important things:

First, the fixers don’t know what they’re doing.

Second, what MUST happen WILL happen.

Bernanke and Geithner tried to fix this fight. But the fix wouldn’t stay fixed. Each time they proclaimed victory, along came new evidence that Mr. Market wasn’t giving up. And for the last couple of weeks, Mr. Market seemed to have the fixers on the ropes.

The fixers tried all the usual tricks – cheap money, bailouts, and boondoggles. In fact, they used more tricks and fancy footwork than anyone ever had before. Still, the economy barely responded.

And now, the latest figures show that the ‘recovery’ isn’t developing as it was supposed to. Trillions of dollars’ worth of stimulus and there are still 11 million unemployed and 40 million people on food stamps.

An IMF economist says he thinks real estate prices are headed lower. Inventories of unsold houses remain extremely high. Foreclosure rates are at record levels.

The job picture is disappointing too. With the government spending so much money, you’d think we would see a big improvement. But, by and large, people who lost their jobs in the crisis of ’07-’09 are still out of work. Many of their jobs were not merely put on hold – they were eliminated forever. And the economy is not creating many new ones.

Economists believed that a falling dollar would help US exports…increasing employment in the US. But when Europe got into trouble, the dollar went up! Americans felt the warm glow of schadenfreude. But the falling euro is great for Europe and a disaster for the US. Germany was already one of the top exporters in the world. Now, Germany is exporting even more. And US employment is still sinking.

Consumers are ready to spend. They’re willing. But they don’t have any money. We reported yesterday that people are earning less of their money from the private sector than ever before. The rest of their spending money comes from the government. They’re called ‘transfer payments’ – money that is transferred from one person to another. You see the trouble right there. If you have to transfer the money from one citizen to another, there is no net gain.

In fact, there is a net loss. Anytime you take money away from people who’ve earned it…and give it to people who didn’t…you are asking for trouble. Don’t believe it? Try it in your neighborhood. Let us know how it works out.

Of course, the fixers have no idea what they are doing. All they have is a crackpot theory about the way an economy works. They stick with it despite the fact that it makes no sense in theory…and has never actually worked in practice.

In the real world, Mr. Market always wins. He always wins because he IS the real world.

You can’t fix fights in the real world of economics. You’re wasting your time trying.

Porter Stansberry, via The Daily Reckoning

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Richard Russell: Get Out Of Stocks Now

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The author of the closely-watched Dow Theory Letters newsletter warned investors to get out of US stocks now in a report published Tuesday.

“Just as for years I asked, cajoled, insisted, threatened, demanded, that my subscribers buy gold, I am now insisting, demanding, begging my subscribers to get OUT of stocks (… not including golds) and get into cash or gold (bullion if possible). If the [Dow Jones Industrials and Transports] violate their May 7 lows, I see a major crash as the outcome…”

“… Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.

Richard Russell wrote that there is a risk of a “major crash” if the Dow Jones Industrial Average falls below the May 7 closing price of 10,380.43, according to several media reports.

“If I read the stock market correctly, it’s telling me that there is a surprise ahead,” Russell wrote. “And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.”

via The Daily Crux

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Getting Good Businesses At Cheap Prices

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By Dan Ferris in the Extreme Value Weekly Update:

Your letter is called “Extreme Value”. I don’t consider [blue chip stocks] to be generators of great value. How can they be. Extreme value occurs in the early stages of a stock’s growth. It’s a mathematical law. How can [these stocks] ever grow exponentially? – Paid-up subscriber H.M.

Ferris comment: I’m not sure what you’re describing, but it isn’t value investing. Nor is it Extreme Value investing. A company’s market cap has nothing to do with how much value it creates. Nor does value investing have anything to do with a focus on early-stage growth companies or exponential growth. Early-stage companies are risky bets and difficult to value. It’s highly unlikely any such company will never make its way into these pages.

Extreme Value means getting the best possible assets and businesses at the cheapest possible prices. When you’re buying [the No. 1 Extreme Value stock’s] cash and securities at a discount and getting its massive upside and the services of its stellar management free of charge, you’re doing Extreme Value investing. When you buy [the No. 2 Extreme Value stock], the most cash-generative business in the world, at 10 times free cash flow, you’re doing Extreme Value investing. When you recognize the substantial value created by dominating 80% of the global market for semiconductors and understand Intel sets the pace for innovation in its industry, paying 13 times free cash flow, that’s Extreme Value investing. When you buy a business like IMS Health, which has a one-of-a-kind database that’s been 50 years in the making, and now tracks 90% of the prescription drug transactions in the U.S., and you see it trading for less than five times free cash flow, you’re doing Extreme Value investing.

If you want a quick gauge of how much value a business generates, look at return on capital. World Dominator stocks generate high returns on capital. [Our No. 2 stock] requires little capital and generates more cash than perhaps any business on Earth. [Another of our World Dominators] is in a capital-intensive commodity business, and management still achieves high returns on capital. It’s impossible for the business to not generate huge amounts of value.

When the greatest businesses in the world trade at deep discounts to intrinsic value, the situation is the opposite of what you’re implying. Such stocks bought at such prices contain the potential to generate more risk-adjusted value to shareholders than any other stocks in the world. World Dominators are the most valuable businesses in the world. When you can get the most valuable businesses in the world for substantially less than they’re worth, it generates tremendous value for you as a shareholder.

You should read Joel Greenblatt’s book, The Little Book That Beats The Market. It’s a great way to learn what value investing is about: getting good businesses at cheap prices.