My thoughts and journal

Maybe it’s because I grew up as a poor country boy, but I hate to overpay for something. I like to spend money and reward myself for my hard work, but I can’t stand overpaying. I feel the same way about buying a stock. I want to own the leading stocks in the leading groups, but I don’t want to overpay for them. The best way to see the real price you pay for a stock is by looking at the Price to Earnings Ratio. The core of my trading is based upon William O’Neil’s CANSLIM methodology, but this is one area where I do not concur with his advice. I look at the PE ratio as an additional form of leverage I can employ to my advantage in a growth stock, let me explain. A stock’s price can really go up (long term) for only a few reasons. The major reason is an increase in earnings which makes the underlying shares more valuable. If a stock has earnings of $1.00 per share and has a PE of 30 it will trade at $30.00 per share. If the stock grows at 30% the earnings will be $1.30 the next year and assuming the same PE the stock will trade at $39.00 per share. A nice gain of 30% will be shown on your account. However, if you find a stock that is under owned by institutions the same stock might have a PE of 10 and thus it will be trading at $10.00 per share. It is also growing at 30% per year, but you find it before Wall Street. Once Wall Street does get turned onto the stock there is likely to be a rapid inflation of the PE. By the end of the year perhaps the PE is up to 18, and so having grown earnings to $1.30 you are now sitting with a $23.40 stock. So here by focusing on the leverage a low PE can provide you, you have gained 134% as opposed to 30%. I will trade stocks with high PE’s, I will not invest in them.

The major indexes started off slightly lower on Friday, but technology stocks soon recovered their footing on positive economic data and lead the market higher. The NASDAQ Composite gained 24.07 points to close at 2,085.34, while the S&P500 gained 10.69 points and closed at 1,184.17. Volume was heavier across the board, 1.99 billion shares changed hands on the Nasdaq, an increase of 14%, while on the NYSE 1.53 billion shares traded, an increase of 10%. Market breadth was very positive, with advancers leading decliners on the NYSE by 3 to 1, and on the NASDAQ 19 to 12. Jeff Semmel’s Tradingscans.com is showing 416 one month highs and only 10 one month lows. This is showing us an extremely positive tape.

I think that the market is very healthy at this point, but it needs to rest a little more than it got. This of course does not mean we can not or will not go higher, it just tips the risk scales in a slightly less favorable direction. I currently have 60% long exposure, which is fairly high for me. Should the markets get a better resting period I will increase it slightly. For the most part I will continue to work with the list of leading stocks I have been giving here for the last month or so.

Leading stocks: EWA, EWA, EWC, IWD, IWS, GGC, UPS, UTIW, VIP, CME, HMT, ABFS, CREE, MRVL, PGR, FPIC, RSTI, CNCT, NATR, JOE, AAPL, WYNN, CME, PAAS. Oil stocks are starting to give potential setups on the long side, IYE for example looks great. If the price of Oil heads higher again and stays there, that is a major negative for the market. Short of another terrorist attack I see Oil as the major risk we face at this point for the market. AIG looks like a great short. I think it has about a 30% chance of working out if it breaks lower, but we have about 50 cents of risk and $5 + in upside. I’ll take that trade every day.

Brandon

PS, I’m going to start sending out specific picks and a portfolio for paid members starting on January 3rd. It will look like the write up on NATR which was in the 31st of October.

 

Im glad to see people are reading it. I was starting to wonder. No one is even flaming me..wow.

Brandon

 

This is about buying strong stocks in strong groups, the IBD 100 etc.

I talk to people all the time who are getting killed taking this stuff 100% literally. Buy the #1 strongest stock in the #1 strongest group. The only thing that this is every going to do for you is to insure that you are buying the most overpriced stock in the most overprice group. Not only that you will be buying it at the point that it is at its most over bought. Its not a good way to make money. I subscribe to smartlink and look at the IBD100 every day, but I rarely ever buy any stocks on it unless i have established positions in them before they made the 100. The list is good to look at though for pullbacks in those names.

Brandon

 

I have always been a sucker for a good cause, especially if that cause is a child. It is so often said that people don’t even pay attention to it anymore, but a child represents the entire of humanities future. As such we must do all we can to help children throughout the world grow to their potential greatness, for if we don’t they can grow to their fullest potential in terrible ways. In my own life Toni and I have been foster parents to abused and neglected children and we have paid scholarships for handicapped children to get extra attention and for poor rural kids to go to college. I have been blessed in my life, but only because there were people in my life when I needed them. The other day I came across a site, http://www.operationiraqichildren.org, that has great appeal to me for a many reasons. It is my personal belief that we are doing the right thing in Iraq, and I have two brothers in military that are in Afghanistan and Iraq. I believe that one of the things we can do to make them safer, and the entire world a better place, is insure that the future generation of Iraqi’s has an opportunity to expand their mind beyond the hate and suffering they have endured for so long. I provide this commentary for free to anyone who wants to read it, and I hope it provides some value to you as your manage your own portfolio. If you agree, please contribute to the future of a child with your time or your money. It does not have to be the site I mentioned above, there are many other organizations, both domestically and internationally, that greatly need our assistance.

So, I’m sitting here trying to come up with something new to say about the market that I have not repeated over and over again for the last few weeks. I decided to sleep on it, and I still can’t really come up with anything. The market looks great, my only concern is that it has yet to meaningfully pullback since it started to rally three weeks ago. Nothing ever moves in a straight line in the market, and when it does, often it will go in a straight line back the other way. Of course the other reason I want to see that pullback is so I can get a larger long position on than the one I currently have. Yesterday I did put on a small short position in the SMH, this is more of a pain hedge and does not mean that I am bearish. It is simply a position I put in because I do think we are overbought and need to pullback. This will give me some padding if the market pulls back, and if it does not my accumulated profits on open positions are more than enough to offset any loss I get on a stop.

Leading stocks: EWA, EWA, EWC, IWD, IWS, GGC, UPS, UTIW, VIP, CME, HMT, ABFS, CREE, MRVL, PGR, FPIC, RSTI, CNCT, NATR, JOE, AAPL, WYNN, CME, PAAS. Oil stocks are starting to give potential setups on the long side, IYE for example looks great. If the price of Oil heads higher again and stays there, that is a major negative for the market. Short of another terrorist attack I see Oil as the major risk we face at this point for the market.

 

Hedonic Adjustment, I didn’t make it up and you should write it down. Sometime in the future Hedonic Adjustment is going to be a bigger story than Enron, Global Crossings, Worldcomm, and Martha combined. In 1996 a Presidential Commission stated that the government had been reporting cost of living increases improperly and they created a new method to track inflation. Using the Hedonic Adjustments has allowed the Budget Office to report that price increases are much less than they really are. The price of a car, for example, is not up all that much because cars are now much more comfortable, and that must be taken into account. Likewise the cost of gasoline is hardly up at all, after all we are getting much better gasoline now. Nearly 60% of the figures that go into the calculation of the Consumer Price Index are now Hedonically Adjusted.

Why would the Government propagate such a tall tale? Because using Hedonic Adjustments allows the government to keep cost of living increases very low for industry and in programs like Social Security, and this makes it easier for the government to balance the budget, not that they seem to be trying to do that anymore either. It can safely be assumed that eventually nearly the entire CPI will be hedonically adjusted, after all it makes things easier for the government without really having to do anything. Eventually this “little secret” will become widely known, and when it does it will cause some big problems.

On Wednesday NYSE volume increased 24% from the prior session to 1.68 billion shares, while NASDAQ volume increased 18% to 2.22 billion shares. The S&P500 increased 6.51 points to 1,181.94 while the Composite gained 21.05 to close at 2,099.68. On the surface these numbers look as though the market is just going to go straight up forever, but if you look at the action I suspect that we may finally get our long awaited pullback. The reason I say this is the at the day started off very strong and then we sold off into the close. Typically the action into the close is the most important.

Despite Hedonic Adjustments I remain for the time being quiet bullish on US and Global Equities. There remains some shock risk, mostly in the form of a potential terrorist attack, but that has been there for some time now. I continue to be interested in strong growth stocks on pullbacks. Currently I have taken some profits off the table and am looking to reload on stocks at lower levels.

Brandon

 

So I guess you wont be answering my question?

 

Sorry, I didnt know you really had a question as your normal objective seems to be bashing me. However, the majority of my exposure has been long since the end of September, heavily so since the end of October. Now its less so again.

Brandon