Rallies Make You Rich, No Matter What the Type

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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While the major indices were flat yesterday a lot was going on below the surface in the market. Oil went on another incredible roller coaster ride, opening way down, getting close to even and then closing with smaller losses. It's back above the breakout point again in European trading this morning. A lot of small cap stocks, including some oil and gas drillers and producers, had major rallies yesterday however. In fact, the beaten down inexpensive under $5 stocks - the ones that almost every financial advisor tells you categorically to avoid are the stars of this rally. This is nothing new, its always the case in short-covering, technically based rallies.

Oil is repeating the behavior pattern at $50 that took place when it traded around $40. It went above $40 and was driven back below it over and over again. The oil "experts" were repeatedly quoted in the media that a price over $40 couldn't be justified. Oil would then go below $40 and would shortly thereafter bounce right back above it. It then shot up to $45, which the "experts" said was too high. It then promptly went to $50. Yesterday was the 4th time light sweet crude was driven below the key $50.50 breakout point. This morning in European trading it shot back above it. The market has continually shown that the oil "experts" the mainstream media quotes are wrong. Nothing succeeds like failure in financial media coverage however (much like in Washington, D.C.). The media seems to seek out "experts" who have never made a correct prediction in their entire careers.

The "experts" will also tell you not to buy stocks under $5 and stocks that have had huge price drops because they are unsafe. Better to stick with 'sure things' like Enron and those Bernie Madoff funds instead. When the market has has a major drop, buying low-priced, beaten down stocks are the key to making the most money in the rally that follows. Just make sure the company is financially viable - a current ratio around 2.0 and positive operating cash flow are the signs the company is likely to continue its operations. Low or no debt is even better, but not necessary. Running out of cash and failure to make debt payments is what drives companies into bankruptcy. On a fundamental basis, you can find a number of low-priced stocks that have very low price earnings ratios, price to book values well below one and even with price cash flow ratios below one (the price is below the amount of cash generated for the most recent year). There are also stocks with real dividends above 20%. These stocks are major bargains by any criteria. Oil and gas, coal (even in its bright, shiny form), and shipping are the richest source of these stocks. There are a few bargains in technology as well.

Yet is the mainstream media telling you to buy, buy, buy? Not at all. It is filling you with fear and telling you this is a suckers rally. Every rally is actually a suckers rally however. In a bull market, the suckers are the people who buy and then hold. In a bear market, its the people who sit on the sidelines and don't buy at the bottom or close to the bottom or even after the market is off the bottom because the financial media is warning them about losing money. If you are doing this, just remember every major financial publication had nice things to say about Enron. How much money do you think you'll make if you follow the investment advice of those people?

NEXT: The Deflation Boogieman, Oil and Intel

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

How to Handle Earnings Season

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Earnings season officially begins today with Alcoa's earnings after the bell. While some company earnings are released every day, there is a huge bulge of announcements in the two weeks following the 7th of the month at the beginning of a quarter. Dow component Alcoa kicks off this period. While earnings are likely to be almost universally bad this doesn't mean that stock prices will go down. They may indeed go up.

Everything is relative on Wall Street. Any information that is known or suspected has already been incorporated in the price of a stock. Since the market overall fell from October 2007 to March 2009, a lot of bad news is reflected in current stock prices. So much so that anything short of a declaration of bankruptcy will be bullish for some stocks. The mainstream media will not emphasize this however and as it is doing today will write articles how earnings will be bad for last quarter. Since this is already known, your reaction should be that everyone already knows that so why are you wasting my time telling me about it. Only if earnings are worse than expected are they likely to be negative for stock prices (for more than a day or so).

If you are holding company stocks like Alcoa (AA), you have two choices. You can sell before the earnings announcement and buy back after or just hold through it. This decision isn't always clear cut. Having bought AA just off the bottom and having a nice profit it in in just a short time, I chose to sell it with the intention of buying it back. The market has had a sharp up move in the last 3 weeks and it vulnerable to a drop this week in general, so AA's earnings are coming out during a period of weakness. The market reacted quite negatively (at least for a short time) to Chalco's (the Chinese Aluminum company) earnings and negative description to the aluminum industry several days ago, so it is not unreasonable to assume a short negative reaction for Alcoa as well. Of course, Alcoa could surprise on the upside, it which case I would wait a few days for a pull back to buy it.

In general, I am still looking to buy beaten down stocks in a some commodity sectors (not copper since is has rallied since last fall, I also sold my FCX holding recently) and a technology stock here or there and will view a drop on earnings as an opportunity to get a good price. The market is filled with under priced bargains at the moment (some stocks are even selling for less than their yearly cash flow). You should look at anything that will do well in a high inflation environment and avoid the financial sector, where a low price these days usually indicates cheap goods as opposed to a bargain. It is important to know the difference.

NEXT: The News is Bad ... Time to Buy

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Next Few Trading Days Are Important

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Money moves around at the beginning of a quarter. Look for shifts in the next few days. You want to observe whether money is flowing into the market overall or are people taking money out and selling. If the market goes up, the big money has become more confident and the rally is going to continue for awhile. It is even more important to note which sectors have money moving into them and which sectors are selling off. The three most bullish sectors of the recent rally have been financials, basic materials and technology. You would like to know if this is continuing or are other sectors getting more fund inflows.

The news backdrop may color the picture somewhat however. The G20 meeting is on Thursday and the possibility of fireworks exists. The Jobs Report is coming out Friday and the consensus is that it will be quite ugly. While this may seem like it will be negative for the market, it may not be. When people are expecting the worse, even something slightly better can be considered bullish and make stocks go up. And as we have stated many times in this blog, the U.S. government is not beyond manipulating its economic statistics to make them look better. The market, at least up to this point, takes these reports at face value no matter how absurd they might seem. The latest incarnation of this behavior has been in the seasonal adjustment figures which have recently been quite sizable and always in the direction of making things look better.

The market was filled with panic selling yesterday. I usually look at this behavior as an opportunity to buy and I did pick up some commodity stocks that had big sell offs. So far, yesterday looks like just another typical Wall Street shake down. Investors who got in at good prices are scared out of the market, those that haven't are frightened away. The big money buys the stocks the small money is selling. Take a look at the press coverage yesterday and you will see that it is overwhelmingly negative and one-sided. Many important facts are left out. This is not the coverage you typically see when the market is going to have a serious sell off. Media pundits tell you to get into the market to catch the next move up when the market is actually turning down. Wall Street is busy selling at that point - and they want you to buy.

The market is filled with bargains right now. If you concentrate on buying stocks in the commodity sector and beaten down stocks in industries that deal with the production or movement of tangible goods that are necessities or pervasive, you will make money. This is where you will get your biggest bang for the buck when inflation hits. And don't worry, expect the mainstream media to inform you in a year or two that this is what you should have been doing in early spring 2009.

NEXT: Surgery Done by a Bull in a China Shop

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.