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  • Trade Value & Fundamentals not Technicals

    It is my belief that the market is efficient in the long run. However, in the short run there is ample evidence that proves that the market is inefficient. One word alone proves this point; bubbles. Real estate, internet, commodity, and many more bubbles would not exist if the market were in fact efficient. Occasionally the market is literally rigged as was the case when the big banks were failing to accurately report CDS, MBS, and CDO prices right before the 2008 debacle as noted in the bestselling book, “The Big Short” by Michael Lewis. Despite this short term inefficiency in the market, fundamental analysis and hard work win out in the end.

    I have yet to read one legitimate academic paper that shows technical analysis predicting asset price movements with any level of statistical significance or confidence. Plenty of papers are out there showing that something as simple as buying low P/E stocks, say the lowest 20% at any given time, and holding for X amount of months or years generates alpha at the 95% confidence level. The same cannot be said for anything involving technical analysis. Analysts look at the 50 and 200 day moving averages for example and if the 50 crossed the 200 and the stock rose they say that was a buy signal. Unfortunately, there are just as many times when the 50 crosses the 200 from the bottom and the stock falls immediately thereafter burning anyone who bought on that signal. Analysts just call that a "head fake" or basically false alarm. If you run money, are you really going to invest millions of dollars on this nonsense? When you make a bad trade and lose millions because of technicals your explanation will be that you got "faked out" by the charts? Come on.

    In short, technical analysis is a joke for the most part. You’ll hear people talk about trend lines, articles mentioning support levels, head and shoulders graphs, blogs with all sorts of fancy technical jargon that is absolutely worthless from an investment standpoint.  The only reason technical analysis and “support” or “resistance” cries deserve any attention whatsoever is due to the fact that there are other people out there who actually believe those things matter and will trade on them. This is like a self-fulfilling prophecy where the irrational becomes rational because so many irrational people force the illogical to become reality. Just like the market though, fundamentals will correct this nonsense in the long run.

    A great example is when gold was trading around $1,000 an ounce. You could hear people start to yell bubble and technical terms such as overbought and resistance from miles away. There were people who sold at the $1000 mark just because it was a round number (probably the same type of people who think something that is $4.99 compared to $5 is significantly cheaper and deserves a purchase as a result). People get too caught up in the emotion and psychology of the market instead of focusing on what really matters, fundamentals. Gold is traded in dollars, the dollar is depreciating against other currencies, emerging market central banks are buyers of gold as they look to diversify away from dollars; right there is your fundamental analysis and reasons for holding gold. Holding gold at $1k per ounce would have doubled your money over a couple of years; so much for the technicals there. People started doing the technical song and dance again when gold had its 30% drop in 2008. Look where it is now is all I have to say.

    This wack job analysis is not just done with gold, it can be seen everywhere. People who are too inept or lazy to actually read through an annual report, go buy the product a company sells, talk to management, email IR, etc. like to use technicals. It’s easy, it’s fun, and using big fancy words makes you appear intelligent and as if you know what you are doing. No one wants to put in the time to do real research; technical analysis provides a short cut and rationalization for not doing your homework. Timing the market is insane.  The trend is not “your friend”. The trend exists to begin with because there is a fundamental driver that put it there and as long as that driver exists, so will the trend in the long run. Don’t fight common sense and don’t trade on technicals.

    I am not saying that you don’t want to get a good price. The price at which you purchase a stock or investment has a tremendous impact on your return. You should use relative and absolute fundamental analysis to help determine what you believe is a fair or discounted price for whatever it is that you are interested in buying. Weight all the macro and micro factors that will affect the stock price, earnings growth, etc. and then come to price at which you feel comfortable buying. Read press releases, email investor relations, go to stores and ask managers how sales have been, read annual reports, sell side research, model out your projections and assumptions, do your homework.

    Bottom Line: Don’t be the gambler, be the house or at least learn to count cards. Stack the odds in your favor and make bets on things that you both understand and believe to be trading at a discount to future earnings. Talk numbers and facts, not trend lines and candlesticks. Invest on value and fundamentals, not hope and luck.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Sep 07 4:31 PM | Link | Comment!
  • Rocks Equals "Winning"

    Trade: Buy gold. You can buy the ETF GLD or the actual thing.  Stay away from options here as they are currently expensive from an implied volatility standpoint and this is a long term bet against the dollar among other things.

    Thesis: Gold is not a bubble. As long as central banks try to diversify away from the dollar due to its value depreciating gold is good. Mexico bought approximately 98 tons of gold last quarter alone. South Korea was a buyer for the first time in approximately 13 years purchasing 25 tons. Thailand and Russia are also buyers. Chavez wants the UK to give him his 80 tons of gold or so back which they will have to go in to the market to buy. It does not matter what the little people on finance yahoo or CNBC do. Like everything that is sold in any market, if there is more demand than supply, prices will go up. The only question you have to be concerned with is; are the big boys buying still?

    Gold is a hedge against currency risk for emerging market central banks that hold dollars as their primary reserve currency. The value of the dollar has been steadily declining over the past decade. Our enormous ballooning debt and deficit mean that we will have to raise taxes, default, and or print money (technical default) which will further drive down the value of the USD relative to other currencies. Throughout history gold has always been <em>perceived</em> (key word) as having value and therefore it does despite the fact that it is nothing more than a shiny yellow rock. I do not care if gold loses or gains 10% in the next week or month for that matter. The trend for gold is to go higher on everything from currency fears to debt and European uncertainty. Not to mention the 2012 end of the world characters will be out in full force sooner rather than later; the fear invoked in the populace by the Mayan calendar could help drive gold higher as people perceive the end of the world to mean the end of civilization or currency as we know it. Yea, it’s a stretch, but it’s no secret that people are irrational and illogical especially when they are fearful.

    Bottom Line: If central banks like gold, you should too.

    Tags: GLD, DGP
    Aug 31 4:11 PM | Link | Comment!
  • Stop Trying to Be Buffett

    Last week Warren Buffett poured $5B into BAC. His purchase caused the stock to rocket up from the $6 range to the $8 range. This is a reflection of the stupidity of investors in the market. Warren Buffett essentially received $5B worth of at the money call options that don’t expire for 10 years. That’s right, 10 YEARS. In addition, he gets paid 6% on that investment giving him the right but not the obligation to buy BAC’s stock for about $7. Warren Buffett got a great deal. The buyers who followed Buffett’s lead did not. If they had done their due diligence and understood the risks Bank of America faces and then still felt that the stock was cheap, they would have bought it at $6 before Buffet did.

    Just because Buffett buys does not mean the stock will appreciate. His options on GE are still far out of the money.  There is a reason why Buffett wanted a 10 year time horizon for his bet to play out. Bank of America as of 2Q 2011 has approximately $11B in litigation exposure, $16B in European debt exposure, over $65B in exposure to residential and commercial loans that are 30 days late or more on payment, and another $40B in exposure to Countrywide and subprime mortgages that they carry in their Legacy Portfolio on their balance sheet that are being paid on time, but still carry high risk of future defaults/delinquencies. If payrolls go negative, housing prices continue to slide, and we enter a recession which I believe we will, you will not want to be long this stock. BAC has only $37B on their balance sheet for their loan and lease loss provision despite all this exposure. BAC’s tangible book value per share stands at $11.12 as of June 2011 according to, but can that even be trusted? Who knows what they have off of their balance sheet, or if the fair value that they claim that their assets are worth is long overdue for an impairment charge/write off. Not only did Buffett’s purchase further dilute current and future shareholders, but also it pushed them to the back of the line. Buffett gets paid before the common shareholder does. The stock should have gone down if anything, not up.

    Bottom Line: You and I are not Warrant Buffett and we can’t get Buffett type deals. Unless we can get at the money call options on a stock that expire in ten years for the price of the stock with a 6% dividend we should not pretend that we can invest like Buffett. If you want to invest like Buffett, heed his advice in not buying companies whose business you do not understand or at least can’t get an honest picture of.

    Tags: BAC
    Aug 31 11:02 AM | Link | Comment!
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