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Preparing for the coming Black Swan event - The Slumdog Millionaire Portfolio

|Includes:AAL, American Capital (ACAS), AFFX, ATPAQ, AYR, BAC, BRCD, C, CHK, DRYS, FAS, GAP, GE, GFIG, GGP, GLBL-OLD, GNW, HLX, HUN, IBOC, IO, JNS, KATE, LVS, MFGLQ, MGM, MI, MTG, NRG, NSIT, PCXCQ, PEI, PL, SHO, SKS, TTI, WYN, XL, ZQK

In the year 2011 the popular Oscar winning movie, Slumdog BILLIONaire, posed a multiple choice question to the audience much in the same way it had done in the highly successful original movie, Slumdog Millionaire. The question went as follows:

Two years after winning India’s version of “Who wants to be a Millionaire?” contestant, Jamal Malik, converted his millions to billions by investing in the stock markets. He succeeded because:
 
1.       He got lucky (again!).
2.       His girlfriend he won over in Slumdog Millionaire was a financial genius
          and gave him brilliant investment advice.
3.       He cheated! He had inside info on all the companies.
4.       He followed the black swan!
 
The correct answer to the question is (4). Jamal Malik saw a black swan event in the making and took a chance again with life like he had done in the past and was paid back yet again this time in billions.
 
In the year 2008 the unexpected happened. The great crash of the markets decimated our wealth and left many in the poorhouse. A minority of investors who had bought protective puts and had placed stop losses on their portfolios emerged with minor bruises. Some actually made money. Popular economist Nasim Taleb wrote a book called the Black Swan theory about this very topic. His basic point was that in a world where scientists had only known white swans to exist the appearance of a black swan threw their world into disarray. He postulated therefore that black swan events were possible and and preparing for them was a must in every well-constructed investment portfolio. A hedge fund modeled after his thesis purchased puts in S&P when the Dow was at all time high and reaped a huge payout in 2008 when the Dow (and S&P) dropped to previously unimaginable depths. Mr.Taleb, who recently appeared on CNBC, still seemed pretty dour about the whole situation. When asked by the CNBC host if he saw an end to the downturn he said not and indicated that the sky was not done falling yet!
 
Hey, wait a minute! Mr. Taleb does not now see a black swan event perhaps under way now but to the upside? What if the rare black swan event happened yet again and the markets boomed to the upside leaving the bears in lurch? Are Mr. Taleb and/or his hedge fund prepared for this possibility? Listening to the interview it appeared not. Mr. Taleb looked like one of us investors in 2007 who was buying into the market just as it was reaching an all time high. Mr. Taleb, it appeared, might short the market at any bounce because he vehemently seemed to believe that the market had a long way to go south.
 
I propose that a black swan event is in the making the opposite kind we witnessed in 2008. Chart readings and technical analysis indicate a major bull market in the making. Almost every sector and leading companies within the sector are showing a buy signal on both daily and weekly charts.  If true you now have the opportunity of a lifetime to create some serious generational wealth!
 
Very few people saw the rumblings underneath before the markets cratered in 2008 and very few people are sensing the rumblings underneath as the markets are preparing for a bull run in 2009. A black swan event could happen for a number of reasons. Here are few plausible reasons why a black swan event could be in the making:
 
1.       Going by the old adage things are never as bad as they seem. It is possible that in all this gloom and doom we have written off the economy, the consumer, and the companies and corporations way too much. They probably are more resilient than we give them credit for.
 
2.       Even if we reach 11% unemployment there are 89% employed and making payments on their homes and remaining current on their credit card balances.
 
3.       Perhaps the Obama plans are working. Consider just how much money the energy cost savings and the refinancing have put in the pockets of consumers. I live in Phoenix, Arizona which as you know is the epicenter of the housing pain. Last year you went to a hip restaurant on primetime Friday evenings and you had empty tables as far as eyes could see. Just this week I went to a restaurant and had a line stretching out the door. I live in new housing construction where just 3 months back a quarter of the houses sat vacant. Now a majority of them are all occupied and most of them closed in the last two months. Are we so immersed in gloom and doom that we are missing the light at the end of the tunnel?
 
4.       Three companies shocked me with their earnings. Best Buy, Bed Bath and Beyond, and RIM, the maker of Blackberry. People are buying things at Best Buy? So they can’t make their house payment or pay their credit card but they are shopping at Best Buy? People are actually going and buying things at Bed, Bath and Beyond? In a world that is supposedly plagued by layoffs companies are buying blackberries for their employees? Consumers are replacing their phones with newer phones? Just what is going on here?
 
5.       Now what in the world is the deal with Wells Fargo forecasted 3 billion dollar profit? I actually wrote this article the day before this announcement sent the markets on a huge rally and then had to readjust it to account for this remarkable event. (Additionally, most of the stocks I detail subsequently in this article rallied putting all my calculations in jeopardy).  Wachovia is making money? Jiminy Christ! If Wachovia is making money how about Merrill Lynch and Countrywide at Bank of America? Just what in the world is going on?
 
6.       Is it possible that the great crash of 2008 has awoken the companies, corporations and individuals from their stupor of the past decade into being more responsible, more accountable and doing things a lot more smartly than before? I am sure you and I could list a variety of situations in life where complacency took over and we started taking things for granted until the day of the rude awakening. Many of us have awoken when faced with the rude awakening and done things to change and put life on a secure platform and made more progress than ever before. Why are nations and markets any different? Maybe, just maybe, the crash of 2008 was one of the best awakenings we could ever have and one that has helped us fix what was wrong and laid the foundation and framework for a prosperous future? Look at where we were prior to 2008 – lax regulation, wall street greed, dilapidated manufacturing base, crumbling education system, lack of appropriate labor skills to keep pace with China and India and so on. Do you not feel that for once we have really begun to address these issues head on? Do you envision the day when the American labor force finds its right place in the value chain moving jobs at the lower end overseas and engaging in adding value up the chain?
 
I have reason to believe that many of the stocks I will name below have the possibility to not only break their previous highs but climb to new highs within the next handful of years. So many stocks are beaten down and there is such a wide selection that even if 25% of them don’t make it the rest of them have the potential to make you some serious money. I call these stocks the Slumdog Millionaire stocks. The logic is that these were millionaire stocks at one time and became broke in the crash of 2008 and were sent to the slums. Chart readings show a buy signal on every one of the stocks I detail below. There are stocks below that traded in the triple digits before being worth pocket change! A radical change in their future prospects will quickly power them to new heights creating perhaps the biggest bull market run ever in history.
 
Following are the Slumdog Millionaire stocks. The criteria that I used in picking them were quite simple. They needed to trade in the double digits in 2007-2008 before being massacred and they must show strong buy signals in their charts and other technical analysis metrics. If each stock reached their previous high I have calculated how much money you would make for $1000 investment in each one of them at today’s prices. There are 36 such recommendations therefore it would cost you $36K at today’s prices. You could, of course, chose to reduce your investment to say $100 a stock in which case you would spend $3600 plus commissions. The choice is yours.
 
Please follow your own risk appetite and do your own research before you chose to invest.
 
First column shows the symbol, second shows their 52 week high, and third shows the net proceeds if their previous 52 week high is achieved. Investment is $1K in each on April 8, 2009. Cash-out when 52 week high is hit.

ACAS
$2.5
$35.45
$14,180
AFFX
$3.68
$16.98
$4614
ATPG
$5.89
$47.35
$8039
AYR
$5.97
$16.9
$2830
BAC
$9.55
$40.65
$4256
C
$3.04
$27.35
$8996
CHK
$20.7
$74
$3575
DRYS
$4.75
$116.43
$24,511
FAS
$8.71
$32.68
$3752
GAP
$5.86
$29.4
$5017
GE
$11.33
$37.07
$3271
GFIG
$3.91
$16.35
$4181
GGP
$0.95
$44.23
$46,557
GLBL
$5.01
$20.04
$4000
GNW
$2.75
$24.64
$8960
HLX
$8.57
$41.81
$4878
HUN
$4.12
$23.95
$5813
IO
$1.87
$18.26
$9764
JNS
$8.18
$32.37
$3957
LCC
$3.46
$11.24
$3248
LIZ
$4.11
$20.14
$4900
LVS
$4.44
$80.83
$18,204
MF
$5.5
$15.19
$2761
MGM
$5.3
$55.06
$10,388
MI
$7.22
$29.97
$4150
MTG
$2.1
$14.14
$6733
NSIT
$4.01
$17.31
$4316
PCX
$4.5
$82.23
$18,273
PEI
$5.79
$27.88
$4815
PL
$7.10
$44.38
$6250
RRI
$4.60
$28.06
$6100
SHO
$3.11
$21.11
$6787
TTI
$4.17
$25
$5995
WYN
$7.2
$24.43
$3393
XL
$7.68
$38.30
$4986
ZQK
$1.35
$10.41
$7711
 
Total investment at $1K per stock = $36K. Return if every stock hits its 52 week high = $290,161. You can run several mathematical scenarios in-between, remove some stocks from consideration, increase/decrease the investment ratio and so on but if you can’t deny it that if a black swan event happens many of these strong companies will see better days. Some of them will not make it. Some of them will exceed their previous 52 week highs while some of them may attain only part of their previous glory. In any case I am strongly convinced that there is merit in considering investment in each of these stocks as suited to one’s risk profile.
 
As I said before with the bull rally under way each of these equities has registered a strong buy signal on their charts. There are other eligible slumdog candidates that I had to leave out because in spite of their beaten down price they have not yet shown a buy signal on their charts. If and when they do I plan to add them to the slumdog portfolio. If things change for a stock and they register a strong sell signal they will be removed from the slumdog portfolio. Any stock removed from the slumdog portfolio is eligible for reentry if and when they register a buy signal again on their charts.
 
I want to make the following disclosure. During the worst times for the Dow, just a few weeks back, I made an investment in each one of the above equities at a better price than listed above as soon as they registered consecutive buy signals on their daily charts. I also established stop losses taking the support prices from their weekly charts. And I keep moving the stop loss price up on a weekly basis. If you are interested in my weekly updated stop loss prices let me know. If you would like me to run a chart evaluation on a stock for entry into the slumdog portfolio please post a comment on that stock under this article. I plan to have a website soon where I plan to track the weekly progress of the slumdog portfolio.  Good luck to all and God bless the United States of America.
 
UPDATE ON APRIL 17, 2009
=======================
 
Let us see how the Slumdog Portfolio did since its inception (End of Market, April 8, 2009). Approximately, 1.5 weeks has elapsed since then.
 
If you invested $1000 each of the Slumdogs at the price as of close of April 8 you would have spent $36,000 on the 36 slumdogs. One of our slumdogs, GGP, has gone into bankruptsy so we will write off the $1000 invested in GGP. Of the 35 other slumdogs only two had a down week! Not bad, huh? If you add it all up you would have seen your $36,000 climb to $39.749 which is a return which is 10.4%. For 1.5 weeks would you say it was a good return?
 
Here is the spreadsheet where the second column lists the price as of close on April 8 and the third column lists the price as of close of April 17, 2009. The last column lists how much profit/loss we made on each of our slumdogs for our $1K investment in each.
 
ACAS
$2.5
$2.79
+$116
AFFX
$3.68
$4.17
+$113
ATPG
$5.89
$6.37
+$81
AYR
$5.97
$7.09
+$187
BAC
$9.55
$10.60
+$110
C
$3.04
$3.65
+$200
CHK
$20.7
$21.63
+$45
DRYS
$4.75
$7.17
+$509
FAS
$8.71
$9.40
+$79
GAP
$5.86
$7.13
+$216
GE
$11.33
$12.39
+$93
GFIG
$3.91
$4.5
+$151
GGP
$0.95
$0.0
-$1000
GLBL
$5.01
$5.94
+$185
GNW
$2.75
$2.30
-$163
HLX
$8.57
$8.36
-$25
HUN
$4.12
$4.64
+$126
IO
$1.87
$1.97
+$53
JNS
$8.18
$8.65
+$57
LCC
$3.46
$3.97
+$147
LIZ
$4.11
$4.26
+$36
LVS
$4.44
$5.03
+$133
MF
$5.5
$5.91
+$74
MGM
$5.3
$6.30
+$188
MI
$7.22
$8.97
+$242
MTG
$2.1
$2.65
+$262
NSIT
$4.01
$4.29
+$70
PCX
$4.5
$4.76
+$58
PEI
$5.79
$6.34
+$95
PL
$7.10
$8.29
+$67
RRI
$4.60
$4.95
+$76
SHO
$3.11
$3.90
+$254
TTI
$4.17
$5.71
+$369
WYN
$7.2
$8.92
+$239
XL
$7.68
$8.16
+$62
ZQK
$1.35
$1.68
+$244

 

Of our two downers, GNW and HLX, neither of them have registered a sell signal so they continue to be good standing members of the Slumdog Millionaire portfolio! As I have stated in my article I will list any removals from the Slumdog portfolio.

As of this week we have a few more additions to the Slumdog Millionaire portfolio. The closing price as of April 17, 2009 would reflect our entry point into these new slumdogs. Here is the updated Slumdog Poriflio. I have added two new colums -- one that shows the date these equities were inducted into the Slumdog hall of fame and a new column that shows you the curent stop loss setting. I will keep these stop losses updated on a weekly basis.

EQUITY
PRICE ACQUIRED
DATE
CURRENT S.L.
ACAS
$2.5
04/08/2009
$2.0
AFFX
$3.68
04/08/2009
$3.0
ATPG
$5.89
04/08/2009
$5.25
AYR
$5.97
04/08/2009
$5.95
BAC
$9.55
04/08/2009
$9.3
BRCD
$4.65
04/17/2009
$3.9
C
$3.04
04/08/2009
$3.25
CHK
$20.7
04/08/2009
$18.6
DRYS
$4.75
04/08/2009
$5.0
ETFC
$2.58
04/17/2009
$1.75
FAS
$8.71
04/08/2009
$6.8
GAP
$5.86
04/08/2009
$6.15
GE
$11.33
04/08/2009
$10.5
GFIG
$3.91
04/08/2009
$3.5
GGP
$0.95
04/08/2009
*LOSS*
GLBL
$5.01
04/08/2009
$4.45
GNW
$2.75
04/08/2009
$1.9
HLX
$8.57
04/08/2009
$7.3
HUN           
$4.12
04/08/2009
$4.0
IBOC
$11.53
04/17/2009
$8.75
IO
$1.87
04/08/2009
$1.55
JNS
$8.18
04/08/2009
$7.3
LCC
$3.46
04/08/2009
$3.0
LIZ
$4.11
04/08/2009
$3.25
LVS
$4.44
04/08/2009
$3.95
MF
$5.5
04/08/2009
$4.95
MGM
$5.3
04/08/2009
$4.3
MI
$7.22
04/08/2009
$5.7
MTG
$2.1
04/08/2009
$1.75
NSIT
$4.01
04/08/2009
$3.4
PCX
$4.5
04/08/2009
$4.0
PEI
$5.79
04/08/2009
$4.4
PL
$7.10
04/08/2009
$6.9
RRI
$4.60
04/08/2009
$4.1
SHO
$3.11
04/08/2009
$2.75
SKS
$3.54
04/08/2009
$2.3
TTI
$4.17
04/08/2009
$4.15
WYN
$7.2
04/08/2009
$7.2
XL
$7.68
04/08/2009
$7.0
ZQK
$1.35
04/08/2009
$1.1
 
New additions are BRCD, ETFC, IBOC and SKS. These additions make the total number of slumdogs = 40. Total investment at $1K per equity = $40K.