Insiders sell like there’s no tomorrow

NEW YORK (Fortune) — Can hundreds of stock-selling insiders be wrong? The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized. But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago. While a wave of insider selling doesn’t necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don’t believe current stock prices are justified by economic fundamentals. “It’s not a very complicated story,” said Charles Biderman, who runs market research firm Trim Tabs. “Insiders know better than you and me. If prices are too high, they sell.” Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn’t the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007. Silverman said the “orgy of selling” is noteworthy because corporate insiders were aggressive buyers of the market’s spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000. “That was a great call,” Silverman said. “They were buying when prices were low, so it makes sense to look at what they’re doing now that prices are higher.” Straightforward trading In the case of firms such as discount broker TD Ameritrade (AMTD), they are selling with abandon. Chairman Joe Moglia has netted more than $10 million in profits from stock sales since April, by selling shares on each of the last 106 business days, according to Securities and Exchange Commission filings. 0:00 /4:07The stock market’s lost decade A TD Ameritrade spokeswoman said Moglia’s sales are being made under a pre-arranged selling plan he filed with the SEC last August. Under that plan, his brokers exercise some options he got eight years ago and sell the underlying shares every day the company’s stock price is above a certain level. Moglia’s not the only insider selling at TD Ameritrade. The company’s founder and former chairman, Joe Ricketts, and his wife Marlene last month sold 5.7 million shares to help fund the family’s purchase of the Chicago Cubs baseball team. They owned 16% of the company’s stock at last count. Silverman said the TD Ameritrade insider sales don’t particularly raise concerns about the company’s health, because “special circumstances” — the Cubs deal and the pending expiration of Moglia’s options — are evident. He said it’s potentially more worrisome when insiders suddenly make big sales without obvious motivating factors. Fossil (FOSL) CEO Tom Kartsotis has sold $25 million of the watchmaker’s stock over the past month. Shares of Fossil have more than doubled since early March. Fossil didn’t immediately return a call seeking comment. At video game maker Activision Blizzard (ATVI), CEO Robert Kotick and director Brian Kelly each made more than $10 million last month by selling shares after exercising stock options. While some of Kotick’s options were due to expire next year, others weren’t due to expire until 2014 in his case and 2012 in Kelly’s. The stock sales took place at prices that were about 50% above their 52-week low. Activision didn’t respond to a request for comment. Adding to the flurry of stock sales, companies are selling stock to the public at a brisk clip while buybacks have tailed off. All told, U.S. corporations have been net sellers of $105 billion of stock over the past four months, Biderman said. Insiders have managed to cash in on some of those offerings. Healthcare payment administrator Emdeon (EM), for instance, last month raised $155 million in an initial public offering. At the same time, selling shareholders led by private equity investor General Atlantic Partners raised $188 million. Though the wave of selling by insiders doesn’t necessarily predict a pullback in their stocks or the market as a whole, it’s hard to put a happy spin on the recent trends. “The disparity between buyers and sellers right now is vast,” said Silverman. “That’s the beauty of following insider trading — these guys are talking with their checkbooks.” First Published: September 10, 2009: 2:36 PM ET

http://money.cnn.com/2009/09/10/news/economy/insider.sales/index.htm?postversion=2009091016

Gold prices getting higher… Petrol price still below USD70… Share market hitting higher point ….. but economy not improving…..

To all investor time to encash your profits…. wait for the next round…. Just my personal view….

LONDON – Gold prices rose above $1,000 per ounce on Tuesday, the highest since March 2008 — suggesting investors are wary of the U.S. dollar’s weakness and expect international interest rates to remain low for some time.

The gold contract for October delivery traded up $10.10, or 1.0 percent, at $1,005.60 per troy ounce in midday European trading on the London Metals Exchange. That is the highest since it hit a record of $1,038.60 on March 17 last year.

Gold is typically bought as an alternative to the dollar among safe-haven assets favored by investors seeking to preserve capital. So its rise often correlates to a drop in the value of the American currency.

That is what happened in the spring of 2008, when gold was last above $1,000 and worries about the financial crisis brewing in the U.S. were hurting the country’s currency.

“It is mainly the reflection of the weakness of the dollar,” said Julian Jessop, economist at Capital Economics.

The dollar fell to 92.29 yen on Tuesday from 93.05 yen the night before and slid to $1.4434 against the euro from $1.4332 as stock markets rose and investor sentiment improved.

Jessop noted, however, that gold was also being boosted by market expectations that global central banks would keep their interest rates low for some time to come. One disadvantage to holding gold is that no interest is earned — but rates on dollar-denominated assets such as government bonds have fallen sharply, lessening that disadvantage.

“Near-zero interest rates in many of the world’s largest economies reduces the opportunity cost of holding gold,” Jessop said.

The fact that 20 of the world’s rich and developing nations promised over the weekend to keep in place their stimulus measures — which include both spending as well as low interest rates — reinforced the appeal of gold.

Jessop was not convinced gold could sustain such high prices for very long or push much higher, since consumers quickly start selling gold items to take advantage of stronger prices.

“This rally is sowing the seeds of its own destruction,” he said.

 http://news.yahoo.com/s/ap/20090908/ap_on_bi_ge/gold_prices

Keep an eye on this 3 stocks:
Zelan
RCECAP
NgiuKee
Try to keep as much share as possible when market is moving down.

High risk investors,
I would like to share my idea on this 2 shares. Consider to take advantage on this coming fall or bear move…

MTLQQ – Motors Liq Co – 0.76
Citigroup Inc (NYSE:C) – 4.54

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2. IPOs Company’s Prospectus: http://www.klse.com.my/website/bm/listed_companies/ipos/prospectus/

3. Structured Warrants Profile: http://www.klse.com.my/website/bm/listed_companies/structured_warrants/warrants_announcements/index.jsp

4. PN4, PN17, Amended PN17 & GN3 Companies: http://www.klse.com.my/website/bm/listed_companies/list_of_companies/

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Taxpayers, the union and bondholders – GM’s new owners after bankruptcy – are eager to find out. But it’s uncertain how the market will value a new GM.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: May 30, 2009: 8:59 AM ET
NEW YORK (CNNMoney.com) — Once the bankruptcy process at General Motors plays itself out, what will the company be worth?

It’s more than an academic question of interest only to Wall Street traders. It will determine how much money taxpayers can expect to recoup from multiple bailouts of GM. When all is said and done, the Treasury Department is likely to pump more than $50 billion into GM (GM, Fortune 500) — including loans made to the automaker last year.

It is also key to determining the level of future health insurance benefits for hundreds of thousands of GM retirees and how much money holders of $27 billion on GM bonds, including pension funds and individual investors, will be able to recover.

GM is widely expected to file for Chapter 11 bankruptcy protection on Monday. As a result, the government, bondholders and a trust fund controlled by the United Auto Workers union will wind up owning virtually all the stock in a reorganized GM. (Current GM shareholders will essentially have their holdings wiped out through bankruptcy.)

So taxpayers, retirees and bondholders need for shares of a new, leaner GM (GM, Fortune 500) to start trading for them to stand any chance of benefiting from the company’s emergence from bankruptcy. Unfortunately, these new owners probably won’t know until at least 2010 just how much money, if any, they will recover.

GM’s most efficient plants, dealerships, brands and other assets could exit bankruptcy within two to three months.
0:00 /02:46Coming to U.S.: GM’s Chinese cars

However, it will take at least 6 to 18 months for the bankruptcy court to wade through the company’s unprofitable plants, most of its debts and other liabilities, according to a senior Obama administration official. During that time GM stock is unlikely to be publicly traded.

But even once shares of GM do begin trading again, it’s highly uncertain what the company could be worth.
$25 billion: too high or unreasonably low?

According to a filing by General Motors late last month, the company estimated the equity value of its common stock would be about $25 billion once it completed a reorganization.

That’s substantially higher than the market value of about $450 million that GM was worth based on Friday’s closing stock price of just 75 cents a share. But the last time GM was worth as much as $25 billion was late 2007.

A new company, with a greatly reduced debt burden, fewer plants and lower labor costs, could end up being an attractive investment. But auto analysts and other experts are reluctant to speculate on exactly what GM’s value could be following bankruptcy.

Len Blum, managing director of Westwood Capital, an investment bank, said he thinks there’s a better chance for taxpayers to recover money from their investment in GM than with insurer AIG. Taxpayers also have a majority stake in that company, and the government has kicked in more than $180 billion so far to keep AIG afloat.

Blum said that given the reduction in GM’s debt level and operating costs that are being planned, there could be “some real value” in a new GM, but that there was still great risk for all shareholders.

“If it was a slam dunk, the union would have wanted more common equity,” he said. The UAW wound up agreeing to a 17.5% stake.

Other experts question whether cost cutting and a lower debt load are enough to make the company attractive to investors, even if it they enable GM to earn its first profit on its auto operations since 2004.

“Back in 2007 GM was being valued on its future prospects and its assets, not its profitability,” said Chris Jadro, an equity strategist focusing on distressed companies for Jefferies & Co. “But it’s just hard to imagine that GM will be worth what it was a year ago coming out of this down cycle.”

The two biggest shareholders of the new company also expressed doubts about how quickly the stock will recover.

A senior Obama administration official speaking to reporters Thursday conceded it is unlikely that the government can get back its entire investment in GM. The official said the government hopes “to recover as many taxpayer dollars as we can,” and that it expects to sell the shares as soon as possible.

UAW President Ron Gettelfinger, who also said he would like to sell the union’s stake in GM as soon as possible to have money available in the trust fund, downplayed expectations about the company’s value going forward.

Although he said Friday that the union believes “the stock should be worth a lot more a lot quicker,” he added that “right now, we realize the value is zero.”

Some auto industry experts believe that the changes made by GM could position it for a level of profit it hasn’t earned in decades. David Cole, chairman of the Center for Automotive Research, said GM is well-positioned for even a modest rebound in industrywide sales.

Carr said the $25 billion market value estimate “is pretty reasonable and it could even be conservative.” He said that profits for GM and the rest of the industry could be robust in the next few years due to reductions in capacity and pent up demand for autos.

But a number of experts doubt that GM’s market value will get anywhere near the $25 billion figure in the next few years. They point out that GM will face a difficult competitive position compared to cash-rich Toyota Motor (TM) and even U.S. rival Ford Motor (F, Fortune 500), both of which could pass it in terms of U.S. sales in the coming years as GM sheds brands and dealers.

Sean Egan, managing director of rating agency Egan-Jones Group, said he’s not sure GM can generate a profit even with all the cost concessions they’ve received from the union.

“In almost every competitive front, GM is being beaten. People who see strong profits for GM are being delusional,” Egan said.

But Susan Helper, an economics professor at Case Western Reserve University in Cleveland and expert on the auto industry, worries that even if GM does return to profitability following bankruptcy, investors could penalize the stock due to the company’s previous problems and doubts about its future.

“It’s tough to see there being a line of investors looking to get into the stock,” Helper said. To top of page
First Published: May 29, 2009: 5:52 PM ET

http://blog.samjoywallet.com/wp-admin/post-new.php

How to Day Trade With Confidence
Austin Passamonte
On Monday May 11, 2009, 9:25 am EDT

Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. More work by Passamonte can be found at CoiledMarkets.com.

Cut losses short: let profits run. An age-old adage that’s stood all tests of time for great reason. It’s a pillar of trading success, a testament to trading from a position of confidence and strength rather than weakness and fear. That guy Churchill had it partially right. The only thing traders have to fear is fear itself. Of course in most cases that fear is based on valid concerns. Too many traders operate from positions of fear because deep down they know it’s a gunfight they attend which finds them holding knives. Dull knives. Butter knives.

Confidence = Correct Actions

You’re the general manager of a professional football team. How would you prefer, make that demand your starting quarterback to think? Would you prefer him to have the confident mindset of a Peyton Manning, Tom Brady, John Elway or Dan Marino? Or would you prefer a fear-based minded QB like Jim Everett instead? It’s your team. A team you are preparing for the long, tough road ahead from preseason to SuperBowl quest. Do you want the captain of your team to stand tall under pressure and adversity while steadied by true confidence, or would you accept a QB who when the chips are down and heat is up takes a phantom sack when gripped by fear? Which mindset are you going to stake your professional and financial career as the general manager of a professional football team (aka your business enterprise) on?

True Confidence

The term “confidence” does not describe cockiness, arrogance or false bravado. Please don’t mistake all those social masks of fear with calm, quiet, inner confidence. That is a belief system which doesn’t waver regardless of the present temporary conditions around. Confidence is a knowledge that performing certain tasks regardless of short-term results will have a positive long-term outcome. Said another way, there is no need for constant reassurance or biofeedback to assuage insecurities and fears with constant support. Confidence does not need short-term approval because it knows the delayed gratification pays off in long-term success with unmatched levels of reward.

Randy Moss may be the most talented & gifted wide receiver to ever play NFL football. Others have worked harder and accomplished more, but none before him had greater raw skills. Right now that description probably fits Larry Fitzgerald best. There is not a more dominant wide receiver in the NFL today. Defensive backs forced to match up with those two athletes in their primes were in most cases overmatched. It was/is pretty impossible for corners and safeties to have a good day when facing those two at their respective zenith.

On the other side of that field, Deion Sanders was arguably the most complete cornerback in NFL history. In his prime he was the epitome of shutdown corners who could essentially take any receiver out of a game. In his respective prime, “Prime Time” could be left solo on an island with either Moss or Fitzgerald and the general outcome thru numerous games would be washed. The receivers would make some catches, Deion would make some picks. You can pretty much count on that overall edge being negated for those single games.

The good news for all athletes involved is they wouldn’t face one another every single game. Invariably, Moss and Fitzgerald would line up against inferior athletes just like Deion would. Their respective “edges” which will send all of them in time to the Hall Of Fame in Canton, OH was consistent application of their developed skills into the entire football season.

Short-Term Results <> Long-Term Decisions

Now, it’s entirely possible if not probable that over the course of their careers, either wide receiver might have a solid day’s performance against the world-class defensive back. Or vice-versa. No one should expect a stalemate every single time they face one another. Right? So let’s say Randy Moss has eight catches and two touchdowns against Deion in their first of two matchups during a season. Should the defensive coach pull Deion from the next random game and stick a rookie draft pick in his place instead? After all… the last game resulted in failure using Deion. What makes you think the next game won’t follow suit?

By the same token, assume Deion had three interceptions and ran two of them back for touchdowns against Fitzgerald in game one of two matchups per season. Does the QB completely ignore Fitzgerald in the next game scheduled? After all, he got dominated in the last game… maybe he “stopped working” and hit his all-time peak forever. Maybe there’s zero upside for him from here. Maybe he offers no long-term edge after all. It was just an illusion.

We’ll get back to those thoughts in a bit.

Ignorance + Realization = Fear

Show me a trader who is gripped with fear, and you are pointing towards someone who knows they don’t have a true, all-encompassing method or approach with profitable edge. Knowing one has a trading edge means the entire gamut is covered: entry points, risk management from loss to profit exits and mental operation of such with steady hands thru all market conditions. A true “edge” is far more than the act of entering a trade when some squiggly lines cross or price meets a supposed objection point. Your edge as a trader compiles many things into one complete package.

Too many aspiring traders spend months, years and entire careers searching for the holy grail of trade entry secrets with false assuption that the right combination of indicators or settings will result in overall winning trades performance. It goes without saying that trade entry tools and the decisions they lead to are a critical component of success. But there is no magic “system” that can be followed by blind monkeys that will take an undeveloped trader from neophyte to consistently profitable by itself. That has never happened, does not happen now and will never happen in the course of human history, with absolutely zero exceptions.

All aspiring traders want the same thing: quickest path to success with least amount of effort and delay possible. Who doesn’t? Everyone who comes into this profession does so first for the money. No one ever decided to become a trader simply because it pays out high-score credits applied to War Of World craft. We become traders with expectation that the end result will be money, real dollars accumulated in an account to be spent as our hearts desire.

That quickest path to success means working with or working around any current flaws or weaknesses. Just give us the patch repair fixes to whatever holes lay in the path between right here and consistent $$ millions trading profits. When it comes to building a base of knowledge > base of belief system, that doesn’t sound too good. It sounds a lot like there is time, effort, cost and (perish the thought) delayed gratification required. Worst of all, it might be expected of us to make some personal changes, too. We might actually have to do some things that clash with our emotional weaknesses and flaws. Personal weaknesses and flaws we full-well realize exist, but don’t want to face any more than a habitual smoker diagnosed with emphysema wants to face the addiction of smoking and how to deal with that.

So with false hope that a trader can be successful with limited knowledge or skills, emotional warts & all, they too often dump real money in a trading account and wade right into the daily fray. A great part of that false hope is bolstered by reality that blind luck can result in pure profit. It is physically possible to place a trade or sequence of trades and hit a blind winner’s run from nothing more than statistical random chance. Maybe, just maybe that trader can get started with minimal knowledge and sometimes minimal cash but make enough correct errors to wind up profitable despite it all.

That pure gambler’s mentality squelches more fledging trader careers than any other single factors. Such “traders” are included in the overall stats of massive failure in this profession when reality is, they were nothing more than two-bit casino gamblers in the first place. They never got started with a sound base of knowledge, skill set, practiced application of knowledge and skills in simulated fashion or experience dealing with ever-changing market conditions. Nope, forget about wasting time with boot camp and basic training. That sounds like too much time & effort preparing to be a U.S. soldier. Hey, just read a few books about warfare, spend an hour online learning how to fire a gun and have the Marine Corp drop you off in the mountains of Afghanistan hours after enlisting for service.

Does that sound to you like a recipe for success? It is exactly what a vast majority of “traders” do to launch their careers. Why? Because it is statistically possible to risk x-amount of money in the market and harvest a return of y-amount of profit as a result. It is equally possible for a totally green soldier to engage the enemy in a live firefight and survive to fight another day. But how many days, how many firefights will be survived? What happens when the first situation of inferior defensive position, outmanned and outgunned situation or lack of ammo & weapons against superior firepower is faced? How will our untrained soldier adapt and overcome then? Sadly, he won’t. Neither will the untrained trader when he faces the first bout of inevitable adverse market conditions. Both the untrained soldier and trader have exactly zero expectancy for long-term survival in their chosen professions.

Hardware – Software Compensation

Traders with an affinity for math or technology that know they haven’t developed an edge seek end-around solutions down failed paths. Many try to compensate lack of learned skills with computation power. Rows of 24″ screens to monitor everything makes them feel like they should likewise spot something. Endless hours spent back-testing systematic parameters makes them feel like they should stumble onto a profitable solution in the same manner a cure for polio was discovered. Rather than studying market action, price action and how to aptly measure such, they seek immediate solutions hoping for instant gratification instead.

Despite all those attempts of using science (computation power) to dominate basic human nature (historical financial market behavior), deep down inside these aspiring traders know that they don’t match up against financial market action thru the long-term basis of evolution. The real road to successful systems trader is longer, harder and requires an equal degree of patience & discipline if not more than it does a pure discretionary trader. Anyone who thinks they can mindlessly operate a profitable system trading financial markets has some real self-realizations straight ahead.

Small Win + Big Loss = Fear

This one is the classic “scalper” equation. After dabbling around with enough stuff long enough, developing traders realize they have limited skill-set development to deal with financial markets. They look around for what appears to be viable with the current set of tools to apply. It seems like a majority of trades taken go at least a little bit in favor somewhere or another before hitting stop-out orders. Hey… here’s a novel idea: what if that trader simply widens the initial stop further away from the entry point? Never mind that it risks -$3 for every +$1 potential gained. All that matters is winning enough times to make them feel good about the whole process. “Ring the register”, as Buzzy Schwartz wrote in his book. Force enough positive biofeedback into the process for making said trader feel like he’s on the right track.

Never mind that even a +80% win ratio would result in +$800/ -$600 performance before commissions, trade costs and taxes are subtracted from that paltry gross. Block out the fact that somewhere or other, a losing streak of four ~ five consecutive trades at -$300 each is a statistical certainty. Not probability: a mathematical certainty. How does that scalper handle the very next day following a session of four straight losing trades equaling drawdown of -$1,200 per contract? Will that proverbial QB look to the same all-pro receiver for critical touchdowns tomorrow? It’ll take twelve (12) straight wins with no losses with that -3/+1 approach just to reach prior peak equity high before new costs incurred. Does the trader trust his scalping method = star athlete enough to stick with his long-term gameplan? Or does he begin taking phantom sacks for new youtube material instead?

Think of that failed logic as your football team running a no-huddle offense with empty backfield in five-wide set, every down. Targeting +4 yards per play = +12 yards in three plays or a successful first down. Meanwhile, all of those little pass completions in that pure-pass scalping playbook makes the QB stats and percentage of positive plays really pop out in impressive fashion. Keeps the chains moving, correct? Sure it does, in theory. But blackboards and gridirons aren’t synonymous. That gameplan requires perfect execution with no interceptions, fumbles or sacks to disrupt the sequence. Any negative yardage plays result in forced punts to the opposing team, or far worse.

Biggest Size @ Largest Point Of Risk/Ruin

A first cousin to the risk -3 make +1 set is the martingale or average-down player. Someone who keeps buying into a falling market or selling into a rising one with hopes of catching a price halt & turn, a reversal that takes the big-loss position slightly positive for profitable exit. Now I will tell you that some traders do learn to apply parts of that approach successfully. It’s a market marker’s tool, basically. Anyone who uses that approach of building trade positions as price action moves against them will likewise tell you that all of the time they are gripped with fear. If they are honest with you, they will report how many times they sweated out positions that went against them to mere ticks from exiting at huge, painful loss that luckily turned right there and wound up being slightly profitable in the end. You may see strings of winning trades, winning days, weeks or months with no losses realized. What you don’t see are myriad large unrealized losses that were not taken. Unrealized losses that drove said trader to the literal verge of puking, right before nothing more than random blind luck alone saved him from misery & despair.

They Talk About Fear

You’ll see, hear and read about traders discussing fear all the time. What is labeled as a “healthy dose of fear” actually describes respect. Respect in this context as a performance athlete or trader is not fear: it is a complete understanding of your adversary, strengths and weaknesses alike. You know and admit that the opponent has strengths and advantages. You know equally well that you are equipped to deal with, negate and overcome those adversarial strengths with a defined edge of your own… applied thru all conditions over the course of time. That does not mean you can win every time. That does not mean you cannot or won’t take losses. That does mean you have a solid gameplan for the entire season that permits wins to exceed losses in the end. Long-term objectives instead of short-term emotional gratification.

Professional traders don’t harbor fear. They control it. There is no fear of inevitable loss, because they are confident their learned skill-set will prevail over time thru all market conditions. They don’t fear risk of ruin on any single trade or series of trades because their money management approach won’t let that happen.

Neophyte traders constantly talk about fear and how to massage it. Yes, financial markets are one collective sum of variables with few constants. Yes it’s true that anything can happen at any time, even the least expected if not unthinkable. For sure it’s a fact that unforeseen adverse moves against open trade positions can result in larger than expected net loss. Those factors are all part of a trader’s edge which encompasses everything. A trader’s “edge” doesn’t stop at the decision to enter a trade. It doesn’t begin at the point of where an open trade needs to be managed for locking in some portion of unrealized gain. The edge is not exclusive to monitoring an individual’s mental – emotional state OR equally applicable mechanical system’s optimization for same current conditions. A trader’s edge includes all.

Once you have that entire package under wraps and only when you do is it possible to have real, honest confidence in your operation as a trader.

Summation

Fear and trading success are polar opposite ends of the spectrum. You should not be able to see one from the other on a bell curve. The opposite of fear is not arrogance, cockiness or bravado. Those are false expressions of fear itself. The opposite of fear is calm, quiet confidence in the overall outcome being as expected long-term regardless of what happens short-term in between. Our task as traders is to move ourselves as far from the bell-curve end of fear as possible… which naturally moves us toward the goal of confidence on the opposite side. That’s where our long awaited, very hard-earned pots of gold await us all.

For more trading strategies, go to TradingMarkets.com/reports.

http://finance.yahoo.com/news/How-to-Day-Trade-With-tm-15199822.html

What’s a value investor to do?
By Joe Light, Money Magazine staff reporter
Last Updated: April 23, 2009: 4:50 AM ET

(Money Magazine) — Value investing in a deep recession is a bit like trying to bargain hunt at a dollar store. At first blush you’re overwhelmed by the prices on just about everything. A value investor is, after all, drawn to beaten-down stocks trading at low prices relative to earnings.

But in this market, “you could start randomly typing in ticker symbols and find shares that are cheap,” says Bill Nygren, manager of the value-oriented Oakmark Fund. That doesn’t make them all good deals.

When shares of nearly every company in all sectors of the market are down sharply, as is the case today, you need to be more discerning about what makes a stock cheap. And to create an extra margin of safety, says Thomas Shrager of the investment firm Tweedy Browne, you should stick with “companies where the probability of them going under is very small.”

Here’s how to go about it:

Comparison-shop on P/Es. At first glance, a stock might look cheap at a price/earnings ratio of, say, 11, which is below the market’s average of 13. But it’s not that simple. Just as shoppers pay different prices for Italian wingtips and flip-flops, the market sets different valuations for different types of firms.

The only way to tell if a stock is really on sale is to compare its P/E with those of companies in the same industry. You can find sector ratios at standardandpoors.com. Click on Indices and go to the S&P 500 section.

Understand the business. When you screen for companies with extremely low P/Es, you’ll run into some risky shares. After all, if a stock is priced significantly below its peers, either something is wrong with the firm or investors think there is. Take the troubled insurer AIG (AIG, Fortune 500). It trades at a P/E of just 7, based on projected future earnings. But how confident are you that AIG will post profits this year?

This is why it’s important to invest only in firms whose business models you fully understand, says Wally Weitz, president of the Weitz Funds. Frankly, that writes off much of the financial sector, since no one seems to know all the counterparty risks banks and brokers are exposed to.

By contrast, you might consider a stock like Nike (NKE, Fortune 500) (see the chart above). It’s no secret how this firm makes money – shoes and apparel. And while it’s threatened by the recession, Nike has a solid balance sheet, a powerful brand, and is making inroads into the lucrative Chinese market.

Avoid firms with big debts. The father of value investing, Benjamin Graham, argued that financial troubles are often “heralded by the presence of bank loans.” So he favored companies with low debt.

Graham, in particular, preferred companies in which working capital – defined as current (or liquid) assets minus current (or short-term) liabilities – exceeded long-term liabilities. In theory, those firms, which include companies like Nike and the oil driller Ensco International (ESV), have enough assets on their balance sheets to meet all their obligations.

At least make sure the company generates enough cash to pay off debts maturing in the next few years. Why? It used to be that firms could simply refinance when debts came due. But in this credit crunch, that’s no longer a given, says Bill Fries of the Thornburg Value Fund. You can look up cash-flow figures here. But you’ll have to look in the footnotes of corporate annual reports to find out how much debt is coming due soon.

If you don’t want to do the leg-work, there are plenty of portfolios that follow value guidelines. Several can be found in the Money 70, our recommended list of funds, including T. Rowe Price Equity Income and Weitz Hickory.

All of these portfolios charge lower-than-average fund fees. And that’s important. After all, you’re bargain hunting.

First Published: April 23, 2009: 4:50 AM ET