October 2007 Archives (Eileen's picks)

October 2007 Archives

Sing when the spirit says sing

Rating: 2.00 (10 votes) Vote:

InvestorPlace Blogs is powered by Marketocracy. Marketocracy has authorized Investor Place Blogs as an official registrar for voting through Marketocracy's Investment Research Rating service. Registered members of InvestorPlace Blogs are linked with a Marketocracy account to establish voting power based on their performance of trading and posting on stocks.

There's a marvelous African American spiritual called I'm Gonna Sing When the Spirit Says Sing. Just thinking about that song lifts my spirits.

Yesterday, watching the market (and several of my picks in particular) skyrocket, lifted my spirits too.

Then I remembered that, while to the best of my knowledge there is no song about it, there is a tried and true adage that definitely applies to the market: What goes up must come down.

I believe that profit taking is going to set in soon, especially since yesterday's rally appears to be based largely on euphoria about bad news. As MSN's Jim Jubak said in his post today, "There's not a chance the worst is over, and Wall Street knows it." Maybe a few more days of rally, with spokespeople talking on television about how the fourth quarter is going to be even better than September was to draw cautious money of small investors out to "buy near the top and push it higher" and then POW. Even if it only lasts a day, there is bound to be a reckoning.

My tune changed. Suddenly I heard You Gonna Sell When the System Says Sell. So I sold more RIO -- which has grown phenomenally since I bought it low -- and some AMX which, though doing really well, is my least well performing foreign stock. I plan to keep my cash percentage between 29% and 31% percent, selling shares of foreign stock (which always drop the furthest fastest) to do so, until there is a major pullback.

When the drop comes I'll be ready to buy what the system says buy, which is large cap U.S. growth stocks. And possibly a new large cap growth foreign stock if the plunge is really big. In the meantime I'm reading posts to learn from others and researching possibilities.

A "make up" purchase

Rating: 2.31 (26 votes) Vote:

As profit-taking on high-flying foreign stocks set in with a vengeance yesterday, I got to offset the depressing feeling of sinking in the ratings with thankfulness that I had safely stowed $100,000 in cash while prices were at or near their highest.

I also found I had to make a purchase because as stock prices dropped, the percentage I was holding in cash was nearing 35%. In real life that would be fine, but as we're all aware, a competition is not real life, and I didn't want to risk non-compliance as we're nearing the point non-compliant portfolios will be eliminated from the competition.

So what to buy?

I hadn't made up my mind yet on large cap US stocks, so I went back to one of my original choices that never made it into my portfolio. I would have liked to buy PBW, an exchange-traded fund specializing in alternative energy, but once again competition rules stood in the way. So I looked for a single stock that was as much of a broad-based choice as possible.

I settled on LDK Solar Co., Ltd. (LDK), a manufacturer of multicrystalline solar wafers, which are the principal raw material used to produce solar cells. LDK sells multicrystalline wafers globally to manufacturers of photovoltaic products, including solar cells and solar modules. The company went public June 1, and it is helping China meet its pre-Olympics clean air objectives as well as selling to companies all over the world. A friend who lives in Washington State tells us they see and smell the pollution from China on certain days, so it's a positive sign for all of us as well as LDK that China is investing heavily in alternative energy.

StockScouter doesn't cover foreign stocks, and it's too new for StarMine to have reliability data yet. Morningstar rates their profitability an A- and the 2 analysts covering it say (and have said through its meteoric rise) "Hold".

Argus Research said on August 24:

"We are initiating coverage of LDK Solar Co. Ltd. (NYSE: LDK) with a near-term
HOLD rating and a long-term BUY rating. LDK is a Chinese startup manufacturer of
multicrystalline solar wafers, the primary component in photovoltaic solar energy cells.
The market for solar energy is growing rapidly thanks to the increasing demand for clean,
renewable energy, though solar power still depends on government subsidies to be
competitive with fossil fuels. LDK is looking to expand its business outside of China and is
rapidly adding manufacturing capacity. While LDK's long-term prospects appear bright,
the shares have risen substantially since the June 1 IPO, and we remain cautious about the
stock at current prices."

After dropping more than 10% yesterday alone, LDK hit my limit order price of $58 just before the market closed, and I bought about $17,000 worth, enough to keep me in the 29% - 31% cash position I am aiming to maintain until the October earnings reports are over. The first time I bought LDK (when it landed in my practice portfolio) I bought it on August 16 when it hit my $34.50 limit order price, and since then it's risen to a high of $76.75, so I'm reasonably confident in my current purchase price.

Now -- barring more plummets that don't trigger my limit orders -- I just watch my compliance numbers, read your posts and research until earnings season is over.

Be sure to read the comments

Rating: 1.44 (9 votes) Vote:

I hope lots of people saw and acted on my suggestion that yesterday might be the time to buy RIO and/or AMX. They have both more than recovered from their dip.

The portfolio numbers haven't been updated yet; my portfolio is up more than $20,000 today thanks mainly to those two stocks.

Remember that you have to click the name of the article to the left to make comments; for some reason the form is not available on the featured posting of each blog.

In case you haven't discovered how to enable "comments" on your blog, read the excellent descriptions provided by toroandbruin. It can be done on previous posts, not just new ones. I wish everyone would do it because I've read many posts I would have liked to respond to.

Unfortunately, I should have been more pessimistic on my limit order price for LDK. Profit-taking has knocked the price down considerably. You might want to take a look.

Here's what the Motley Fool's are saying today about LDK:

"A former employee of wafer whiz LDK Solar (NYSE: LDK) has accused the company of inventory-reporting shenanigans. The discrepancy that's been cited would equate to an overstatement of about 33%.

"The company has taken a few actions in response. It made sure to note that this individual, hired as a financial controller, was fired after he didn't show up to work for about a week. This ought to help cast doubt on the claim by creating the image of some sort of jilted, slacker employee. More substantively, the company has conducted a physical inventory check, and contracted an independent party to do the same. The latter is obviously the most crucial to regaining credibility.

"It's somewhat amazing to see how much damage has been done to LDK's stock price by a hint of management impropriety. This is an unfortunate part of investing in a business on the other side of the world. When uncertainty is in the air, that wafer factory starts to feel very, very far away -- if, indeed, there is a factory. (Cue ominous music.) That right there is the psychology of fear at work.

"The selling seems a bit overdone here. That said, even after a 30% haircut, LDK doesn't look all that much cheaper than larger wafer producer MEMC Electronic Materials (NYSE: WFR). MEMC offers a similarly slim PEG ratio, a billion bucks on the balance sheet, and best of all, an absence of drama."

Here are more analyst ratings of LDK:

24-Sep-07 CIBC Wrld Mkts Downgrade from Sector Outperform to Sector Perform
12-Sep-07 Needham & Co Initiated Buy
7-Sep-07 UBS Initiated Buy
18-Jul-07 CIBC Wrld Mkts Initiated Sector Outperform
11-Jul-07 Piper Jaffray Initiated Outperform

Duff Beer's Question of the Week

Rating: 1.13 (23 votes) Vote:

Enjoy all your posts, DuffBeer. Thanks for the humor!

I've read several articles analyzing the effect presidential elections have on the stock market, and it's been negligible. Even the unique and constitutionally challenging undecided month after the 2000 election had no significant effect on the market.

MSN Investing Jon Markman's New Year's prediction last winter included the possibility that President Bush and Vice President Chaney might be impeached this year and Nancy Pelosi, the Speaker of the House being third in line, installed as President this year. Jon said he thought the impact of that -- or any of the other more probably predictions he made -- on the market would be temporary and minimal with all three indexes setting new records by the end of the year.

Personally I think this election is less likely to have an impact on the markets than any in the last 50 years. Business and lobbyist donations have already shifted dramatically from being overwhelming to the Republican Party and its candidates to 50-50. I just read an article that says there are indications that major conservative donors are so upset with the deficit and financial corruption that they may not donate this election cycle and may even back a few very conservative Democratic candidates. In such an environment, it's hard to envision big swings except perhaps in stocks that will benefit or be hurt by policy differences. Health care of
course leaps to mind, but I think most companies are already adjusting their approaches and products since the shift in control of Congress. Now there was a dramatic political event -- the shift of control of both the House and the Senate -- no one was seriously expecting, and I don't recall it's having a negative impact on the market. Think I'll go back and have a look!

Thanks for posing such an interesting question.

Bianca sells again

Rating: 1.64 (11 votes) Vote:

Bianca, my 15 year old fashionista collaborator, doesn't have time to shop this fall. She got a part in a play where she has to die convincingly twice and, taking psychology without having done the usual prerequisites, loves it so much it has inspired her to extra effort in science and math. Maybe Bianca is typical of teens this fall or maybe each one has a different reason for staying out of the stores, but fashion is not selling, and it's not the place we want our money.

Ralph Lauren himself, the epitome of fashion, decided the same thing. He exercised options and promptly sold them. A heads up for us to consider selling our shares if there ever was one! Nevertheless, Bianca and I took the time to do our homework, checking MSN StockScouter. Sure enough, the rating had dropped. Reading the details of that report:

"Expected to match the market over the next six months with less than average risk; earnings growth in the past year is holding steady compared to earnings growth in the past three years; price-to-sales multiple is slightly lower than the average for all stocks in the StockScouter universe, not bad for a medium- to large-sized company like RL; quarterly earnings report only slightly lower than analysts' consensus forecast; relative price change and consistency low"

and reviewing the long term reasons we bought it in the first place, we decided that if we really owned RL stock we'd keep it and buy more as the price drops.

But this isn't reality, it's a short term competition, and we're concentrating on doing our best from now until the end of the term of the contest, just as Bianca is with her least favorite class. So this morning Bianca and I followed Ralph Lauren's lead and sold our 260 shares of RL and cancelled our planned limit order purchase of American Eagle Outfitters (AEO).

This sale brings our cash position up to 31%. Like Keith Barton, I don't think this market euphoria is going to survive the earnings reports of the banks, so I'm going to be watching carefully for when it's time to pull more money out of my ever-growing foreign positions so Bianca and I are prepared to hit the "bargain basement sale tables" next week or the week after.

Will there be a blood bath?

Rating: 1.34 (18 votes) Vote:

How could I ever explain to the beneficiaries of our family trust that I knew risk levels were rising but I kept our money -- their money -- fully invested in the stock market anyway?

In real life several years ago I set myself the discipline of writing monthly to the family to detail how our trust is doing, what has been bought or sold and why, and to evaluate for them what risks and opportunities might lie ahead.

My competition portfolio is a pretend trust fund, and here as well as in actuality I've "harvested" more gains than the system calls for into cash because -- based on my reading -- I expect at least one more debt-related plunge of the markets.

Apparently I'm not alone:

New York Times
October 14, 2007

Banks May Pool Billions to Avert Securities Sell-off
By ERIC DASH

Several of the world's biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy.

Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days.

A broad framework for an agreement could be reached as early as tomorrow, according to people with knowledge of the discussions, but many important details still need to be hammered out. Another round of discussions is taking place this weekend, and it is still possible that the parties will not reach an agreement.

"Treasury is very serious about getting some solution in place to take away the fear hanging over the markets," said Alex Roever, a credit analyst at JPMorgan Chase who has been following the discussions but is not involved in them. "It is a very challenging thing to do. There are so many parties involved and they all don't agree.

The proposal echoes the 1998 bailout of the hedge fund Long Term Capital Management, when a group of big banks came together to prevent the fund from collapsing after it made a series of bad bets. And the current round of crisis-driven collaboration illustrates the heightened level of concern among both government and financial players.

While there are signs that the broader credit markets have begun to stabilize after the Federal Reserve lowered interest rates last month, a pocket of the commercial paper market remains under siege: structured investment vehicles, known as SIVs. The fear is that problems with these vehicles could infect the broader economy.

SIVs, which issue short-term notes to invest in longer-term securities with higher yields, are often organized by banks but are not actually owned or held by them. They are supposed to be financed through the issuance of commercial paper backed by pools of home loans and credit card debt, but the loss of confidence in the quality of subprime mortgage bonds has also tainted these securities.

Analysts say that investors have all but stopped buying SIV-affiliated commercial paper, and the worry is that the 30 or so SIVs will unload billions of dollars of mortgage-related assets all at once. That would put intense pressure on prices. As Wall Street firms and hedge funds mark value of similar investments they held to their new lower values, they face potentially huge hits to their profits.

Still, the impact on the biggest banks is even more severe. In times of crisis, they are committed -- either legally or to maintain their reputations -- to stepping in to buy those securities. Banks have already been buying significant amounts of commercial paper in recent weeks, even though they did not have to. But if they are forced to bring those assets onto their balance sheets, they might be less willing to lend to businesses and consumers. That could set off a credit crunch and thrust the economy into a recession.

The proposal being floated calls for the creation of a "Super-SIV," or a SIV-like fund fully backed by several of the world's biggest banks to provide emergency financing. The Super-SIV would issue short-term notes to finance the purchase of assets held by the SIVs affiliated with the banks, with the hope of reassuring investors.

But whether the banks would buy the assets directly or just buy the short-term debt is still unclear, according to people briefed on the situation. So are other aspects, like the amount of capital each bank would need to contribute, how it would be administrated, and the fee structures and cost burdens.

The effort to create a backup fund began about three weeks ago, when the Treasury secretary, Henry M. Paulson, called a meeting in Washington that included the chief executives of Citigroup, Bank of America, JPMorgan and other big banks. With Wall Street firms having almost no luck finding buyers for mortgage-backed securities and derivatives, Mr. Paulson wanted to see what could be done to relieve the bottleneck.

Several rounds of discussions followed -- in Washington, New York and on conference calls -- led by two senior Treasury Department officials: Robert Steel, the under secretary for domestic finance and a former Goldman Sachs executive who is a close adviser Mr. Paulson; and Anthony Ryan, a former investment banker who is now assistant Treasury secretary for financial markets.

Besides hearing from senior executives from each of the big banks, the group also sought ideas from others. Several big international banks, including Barclays and HSBC, have been asked about their interest in participating. The group also reached out to several of the major structured investment funds, as well as big institutional investors in the commercial paper markets.

My worst decision

Rating: 1.69 (13 votes) Vote:

Russ has written a thought-provoking not-to-be-missed post. At the end he invites all of us to write about our best or worst decision.

My objective in investing is long term, low risk, minimal tax, commission and management fee impact growth that takes as little of my time as possible to gain. I measure my success by how much I beat the indexes every year, and it's a bonus if I beat them every quarter.

My worst decision was not sticking to my original plan. Had I stuck with it and done NOTHING for the entire duration of the contest to date, my current total would be $1,204,154.75 and I would be in 46th place. My actual SLO portfolio ended last Friday at $1,131,333.65, 124th place.

In real life, I use exchange-traded and mutual funds for 80% of my investments, and use individual stocks as much as possible to get it and keep it balanced across asset and diversification categories and to interest family members, especially the younger generation, in investing.

I've found such a portfolio will generally be fine if you leave it untended for a while, even for months. Contrast the $204,155 gain of my untended-for-three-months EFT plus a few stocks original plan SLO portfolio to Earl Mitchell's apparently-untended-for-two-months portfolio that has lost almost $106,000. On August 24th when Earl was very near the top in the competition.

My original SLO portfolio, like our family trust, would have been largely invested in exchange-traded funds. I would have placed carefully researched limit orders to buy VTI, IWP, JKJ, PYH, DWM, VGK, PID, EEM, EEB, DBV, FXE, ICF, GLD, IGE, PHO, and DBC.

With some of the 20% reserved for individual stock purchases I would have placed limit order purchases for RIO, BAM and NVO. The allocations of each, based on their limit order price, would have created a portfolio perfectly balanced across all aspects of my diversification system and have left enough cash for purchases of individual stocks to balance categories over the duration of the competition. With the drops in the market I was sure August, September and October were bound to bring, I believed the limit orders were likely to all trigger. In fact they did, beginning quite early in August with the remainder being hit on August 16th.

So what happened? Why didn't I stick with the plan? In essence, I got too caught up in a last minute reinterpretation of the competition rules and switched from my tried and true approach to stock picking which I'm not interested in and normally do for very specialized reasons totally unrelated to the objectives of this competition.

Now the truth is, even had I stuck with my original plan at the offset of the competition, I would not have left that portfolio alone. I would have rebalanced it several times by now, because it has become way too heavy in foreign equity (gains averaging about 70%) and real estate (gains of 60.27%).

The result would have been less gain perhaps, but more potential for long term stable growth. In fact, my portfolio would probably have ranked only a little higher than my actual competition portfolio ranks now.

But I would have met my goal, meeting or exceeding my actual performance

* Trailing 30 days
+ Return: 10.69%
+ Did you beat the:
o S&P 500 (return of 6.13%): YES
o NASDAQ (return of 8.24%): YES
o Dow Jones (return of 6.03%): YES

So, on second thought, I think my worst decision was second-guessing myself -- whether it was on my original plan or a buy I made recently to compensate for a mistake I made early on.

It may turn out that deviating from my system to hold 30+% in cash awaiting an October crash may have been another mistake, but I dug out of the August hole not sticking to my original plan dropped me into by holding cash waiting for bargains, and now I simply won't buy when everything looks too expensive as long as I can beat the indexes while protecting 30% of assets -- in the competition or in real life.

Share the wealth

Rating: 2.08 (13 votes) Vote:

Share the wealth of your knowledge.

Those of us who are securing our own futures through investing can help make the futures of many others more secure too by simply sharing what we know and do.

I got a shock this week.

I put out an inquiry to my church on whether there would be interest in an adult education class on investing for those who know nothing about it, for those who might have as little as $100 to invest.

Responses started pouring in within minutes. I heard from people who are scraping by on a patchwork of jobs and from a doctor; I heard from retired people and from young parents; I heard from people who have no clue what investing is and from people who have had substantial amounts of money "managed" by advisors from companies like Wachovia and haven't seen a gain of any sort in years.

I discovered that people in fields that help others -- nursing, teaching, social work, law enforcement -- tend to know the least, have the least confidence in their own ability to invest, and yet be the most worried they should be doing more to secure their own financial futures and their childrens'. They are also the most likely to be ripped off by companies that sell them fixed annuities that charge more in fees than the money can ever gain.

As soon as I announced dates for two "101" classes, the classes filled up. Some people have to rearrange their work schedules or get grandparents to baby sit so they can attend. People have come up to me with tears in their eyes, saying what a wonderful thing I'm doing. Yet it's just a few hours of my time, sharing what I already know.

Share the wealth of your knowledge.

Contact your place of worship or one in a lower income community. Parent - Teacher organizations are another possibility. Or you could ask your local United Way or Community Foundation for an organization you might partner with - the organization promotes the class and provides a venue, you present.

If you're interested in sharing the wealth of your knowledge, post a comment (you have to click the title under my photo to get the version with the comment form), and I'll tell you more about what I'm doing and how my classes turn out.

Watching fund managers

Rating: 2.67 (3 votes) Vote:

One of you recently suggested that it's productive to think about what fund managers are likely to buy and sell because the volume behind their decisions has a disproportionate impact on the market. (Sorry I don't remember who wrote it - please post a comment if it's you and I'll put in a link to your post).

That got me thinking about how mutual funds fit into my approach to investing.

I'm not much in the way of a crystal ball forecaster, but I do look monthly at how market allocations are shifting. Is it toward or away from energy, toward or away from growth? That gives me an indication of what professionals are deciding so I can think about whether I agree or not.

When allocation data is updated, I look at how allocations have shifted in several mutual funds with high long term performance. Are they adding to or reducing particular large positions, are there stocks they've just added? I know the information is out of date by the time it's made available publicly, but it's fresh enough for my purposes.

I use funds for most of my and my husband's retirement accounts, some actively managed, some index. I'm more than happy to pay fees to avoid the time researching and agonizing, especially with foreign stocks and IPO type investments.

Three actively managed funds that have been very kind to my SEP are KINETICS PARADIGM FUND (WWNPX), DRIEHAUS INTERNATL DISCOVERY (DRIDX) and ACADIAN EMERGING MARKETS PORT INSTL (AEMGX).

Do you watch funds? Why? Do you own funds? What are your favorites?

If you're interested in mutual funds for any reason, check out FundAlarm. It doesn't provide what I look at on Morningstar, but it does provide an unbiased and often caustic look at funds, their managers and their performance.

Family/Bicycle Trust Portfolio

Rating: 2.10 (21 votes) Vote:

Have you seen what Ken Kam has written about the multi-generational trust he and his wife have created? He has an approach to providing support to future generations you may find interesting.

Since my father died, I've been responsible for keeping track of how the investments in our family's three generation trust are doing and making recommendations on what to buy and sell.

I enjoy knowing that what I'm doing is putting "wind in the sails" of the dreams and aspirations of the family, but agonizing over what type of investment to buy and how much to invest in any given investment is - well - agony.

To minimize the pain, I've developed a "diversification across asset types and more" system that answers most of those questions for me more or less automatically.

I've approached my SLO portfolio as though it too belonged to a family trust. My "Little Sister" Bianca, who's helping me with stock picks and with teaching a "101 of investing" class, represents the younger generation, and we're using the same diversification system.

Before the competition began, we set asset type percentages: 40% in US equities, 30% in foreign, 6% in real estate, 9% in commodities and 15% in "safe stuff". Now the November-December rally period is near, we've done our annual "shift out of safe stuff" adjustment, and increased foreign to 35%, real estate and commodities to 10% each and dropped "safe stuff" to 5%.

Instead of waiting for the calendar to tell us to re-evaluate, we decided to use a "down" day before the Fed announcement to assess and make purchases. That happened yesterday.

Here's what the assessment showed: we are $188,568 low in US equities, $56,387 low in foreign equities, $112,870 low in real estate, and $9,544 low in commodities, and, of course, that much high in cash, having salted away gains from foreign equities since mid-September.

It also told us we were $136,858 under plan in large cap, $200,080 under in mid cap and $30,430 under in small cap. We're doing fine in value investments, but need $31,222 more in core/blend and $283,586 more in growth.

Armed with that information and the research we've been doing over the last couple of weeks, Bianca and I made purchases that bring us close to plan. We are reserving $25,000 in PowerShares DB G10 Currency Harvest Fund, a cash-equivalent exchange-traded fund that has gained more than 7% since we bought it. We want to see what happens with our current purchases before we do any final buying.

I'm doing the real family trust assessment early too, but for a different reason: it's the anniversary of the start of my management of the trust, and I'm meeting with my mother in Florida to celebrate, so it will be a week until my next post. Bianca and I will tell you then what we bought and why.

Eileen's picks

Eileen Teska

Recent Posts

Monthly Archive