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	Taking on the Not-So Dummies
	What to Do When Up is Down

	MaryEllen Tribby Publisher
	Jedd Canty Business Director
	Nicole Reynolds Marketing
	Jon Herring Editor

	Charles Delvalle
	Andrew M. Gordon
	Dr. Russell McDougal D.D.S.
	Rick Pendergraft

Tuesday, April 8, 2008

Taking on the Not-So Dummies


	Lynn Carpenter

You’ve heard it before. Wall Street is full of idiots.

But you won’t hear it from me.

In fact, I think the whole notion of idiots on Wall Street is a dangerous idea for people to assume. It makes you vulnerable to silliness. Like this bit from one of my favorite personalities, Jim Cramer. I don’t worry about picking on Cramer this time. He’s a big guy and he can take it. Anyway, here’s the mal mot straight from the Mad Money Recap website:

“One of the best ways to make money in a stock is to buy it right before the company undergoes dramatic change. That’s what’s going on in Applied Materials, Cramer said on Tuesday's show, and Wall Street hasn’t realized it yet.”

Whooo! My stomach is sore from laughing, and my head hurts from the bump I got when I tried to get off the floor from under my desk where I rolled in helpless glee. Excuse me… gotta wipe the tears out of my eyes.

Now listen, I am going to reveal one and only one stock in the
Rising Tide portfolio—Applied Materials. I recommended it in October 2006. And I have this to say about it.

Wall Street knew.

Yes it did. And so did I.

Performers and entertainers in the investment business need attention. It’s easy to get it by saying “Wall Street doesn’t know” or that they are recommending a stock “before Wall Street finds out.”

That’s pure bunkum. On occasion, a person working at the company or a local newsletter will catch some small new development that may seem too minor to a faraway New York analyst. But it’s not commonplace that this kind of news even goes beyond the company cafeteria. And unless the secret comes from someone in the business who understands what it means or the local paper, believe me, Wall Street already got it

That’s not to say that everyone on Wall Street will do the right thing. Nor will they always understand its implications. But before you figure someone has tipped you a hot secret, at least check the company website.

Let me show you something. This was tucked into the very short “Management Discussion” section of Applied’s quarterly report for May 2006:

“Subsequent to the second fiscal quarter of 2006, Applied entered into certain agreements in connection with the Company’s long-term growth strategy. Management believes that these pending transactions will enhance Applied’s ability to extend its nanomanufacturing capabilities into adjacent and new markets, including: color filters for flat panel displays, solar energy, flexible electronics, energy-efficient glass, track solutions for semiconductor manufacturing, and advanced parts cleaning services. These transactions, when completed, will involve the acquisition of Applied Films Corporation, formation of a joint venture with Dainippon Screen Mfg. Co., Ltd. and purchase of certain assets of UMS Solutions.”

Note the “new markets” include energy efficient glass and solar. I guarantee you that everybody on Wall Street with any interest in the semiconductor industry read the quarterly report on the industry’s largest player. What’s more, I double-guarantee you they read the management discussion. That’s always a section you read if you’re serious. And in this case, it was only six paragraphs long. And if all of Wall Street in some incredible case of blue brain fog missed that, there was the annual report, published Dec. 14, 2006:

In fact, Applied Material’s solar play has been so well known that just this Monday (April 7) Credit Suisse downgraded Applied Materials to neutral because it thought that it was getting too much of its income from its solar panel business.

Wall Street doesn’t miss much. It spends billions on research; each investment house and major bank spends millions, hundreds of millions, even, every year. The advantage is not having the information. We can get that as well. I certainly found out about Applied Materials’ solar plans from the early days, just by sitting at my computer reading the same kind of material anyone can get if they try.

Our advantage is never in discovering something Wall Street doesn’t know yet. It is in understanding what it means.

But don’t believe Cramer just discovered Applied Materials’ plans and you’re coming early on this play. Very often, falling for that old “special secret” line will only net you a company Wall Street wouldn’t touch and you shouldn’t either. At least with Applied Materials, you are getting a good company with a good dividend.

Sincerely,

Lynn Carpenter

P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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What to Do When Up is Down


Jon Herring

What do you do when up is down and down is up in the markets? That’s what KG in California wants to know. He wrote to IDE this week, asking:

“How do you invest in a market like this? I just don’t understand it. A few weeks ago, bad news was greeted with massive selling. Now, it seems like the worse the news the bigger the rally. Bear Stearns ceases to exist and the market rallies furiously, led by the financials. Then Lehman and now Washington Mutual go out and dilute their shareholders to the tune of billions and the market is off to the races.

I have always heard that when the market responds positively to negative news, it is a sign that the bottom is in. But I have a hard time believing the worst financial crisis in decades would come and go just like that?”

Whether you are long or short, today’s market can be frustrating. The Dow might be down 150 points by lunch and end the day up 200. And it can be next to impossible to determine how the market will react to news.

Case in point, on Friday last week, the U.S. Bureau of Labor Statistics announced 80,000 jobs lost in March and 232,000 lost in the first quarter of 2008, with unemployment at its highest level since Hurricane Katrina destroyed huge swaths of Louisiana and Mississippi. The market basically shrugged off the news and ended the week on a high note.

So, what do you do in a market like this? First thing you do is take a few steps back and look at the big picture. Here’s what the big picture tells me. By virtually every fundamental and technical indicator I know of, we are in a bear market. Until proven otherwise, the overall trend is still down.

But it’s important to remember that some of the sharpest moves to the upside come in the midst of a bear market, especially when stocks have taken a beating for weeks on end.

As a long-term investor, your plan of action should be the same in a bear market as it is in a bull market. Buy great companies with a wide competitive moat, a strong balance sheet and growing earnings. Sell these companies only when the reason you got into the trade no longer exists or when they fall far enough to trigger a pre-determined trailing stop or stop-loss point.

If you are more of a trader, the game plan in a bear market is rather simple. Sell stocks (and sell stocks short) when the markets get stretched to the upside. And buy stocks with both hands when the markets have fallen to such a degree that you are scared to death to buy... like the Monday morning when Bear Stearns (BSC) was swallowed by JPMorgan Chase (JPM).

Where are we today?

Technical indicators show that the long-term sell signal is still in force. But for the time being, stocks are in a technical rally that should challenge overhead resistance. If you’re itching to buy, keep a tight leash on your positions and keep your time horizon short.

In my opinion, the fundamental situation is just too bearish to sustain a long-term uptrend. The U.S. consumer is becoming increasingly squeezed. Not only has the housing bust pulled the rug out, but inflation and unemployment are rising and credit is becoming harder to get.

Not to mention that there are likely twice as much subprime losses in the future as we have written off to date. It is estimated that another $400 billion in write-downs (possibly a LOT more) are still coming. And that does not even include the potential defaults on credit cards and other consumer related debt.

And outside of the financial sector, we have only seen the tip of the iceberg in terms of corporate earnings disappointments. Financial analyst John Mauldin summed it up quite well in his email alert, Thoughts from the Frontline:

“Bear markets are made by continued earnings disappointments. It typically takes at least three difficult quarters to truly disappoint investors. We are just in the early stages. The recent drop in the stock market has been primarily caused by the continuing crisis in the credit markets, and only modestly by disappointing earnings. We need a few more quarters of disappointment to really get to a bottom in the stock market. It could be a long summer.”

I agree with John Mauldin, KG. We are in the early stages of this bear market. You need to trade and invest accordingly.

Jon Herring

P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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