11/30/05 Intra-Day Notes

...CNVR - I unloaded 2/3 of my shares yesterday to avoid holding a trading position in this volatile stock through their earnings. They are reporting after the bell tonight. I have had some bad experiences through the years trying to anticipate how the market will react to earnings reports. Given the nice run this stock has had, I am playing with house money so to speak with the remaining 1/3, so am sitting back to watch the action.
...And the action has been interesting. In the after hours trading sessions last evening, Yahoo Finance reported that the stock had traded down $3.11 from the day's close. That certainly got my attention. I checked on the Nasdaq website, but found nothing there regarding the trade. They showed only 3 trades for a total of 700 shares with a low of $16.54 when I checked. The stock had closed the regular session at $16.63.
...Today CNVR opened at $16.54.
...Business Week Online also ran an article on Convera 11/29. http://www.businessweek.com/the_thread/dealflow/archives/2005/11/the_long_and_sh.html
That was interesting because I wondered why a publication as big as Business Week would care enough about a company that had generated a total of $5.5 million gross revenue in the previous quarter to write an article about it the day before that company reported earnings. I still wonder about that.
...One thing the article did point out was that Convera is a stock that people either love or hate. During its 222% price gain, short interest has climbed the entire time, too, and is now over 15%, according to the article. That is certainly reflected in the tone on the Yahoo Finance bulletin boards when folks discuss CNVR. The bulls seem to think it is the greatest thing since sliced bread, and a threat to Google, while the bears try to scare the bejabbers out of everyone, as they always do. Me, I'll sit back with my position, and wait for the dust to settle after everyone reacts to the numbers. If this really is going to be a good long term story, there should be plenty of time to add. If it is going to be a train wreck, time will tell that as well.
...Regarding the Yahoo Finance bulletin boards, I frequent them sometimes to come across a nugget here or there. Many of the posts are drivel, and many posters, taking advantage of the anonymity the forum provides, use it for all sorts of purposes, since they can say anything without fear of reprisal. But it is where I found the above mentioned article about Convera. It is also where I first found out that earlier this year, Bill Miller of Legg Mason Capital Management bought into Convera to the tune of 5.5 million shares in a private placement.
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/24/AR2005102401708.html .
Analyst issues: I never cease to be amazed at how many people pay so much attention to the pronouncements coming out of the sell side brokerage houses. Gotta love 'em. As I've stated here before, XTO is a core holding for me. I keep a long term core position in the stock, and then trade around that core position from time to time, adding or subtracting and on occasion even going short (as a trade, not the core position) when I think it is going to take a hit for a while. But I check on it every day, which is how I ran across the following: The analyst for J P Morgan who follows XTO issued an upgrade on it 10/4/05. Since I was painfully aware that the stock had been getting clobbered regularly for a while, I decided to look further into the analyst's performance on this stock. Here's what I found:
...On 3/1/05 JPM downgraded the stock from overweight to neutral. It closed that day at an adjusted price of $32.33 (per Yahoo Finance - actual close was 43.28, but closing data was adjusted for subsequent 4:3 stock split on 3/16.)
...Then on 10/4/05, JPM upgraded the stock from neutral to overweight.
...How did those recommendations work out, you ask?
...From the 3/1 DOWNGRADE to the 10/4 upgrade, the stock went UP 40%.
...From the 10/4 UPGRADE to last night's close the stock has gone DOWN 9%.
...But hey, we're talking professionals here folks, don't try this at home.
...It is almost enough to make someone think that the 3/1 downgrade was intended to force weak hands to sell the stock so that someone could accumulate shares on the cheap for a position, then the 10/4 upgrade was to bring liquidity in so that those shares could be dumped? Nah. They wouldn't do that.
...Actually, I happen to agree with the upgrade. On 10/20, XTO reported record earnings and revenues. They are one of the most efficient of the oil/gas producers, and I like the fact that they are entirely located here in the U.S. Hopefully, that lessens the chances of geopolitical risks.
...Another note regarding bulletin boards and XTO: Mr. Simpson, who runs the company, gets bonus compensation that pay him on the levels of a rock star, maybe even a baseball player. People on the boards get apoplectic every time this issue comes up. And I wish the company had another system in place. The compensation sometimes does seem excessive. But, at the same time, this stock has been an outstanding performer, and unless something changes in the economy or the company, I expect it will be solid for the foreseeable future (but who knows? I don't, it's just my opinion.)
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11/29 CNVR update

...Sold 2/3 of the CNVR position on the run-up today. They are reporting earnings tomorrow, and as a general rule, I don't like to hold trading positions through earnings. This stock has had a really nice run, it is volatile, and there is no telling how the markets will react to whatever news comes out tomorrow, good or bad.
...I'm keeping 1/3 as a longer term holding, not a trade. And once the volatility from the announcements tomorrow calms down, I may re-add a trading position.

Note #2 11/22/05 Pre-Market

2nd day before Thanksgiving - down seven years in a row.
...For very short term traders, the 2nd day before Thanksgiving has been down the last seven years in a row. That makes an attractive one day trade setup for shorts, especially given that the S&P 500 has been up the last four days in a row at a very steep angle. See the charts.
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...Short squeezing? Nice article on the MSN Money site today by Jim Jubak, one of my favorite columnists. Jubak is an excellent picker. One could do a lot worse than just following his model portfolios. He has consistently beaten the market. The article today is about short sellers, the continuing battle between the bulls and the bears, and how the bulls sometimes take advantage of the bears plight (called a short squeeze, and it can be painful, I can testify). There's also some pertinent observations in there about hedge funds. That's interesting to me, as I think those deep pocketed hedge funds (controlling about $1.1 trillion dollars according to the article, account for a lot of the strange pin action in the markets these days. Here's the link:
http://moneycentral.msn.com/content/experts/jim_jubak.asp?msn
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11/22/05 Pre-Market

Hey! It's War Out There. Watch yourself.
...Interesting article by Paul Farrell on MarketWatch this morning. Interesting because of its downright belligerence toward the Wall Street establishment. Farrell is often different from most of the financial writers you read, but this one is bold even from him.
...His contention boils down to this - it's war out there. And the people who should be looking out for you, and who are providing your guidance and the information you use - they are your enemies. Here's the link to the entire article:
http://www.marketwatch.com/news/story.asp?guid=%7BF5F5DB02%2D70B6%2D41C2%2D94A4%2D0DD58C71D5FC%7D&siteid=mktw&dist=
...Did you know, according to Mr. Farrell, that Wall Street tells you that for every $10,000 income you expect in retirement, you'll need about $230,000 in investments?
...Mr. Farrell wrote an article a few years back that I saved somewhere - can't find it right now - on how one could retire with a lot less money than anyone would think. His point on that article was to tell you to not let anyone tell you that you could not retire. He has done it three times. I plan on doing more writing about that subject myself for several reasons.
...I like freedom, and I think we have become a nation of serfs. I have seen people live in retirement on what would normally be considered poverty level incomes, and seem to do as well as most other lower middle class folks. The secret? They were debt free, not in bondage to any lenders, especially those of the credit card ilk.
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Better to be lucky than good? Sometimes, for sure. Some time ago a friend urged me to get into Convera (symbol CNVR). I don't normally take stock tips, from friends or from those friendly advisors giving out all those free stock tips on tv. (Incidentally, I get great amusement out of those disclosures that some of the financial shows use now when interviewing an analyst about a pick he or she is making. Here this person is telling you how much they like this stock while the disclosure info on the screen shows that the analyst doesn't own the stock, nobody in his/her family owns the stock, his/her firm doesn't own the stock, but hey, they think it's great anyway!) But I put CNVR on my watch list.
...And when I saw it moving, I picked up a few shares just so I wouldn't have to hear about it in case my friend turned out to be right - you know how those friends can be. But as I kept track of it every day on my stock watchlists, I saw that the up/down volumes suggested accumulation. That set off my radar detectors. So I checked further into the stock.
...They have about 200 customers currently for their paid search engine, and many of those customers are U.S. government agencies, including our defense agency. Convera's search engines are able to handle complex queries that lesser engines cannot. And their largest shareholder is the investment bankers the Allen Group. Mr. Allen has been listed as one of the 400 richest Americans according to Forbes magazine. All of that made me think that something might be going on here, and I bought more.
...So now CNVR has become my largest holding, at least for now. And I'm thinking about adding more as a trade if the positive volumes keep occurring. They report earnings December 1, and they are also coming out with an updated product launch.
...The BB's are very mixed about this stock. Some folks seem to think that they are going to rival Google, others think that they are all hype and very over-priced at cheaper levels than they are now. I guess that's what makes a market. There's even one disgruntled ex-employee bashing them on the boards and I like to see what folks like that have to say as well. I see that back at the peak of the dot-com bubble back in 1999-2000, they once traded as high as $70 a share. Who knows what will happen from here? What makes it tradeworthy for me, in addition to the government agency contracts and the quality financial backing, is that I see the volumes higher on up days than on down days - sometimes it is tough to tell, but that normally means accumulation.
...As for frequenting BB's, I take everything I read on them with a very large grain of salt. People are posting anonymously, and without verifiable track records. But every now and then you run across a nugget. Besides, they can be entertaining and I like to hear everybody's opinion on something I'm checking out, whether they be knowledgeable or a whack. That's where I came across the following link somebody posted. Convera was mentioned in an article on the online edition of Military Information Technology. Here's the link:
http://www.military-information-technology.com/article.cfm?DocID=1245
...This is not a stock that I would have found using any of my pre-determined screens, and it is not the kind of stock I would normally be in, but the ride has been good so far. Better lucky than good? Sometimes.
...Along those same lines, I'll mention BMD. I first heard of this company on Cramer's Mad Money show on CNBC. Sometimes Booyah Cramer has a segment where he invites callers to try and stump him on a stock. That's what happened with BMD. He didn't know anything about them. But then he checked them out later and featured them on a subsequent show.
...What I decided to check then was the market reaction the next day. Sure enough, BMD opened up about 20% at the open, and at one point during the day was up over 30%. Proof again that the mania still lives. And that people are always still hanging on the words of a guru instead of thinking for themselves, but that's another story. I considered shorting them based on that explosive over-reaction, but didn't.
...But I did check them out for myself. On their web site they have a picture that would be a tree hugger's worst nightmare, big equipment, downed trees, excavated earth, etc. But I digress. They also have a 34 page slide show explaining what they do and why they think they will be profitable. The company was formed in 1994 and to this point has been in a developmental stage. They are becoming an operational company in Q4.
...They are located in the heart of Canadian oil sands country. That got my attention because I am a long term energy bull, and Suncor (symbol SU for home gamers as Mr. Cramer would say) is a core holding for me. But they are not in the oil sands business. They apparently lease the mineral rights under the oil sands.
...They are going to mine rocks and limestone, with limestone being the main focus starting about 2007. Apparently the oil sands companies use a lot of limestone. And BMD believes that they can provide it, due to their proximity to the oil sands companies, at a significant discount to their nearest competitor. So that should give them an edge over any competition. This looks like a classic pick and shovel play to me. Anyway, I picked some up for the long term port. I put stuff like this in an account that I don't watch daily. It is on a momentum run right now, and those can end badly and be nerve-wracking. But this looks to me like a good longer term play, and a natural fit and different way to play the energy market.
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Recommended link of the day:
...I recommend reading the following article from Alan M. Newman entitled Still On Overdrive.
Here's the link:
http://www.cross-currents.net/charts.htm
...Great stuff! Newman runs a subscription site, but periodically publishes a free report. This one is outstanding, IMO. (Note: I don't subscribe to Mr. Newman's service, I don't know him or get anything out of this. I just think this article was particularly noteworthy for the wealth of pertinent data shared.)
...So much info in that article that I hesitate to highlight any one thing, but of particular note to me was the following:
...1. Program trading accounts for well over half the trading volume on the NYSE. Newman says that in the week ended September 16, it amounted to 70.9%. Program trading is defined as trades where at least 15 different stocks are traded with a total value of $15 million+.
...2. Mutual fund cash positions are near or at all time lows. Does that beg the question where will the new money come from to finance continued higher stock prices?
...3. Total margin debt is higher now than at the end of December 1999. The mania lives.
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5th year of Decennial Cycle:
...Remember at the beginning of the year hearing about the 5th year of decennial cycles, and how great the returns were? In the 20th century, for example, the smallest gains for a year ending in '5' was 10.9% in 1965. The best was 81.7% in 1915. (Data in Newman's article).
...This year through Friday November 18 close, the Dow is still down for the year. According to Yahoo Finance, the DJI closed December 2004 at 10783.01. It closed this past Friday 10766.33.
...Note: From mid-October through the end of the year, the Dow went up in all those years ending in '5', and I certainly would not bet against it happening again. I think it will. In fact, the smallest gain was about 3%.
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...Of particular interest to me was the data about program trading. To me, this past year has seen extraordinarily strange action. It has been different than I have ever seen. I think there are many reasons, and maybe I'll go further into that some other time.
...But think about this. When computer robots are throwing money around program trading a minimum 15 stocks at a time, that can account for some of the strange action one sees intra-day, or even days at a time, in the markets. For example, I have seen many times in the past year in particular, sessions where a stock would go up relentlessly all morning long, then fall just as relentlessly in the afternoon, making a perfect pyramid pattern. Does that make sense? Is it market efficiency, or is it manipulation and big guys forcing the action one way and then the other?
...And then there's the hedge funds. The last I saw, there were about 9,000 of them. And from what I understand, most have at least a $1 million buy-in. If you have to ask what the minimum is, you don't belong, I'm guessing. :)
...But consider this. When a deep pocket hedge fund sets its sights on a stock, do you think it is unreasonable to assume they have the firepower to move it whichever way they intend, without any regards to fundamental or technical considerations of the equity in question, and then, just as quickly jerk it the other direction?
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Energy
...Energy stocks still taking it on the chin. That has been painful for me, as I keep long-term core positions in a few oil/gas stocks. Everybody's been talking the energy stocks down, there is political pressure from all sides, good weather forecasts, blah, blah, blah. I read recently where the legendary oil maven T. Boone Pickens, thinks that oil is going to $50. Many other folks think it will go a lot lower than that. Maybe it will. I'm certainly no expert.
...But at the same time, I don't buy a lot of the arguments against higher energy prices. The whole concept of demand destruction that I've been hearing so much about doesn't make sense to me, and I would appreciate somebody explaining it to me in terms this old country boy could grasp.
...To me, the market bulls and oil bears can't have it both ways. If demand is falling, how can that be good for the economy? If demand is really falling, then doesn't that mean that businesses are pulling back? Doesn't that mean that consumers are feeling the pinch and cutting back? Isn't that bad for the whole economy?
...And as for releasing oil from our strategic reserves, doesn't it have to be replaced? And did you know that Europe has been sending oil to us from their strategic reserves, and that is now going to stop?
...And here's still the whale in the pond. CHINA. That is what is different this time. We keep hearing about Chinese demand slowing, then later find out that it didn't. I don't think it will. Here's a couple of reasons: Short term, China is building their infra-structure. They are going to be hosting the 2008 Olympics, and every time I think of that, I think Germany 1936. They are going to want to impress the world. And that means a continuing big buildout, not a demand decline. Longer term, I think it is clear that China intends on becoming a world super power, and whatever you or I may think of that, it changes everything from the energy demand standpoint in my opinion. That genie is not going back into the bottle. When the world's largest nation decides to become a heavyweight, energy demand has to go up long term.
...Some folks believe in peak oil theory, some believe that we will never run out of oil. Some optimists believe that free market economies will find other, cheaper alternatives eventually. Whatever. For the foreseeable future, I think higher energy prices are here to stay unless the economy tanks.

No Touch Portfolio results

NO TOUCH MODEL PORTFOLIO
...One of the things I intended to do in this blog was to keep track of model porfolios. Back at the beginning of 2004, I made up a 'no touch' portfolio for a couple of friends. It was designed to buy and forget. I just checked out its results since the beginning of 2004 vs the market averages, as of the 11/4/05 close.
...It was designed as a $10,000 model portfolio. Here's the mix:
$3000 OAKBX
$1500 OAKGX
$1500 BBHIX
$1000 PEMDX
$1000 PSAFX
$1000 TGLDX
$1000 ICENX
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Since the beginning of 2004, here are the results. The results are given both with and without dividends. The results do not include capital gain distributions, since this is just a down and dirty exercise, and Yahoo Finance doesn't include that information. They also don't include total results for PEMDX, since Yahoo Finance doesn't include the data for this fund back to the beginning of 2004 - I used the earliest date in Yahoo for PEMDX. The dividends were just added on to the current price as follows: (Current price * number of shares) + total dividends paid since January 2004. Divide that total by original purchase price * number of shares to get the total return with dividends. Info provided just to let you see how the calculations were performed. They would not be exact, of course, in real life, but should be in the ballpark.
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Model portfolio returns:
20% return without dividends included.
25.1% return with dividends included.
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As compared to:
S&P 500: 9.7% return.
Nasdaq: 8.3% return.
The S&P 500 and Nasdaq returns were calculated by dividing the 11/4/05 closing price by the 12/31/03 closing price.
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SPY (S&P 500 trading vehicle):
13.2% return without dividends included.
16.6% return with dividends included.
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QQQQ (Nasdaq 100 trading vehicle):
11.1% return without dividends included.
12.1% return with dividends included.
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...I think the model portfolio has done pretty well. Makes me wish I had used it in real life. If I were using it in real life, I would probably re-adjust the dollars in the account annually to the original percentages (i.e., OAKBX being 30% of the fund, etc.). I would probably cut TGLDX and PEMDX in half as well, and distribute the funds prorata among the other funds except PSAFX.
...Looking at the results, I might look for something other than PSAFX. It was put in for diversification, and with the expectation that it would perform better in a poor market environment than some of the other choices. Remember, this was to be a buy and forget portfolio, and I think has done well overall.
...I also think the results could be improved with the following adjustment, but I have not done any research to back it up. It is just speculation. It would also require some trading, something the No Touch Portfolio was designed to avoid. Anyway, the idea would be to be long in a stock fund (my old favorite was NPMDX, a mid-cap growth fund - I haven't checked out fund performances for some time, so don't know how this has fared in the last year or two) anytime the markets were above key averages, and in a bear fund, probably URPIX, whenever the markets were below those long term averages. We could take the $1000 we get from reducing our exposure in the TGLDX and PEMDX funds, and use that for these occasional trades.
.....For example, let's use the 200 day moving average as the bull/bear line. Any time the S&P 500 is above its 50 and 200 day exponential moving averages, and the 50 day average is above the 200 day average, we are long in NPMDX. Any time the S&P is below its 50 and 200 day exponential moving averages, and the 50 day average is below the 200 day average, we are in URPIX. Any other combination of averages, we are in cash for this portion of the porfolio, and not in either fund.
...Following is the rationale used in making up the No Touch Portfolio:
...OAKBX: Balanced fund, usual mix seems to be about 60% domestic stocks and 40% high grade, mostly government, bonds. They've only had one down year since their inception in 1996. Oakmark is a value fund. This fund is my longest term holding, and I have been very satisfied. I tell people that if I had to put all my investment money into one stock or fund and leave it, this would be my choice.
...OAKGX: Oakmark's global fund. I like this one because it has the freedom to buy any stock they select, big or small, U.S. or foreign. So I feel I am getting their best ideas, and not just a fund that is being limited by some restriction (i.e., U.S. only, small cap, large cap, etc.).
...BBHIX: A government bond fund, mainly TIPs. It hasn't done very well, but was included for diversification and as an inflation hedge.
...PEMDX: Emerging market bond fund.
...PSAFX: Kind of a bear fund. It has holdings in foreign bonds, foreign currencies, U.S. and foreign stocks and precious metals, among other things. It was included for diversification and with the intent that it would be a portfolio help in poor markets. It has not done well.
...TGLDX: Precious metals fund.
...ICENX: Natural resources fund. This is my favorite energy fund, and I use it in real life.
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...As mentioned earlier, looking at the results makes me wish I had used this portfolio in real life. As it is, I keep long term positions in three of these funds: OAKBX, OAKGX and ICENX, and I trade stocks and mutual funds.