1 November 2011 Blue Light Specials

BAGAKOAA; 1 November 2011 Blue Light Specials

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November/2011

Well we did not post last night because we chose to do Halloween. We only had about 6 visitors to the house, but Jack went out with the kids in the neighborhood and that was a big deal for Devin and I.

You see when Jack was very young, about 4 we had a next door neighbor who came to the door with and ax in his head. Don't worry, it was Halloween and it was a prop. However, that image was burned in our son's mind and he did not enjoy the holiday for, well, for about 11 years. Yeah this was one of the few Halloweens Jack has suited up for BAGAKOAA let me show a picture of the Football Chicken ala Jack.

Some of you are saying it's not nice of me to embarrass my son like that and you would be correct. So I will make amends by sharing a special moment from our Halloween Party at PADI. I was asked to participate by dressing up. Our CFO, Gary P had an idea for my costume and I went along with it. I won the contest, but then found out the CEO and the CFO were not eligible. As you can see, I was quite the spectacle. By comparison, my son has little to worry about.

We mentioned we started another project at the house. They have stripped our roof off the garage and started cutting away at our garage floor to put new footings in for the second story room extension. They got a lot done today, but not as much as Devin. She has moved three bedrooms worth of stuff around, ran to the store to buy storage stuff and began organizing her closet and Jack's closet. It is amazing what she can get done in a day.

Jack had a great day at school even being singled out in religion class as an example of how hard work and focus can improve grades. I was often singled out in school as child. Usually it had to do with how quickly a grade could unimprove. I am especially proud of the job he is doing in Spanish. He struggles with this subject but just did a great job on a report about El Dios de los Muertos, aka Day of The Dead. I think he was hoping it was about zombies, but despite the disappointment, he did a great job.

After assisting Devin with her whirlwind duties this evening we enjoyed some pick up Italian and a round of DVRd Jeopardy. I may have had the edge on Devin tonight as she was really tired. Now it is time to piece together several started but unfinished blogs.

Blue Light Special All Aisles

Wow today was a whacky day and it would be easy to blame everything on those flakey people in Europe and some scary comments from leaders in Greece. By now this is not our first Rodeo, so why is CNBC and MSNBC and even Fox Business blaming the adjustment on the ills of Greek Greed and fiscal malfeasance? Here is why.

We had a chance to answer this earlier today when one of regular readers shared his "Geekatigue" with me. As I explained, "Please keep in mind that you and I and few million other retailers buying their 300-5,000 dollars worth of stock and our worries over the Greek situation is not what drove the market down. Hedge fund managers and MF managers are the heavy weights and their actions trigger High Frequency Program Trading. This is what was on the big boys mind in the last 48 hours. An incredible explosion in the Yen (which if un checked will do more to hurt the global economy than any tsunami or earthquake), disappointing retail spending and production reports from India, Canada, New Zealand, Australia, and Thailand (typhoon related) have many fund managers skiddish about the fourth quarter, a lackluster PMI report yesterday, worries about the FOMC meeting today and tomorrow, trying to understand what role china will play in the Eurozone bailout, flat construction spending, a drop in 4th quarter earnings expectations from 11% to 4%, and a market that everyone has admitted got a little overbought in a real short period of time. And that was just in the last 48 hours.

CNBC would not have many watchers or listeners if they tried to report and explain all of the linkage in those topics z z z z z z z z z. But that is the fact. A 2.5% correction usually does not have one cause. There is no more "build a base and go up" scenarios built into the short term (6-12 mos) scenarios. Sideways movement and volatility is here to stay a while and there are a lot of ways to make money of you are willing and able to do the homework and be patient.

For me a day like today is a blue light special. I took some profits, and added to a few positions and started a new one. (MSFT, if I caught the 26.00 entry point.)"

That's right, we had time to make some changes in most of the portfolios today. We closed out a few positions like TRP, SSN, HON, and even GLW as we did not like the volume and the direction. We added to AAPL, AMZN, NUAN, and started a new position in MSFT. Yeah we bought into the 800 pound gorilla from Washington. We have done our homework and this is what we like.

Recently we like what the big scary Apple and the big number 1 followed by 100 zeros (The definition of a Google, see ya read my blog you learn something.), has done to get Balmer and team off their Apple Baskets. Some of the innovation going on in the background is going to be very rewarding in 12-24 months, but the big money has not really picked up on it yet. We won't spend a lot of time of the fundamentals, but they are sweet. Almost 18 billion a year in revenue and almost 9 billion in cash year in and year out, it is a cash addicts dream come true.

We have teenage boy and we see his with his circle of friends on the Xbox and that platform gets better and better with each new blockbuster game. The sims driving the Xbox gaming is gaining traction in a lot of commercial applications. Windows 8 is slowy chipping into the tablet market and we will see a windows phone ala Nokia in the next 9 - 12 months. Emerging market are still buying a slew of PC based products and industry reports say they will continue to do so making the Microsoft Suite the major player in those markets. MSFT is being treated like old news and before everyone wakes up and see the potential, we want to get some.

We picked up some today at $25.99 a share. We are looking for a slow but steady race to their fair value of $37.5 by this time next year. That would be a pleasant 44% gain. Our stops will be set at $23.90.

We also added to our GLD and SLV position today. We mentioned the SGI (Simple Gold Indicator the other night.) and back tested 5 years worth of data. It was not that hard, but it got my excel skills back up to almost par level. Anyway if you had put 10,000 into GLD in September 2006 and sold when the price was below the 9 month average and got back in all the way when the price was above the 9 month average, you would have $21,765 dollars today. If you also added 1,000 a month with the same rules, your portfolio would be almost $100,000. Pretty impressive. Needless to say we were impressed enough to add to our Gold positions.

Step Right Up, Pick a Stock, Any Stock

(Written on October 23) The most enjoyable thing about this blog for me is when I go back and do a forensic on a position and see just how brilliant I am or are not. The next most enjoyable thing for me is when people are interested enough to ask questions even if they have read the disclaimer and I have warned them that I am just a blind folded monkey in the casino, just like they are. (Did I just finish two sentences with prepositions? Karl -my ghost writer- will be ashamed of me.)

Anyway over the last week or so, we have received a couple of requests or replies to my request to kick the tire and show the actual steps of doing the homework. DID YOU HEAR THAT? That was sound of about 39 people hitting delete. Yeah we are going to get a little instructive hear, but if you want to have any type of edge in this market, it may be helpful.

Doug from Canada is interested in getting in the game. Our adive to his was to look for products, services, or companies that he knows, fulfilling our RULE 1, only buy what you know.

His picks were very well know and two we have talked about here on occasion. He chose to consider AAPL Apple Inc., and BNS The Bank of Nova Scotia ay (sorry couldn't resist.)

Before we begin the homework, just as a reminder, here are few things to keep in mind.

Know your risk tolerance. We manage more than a dozen portfolios and part of the trick is understanding what their risk tolerance is before we get them into a position. So if you are Doug, you have to ask your self, based upon my current station in life am I more concerned about growing my capital or protecting my capital. If Doug is 25 and has moist of his income years ahead of him and is not burdened with a ton of debt and has his basic medical and disability insurance in order he would be in a better position to "reach for a return versus conservative bargain hunting. If Doug is 65 and is near or at retirement age, he might be more included to achieve a more conservative return than his younger self. I will do the analysis based upon a relatively younger person but basically conservative by nature. As such, we would peg his return goal in the neighborhood of double the 10 year yield so he will be looking for a 4-5% annual return. If he does the right homework, that should be very achievable.

OK let's do the homework on AAPL. We will be using 4 primary sources of information to do the homework. Finviz.com, the free side of Morningstar.com, The SEC filings page, and our brokers research in this case Charles Schwab. (Yes I do use more and I use subscription based premium services. Our annual subscription base is several thousand dollars, but our portfolios size justifies the expense.) The sources we are using today are free, except for the broker site which requires a portfolio.

When we get an itch to check out a stock during the day, we first take a quick look at finviz.com. It is one of the best one stop shops to determine how deep we want to delve into a company. Let's take a look at AAPL.

Now according to one of Murphy's Law, before you do something you always have to do something else first. In this case, before you type in AAPL into the search field at finviz, look at the graphics on the homepage. This is the "heat map" of the market at this moment in time. The green areas indicates market segments and industry's that are doing well at the moment. Red means they are lagging. As I look at it now, most of the heat map is green and as we know from reading this wonderful blog, we are in a confirmed market uptrend and have been for the last 7 trading sessions. Also look at the charts at the top of the page for the three leading indices (DOW, NADAQ, and S&P). You will see pretty charts support the premise of a market in an uptrend. Remember the trend is your friend. You usually do not want to start a position when the market is in a correction.

Ok, now let's look at AAPL. Put the ticker in the search field and you will see:

Now there is a lot of data, but we only use a few important items to do our first pass. First we look at the chart and decide what kind of chart it is. Finviz uses a 10 month chart with daily performance and shows a 20 day, 50 day, and 200 day moving average. It also shows daily volume which is very important to see how institutional investors are moving your company.

In looking at Apple's chart, we can see a sell off that ran the first three weeks of June. The stock leveled off at 318ish before climbing to the end of our rally on July 21. Now look at the volume you line because that will give you possible tells of what to look for. Look athe average volume number. Finviz has it at 23.4 million shares. When you see volume higher than that it's a good bet that the funds are buying and selling the shares. Doug and I have to buy a lot of shares to move that needle.

If you look at the last three or four days, you will see some heavy volume to the down side and the price has drifted down from the 420s to the 390s.

Skip past the data and read some of the headlines. (Most companies have several days worth of headlines.) Doug will discover that in reading these headlines, that most of the recent correction (In the opposite direction of the market we might add) were due to the "missed" quarterly earnings last week. It was news worthy because Apple had not missed a quarter in 15 quarters. We would also discover that they missed because of weak top line sales for the iPhone. In reading the articles, all of the carriers in markets where the new iPhone 5 was supposed to be released were reporting weak numbers. So we take away that people were not buying iPhones because they were anticipating the release of the iPhone 5. In reading the articles, we see the carrier are all reporting robust numbers of the new iPhone 4 S. One million units the first day was a record. (As a side note and something you learn when you do the homework, AAPL always under promises and over delivers on earnings, as a result analysts are conditioned to stretch earnings a bit for their expectations. The light top lines sales of the iPhone caught analysts by surprise and as a result the price of shares have taken a hit.) You could also apply a certain amount of downside reaction to the loss of Steve Job, but from a follower of the stock it is our opinion that Steve's departure in 90% already built into the price of the shares.

Now let's look at the fundamentals. Always look at the forward looking P/E ratio aka the multiple. It is a measure of how many times earnings the price of the stock is. With a forward looking P/E of 10.10, this seems cheap compared to the S & P 500 and the industry. (Morningstar shows the industry at 12.8 and if you check S&P 500 it will be about 14.5.) When looking at all those scary numbers, remember green is good and red is bad. Here a re a few of the numbers we pay extra attention to.

EPS 5 years, which in AAPL case is almost a 65% growth. Amazing. They have no debt. They have 27.00 a share in cash. In August they actually had more cash than the US government at 76 billion. Their return on equity (If you don't know the terms, look them up on line at stockopedia or get a little cheat book next to your work area until you learn them. As you can see, almost all of the fundamentals are great. I see we a re getting really long and its after 11:00 so I will wrap this homework tomorrow.

Have a great night and remember, you can't be listening to your soul if you are watching Dancing With The Stars.

BAGAKOAA;

I am not a professional investment advisor. Anybody reading my blog and investing accordingly must be out of their minds. I have made more money than I have lost. There are many more qualified people than I to actually tell you how to invest your money.

BAGAKOAA=Boys And Girls And Kids Of All Ages

Salve Lucrum=Latin for Hurrah for Profit.

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