The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

29 May 2005

Trend Lines - A Primer

Trend Lines - A Primer

Purpose: To delineate, identify, and even circumscribe trends. A down trend is a sequence of lower highs and subsequent lower lows; an up trend is a sequence of higher lows and subsequent higher highs. (NB: the reversal of terms in the denotation is critical for proper understanding!)

Rules: To identify correctly a down trend line, connect each lower high prior to a subsequent lower low. For an up trend, connect each higher low prior to a subsequent higher high. A trend line using any other data points is not correctly identified. (See example below.)

Questions: This comment, "the trend line of declining tops is important but not critical because it is incorrectly identified. It is, however, the trend line most amateur chartists would draw" resulted in two similar questions:
1) I am curious as to why you included it then, instead of identifying the correct trend line.
2) Why [it] is "important" but "not critical" and most importantly, why it is "incorrectly identified."


[click to enlarge]

Trend line 1 is the guilty party that sows confusion. The correctly identified trend line is #2 because it conforms to the rule: it captures each lower high prior to a subsequent lower low. (Note that other declining trend lines from the same starting data point - the all time high - could and would have been drawn.) Each trend line remains in force until the low trade is in place. Thus, line 1 is incorrectly identified because the low trade at B is higher than the low at A -- the decline appears complete. A new trend line should be sought; if not up, then at least sideways -- because the earlier trend (down) is complete.

At best, Line 1 is merely important, and certainly not critical. Why show it? Because it is, as mentioned in the original post, what most participants would draw (including Allan's software) as a trend line delineating the down trend. And *I* want to know what most participants will do, whether their efforts are correct or incorrect.

In Practice: Consider Apple Computer/AAPL -- On 11 May, AAPL effectively ended its down trend; the same day, I alerted readers of this blog that AAPL's reality had changed. By my reckoning, AAPL's decline was suddenly complete, and its new intermediate term base now builds... prefatory to fresh all time highs in the weeks and months ahead.

[click to enlarge]

Note that AAPL shares have yet to breach the correctly identified trend line of declining tops (1); nonetheless, the decline is complete. I have no need to wait for a breakout above ~$43.5 to confirm this reality, so my first purchase was $34.25 on 12 May, with many additional lots purchased since. (Thanks in part to your comments and questions, and other tidbits since accumulated - no less the the way the chart builds - I reassessed, and now perceive Apple Computer/AAPL as a long term investment.) Line 1 is critical, but so is Line 2, which confirms the double bottom, and the change in trend. AAPL is a particularly tricky pattern, which is why I show it. (Caveat: my perceptions rely on many more items than trend lines.) With the hard turn on 11 May, this correction becomes one more of time than price; someday - perhaps in coming days or weeks, perhaps in coming weeks or months - AAPL will break above Line 1, hurdle its all time high, and quickly run toward $60. And higher soon thereafter.

Of course, it is disheartening to see most market participants believe they know the rules, but in fact do not. The two roads to failure when investing:

1) Incorrect analysis;
2) Incorrect application of analysis - whether the analysis itself is correct or incorrect.
Should you ever come to learn and know the rules, then consistent success awaits you. Yes, this effort would require both personal diligence and time, but then it is your money; why not strive for success and excellence rather than be subject to the gales of fortune...?

27 May 2005

Ed Ruscha

I note, with some measure of pride, this article cum review in the current issue of the ECONOMIST. "With pride" because I purchased ~15 years ago the original of the art shown below. (I finally had sufficient monies to match desire and opportunity) ...

[click to enlarge]

(I was fortunate to recognize comparatively early-on the artistic genius of Ed Ruscha. Of course, I cannot but wonder about its current value in light of major retrospectives of his career in London and Venice! ;-)

Edward Ruscha, American artist

Write-on man

May 26th 2005 LOS ANGELES
From The Economist print edition

Edward Ruscha has a way with words — and an ever-growing influence

CALIFORNIA'S biggest urban sprawl is often described as a city of movement rather than monuments, one defined by car culture rather than great architecture or beauty, but Edward Ruscha has found it a source of inspiration for more than 40 years. “Monet had the Seine, I had Route 66,” he says of the interstate highway that led him west from an Oklahoma boyhood to art school in Los Angeles in the late 1950s and whose roadside imagery appears in much of his work. At the time, he seemed to be heading away from the rest of the American art world; the New York school and abstract painting were then at their height. But Mr Ruscha (pronounced Rooshay) felt he had nothing to add to Abstract Expressionism and studied graphic art at a school sponsored by Disney. “It was an enormous freedom to be pre-meditated about my art.”

Today the 67-year-old artist, who refuses to be typecast as either pop or conceptual, has become an unlikely art-world superstar. Long marginalised by the New York establishment, his work has featured in two international touring shows this year. Next month, his work will be seen both in Venice and in London. Mr Ruscha is now regarded, along with Andy Warhol, Donald Judd and Bruce Nauman, as one of the four most influential American artists to have emerged in the 1960s. But the artist remains detached about his current fame. In a recent interview at his LA studio (a vast warehouse space filled with paintings, dictionaries, record collections, and piles of newspaper and magazine clippings), he was as happy to chat about restoring his model-T Ford as he was about his work for upcoming shows.

This homely, laid-back attitude is a central part of Mr Ruscha's art. He is equally comfortable working with different media, from painting to print, photography to drawing. But he returns to two central themes: the faded glamour of the Californian dream and the idea that words can be still-lifes. His art mixes Californian sunshine with film noir, and it records in a deadpan way the ubiquitous architecture of this strange paradise. He photographed 26 petrol stations he passed along Route 66 on his way to LA, every building on the Sunset Strip, and many swimming pools, palm trees and car parks. In these books of photographs and other work, he catalogues an American material culture that is so pervasive as to be almost invisible. And he gives everyday places the real Hollywood treatment, presenting them in his paintings in dramatically lit Technicolor.

Mr Ruscha's love of the commonplace is reflected also in his distinctive paintings and drawings of ordinary words and phrases. His painting “Hollywood is a verb” parodies the fleeting nature of LA's movie culture by making it a permanent work of art. On the one hand, this phrase looks like a book or film title; on the other, it sounds like a slogan. Like all of Mr Ruscha's text pieces, this one conjures up a range of possibilities in the mind, eye and ear of the viewer. A word as a work of art, rather than just something to be read, is both strange and familiar—at times even funny—and therein lies the allure. “I am instinctively drawn in my DNA to words”, says Mr Ruscha. They might grab him while he is dreaming, watching a film, reading the newspapers, or listening to the radio (he does not watch television). He sees words as his still-lifes, as three-dimensional objects, and responds to their look and sound before considering their meaning. “Painting a picture of a word is my way of etching it in stone, of making it absolutely official, almost like an epitaph.”

In some cases there is more to it. One of his most successful recent works, “Words without thoughts”, plays with both verbal and visual meanings. This installation in a Miami library consists of a series of paintings of words from the phrase in Shakespeare's Hamlet: “Words without thoughts never to heaven go”. Individual paintings of each word are displayed around the library's rotunda so that viewers encounter them randomly. The phrase has a profound resonance, reminding viewers of the power of well-chosen words at a time when talk is cheap. In a world where the media are awash in spin, where advertising, political sound-bites and reality television provide ever more invidious forms of communication, Mr Ruscha's art—his words with thought—provides an antidote. But he refuses to be drawn on politics or the specific meanings of his work. Mr Ruscha is not reacting to anything tangible, rather he is picking up fragments of meaning from the ether, treating words like a jazz player riffing on a common melody, revealing the rich tonality of something we thought we knew.

Edward Ruscha's work will be shown in the Summer Exhibition at the Royal Academy, London, from June 7th-August 15th. He will also represent America at the Venice Biennale from June 12th-November 6th


I have been trading WebSense/WBSN (a provider of employee Internet management products that enable businesses to monitor, report and manage how their employees use the Internet) for the past 5+ years; since, in fact, its IPO in which I participated. Now the shares appear near an end of an intermediate term base and ready to resume its long term uptrend. The next several paragraphs represent the pertinent snippet re Websense from an 8 months old article from IBD (© 2005 Investor's Business Daily, Inc)...

Websense is proof that there's plenty of money to be made from humankind's appetite for vice. The company makes software that lets managers halt employee access to Internet sites that feature porn, gambling and other nonwork-related material. The software also fills some security needs.

It's a lucrative niche. Websense has averaged 91% annual profit growth and 72% annual sales growth over the past five years. "They're benefiting from their leadership position in a hot market," said Pacific Crest Securities analyst Rob Owens. "They've been able to drive their bookings and revenue much faster than I think anyone had anticipated," said analyst Garrett Bekker at Tradition Asiel Securities. "Their operating margins have increased very rapidly..."

Selling by subscription helps, says Websense Chief Executive John Carrington says. Each quarter begins with 80% of revenue already on the balance sheet. "That allows you to really manage your expenses," Carrington said. "Say we shared with the Street an expected earnings per share of x. We can back into that and say, 'How much do we have to make in profit, to make sure we make x?'"

A year's subscription for 1,000 employees runs $15,000, Carrington says. Annual price rises are 4% to 5%. "They have a very efficient business model," Bekker said. "They also bill upfront, so they've got great cash flow."

A software revamp finished last year laid the groundwork for Websense to increase sales. The firm sought to make its software faster, easier to use and better able to accommodate add-ons and upgrades. "It was a massive undertaking," Carrington said. "We professed to the world we were going to change the game - from being just sort of Web management focused to a focus on employee Internet management and Internet security."

Websense rebuilt its software to oversee more than just employee use of the Internet. It now can oversee use of the network and desktop applications. The basic Websense Enterprise product can block more than 6 million sites of more than 80 types. Customers also can buy add-ons to block infectious sites that download viruses or spyware. Another add-on helps cut bandwidth-hogging activities such as music downloading. "I relate our products to the flu season," Carrington said. "We're offering our customers masks so they don't have to breathe or get the virus infections."

The software is not a safety panacea, he says. It's meant to work with other security products, such as anti-virus software and firewalls. Most people still regard Websense as a filtering firm. That's a good thing, given the outlook for the niche. Some 300 million people will have the Internet on the job by 2006, says Southwest Securities analyst Michael Tieu. Half work at the kind of places Websense sells to: large enterprises. It's estimated only 30% to 35% of the firm's potential client base uses software from a top vendor.

Websense has taken market share away from rivals in recent years, Tieu says. But makers of multipurpose security appliances are building in more Web filtering, which could chip away at the market. To help ward off lost business, Websense partners up with some of those security software firms. "Where partnerships are going to help them is in small and midsize businesses, where the selling today is more around security and less around productivity and liability," said analyst Brian Burke of International Data Corp.

updated through yesterday [click to enlarge]

Today (Friday), First Albany initiates Websense/WBSN with a "Buy and $60 target". The firm cites the following positives:
1) Attractive subscription rev model;
2) Favorable competitive landscape;
3) Demand for filtering and related security software remains strong;
4) Market leadership position with a sizable installed base; and
5) An extensive network of resellers.

All very interesting. And the chart? First the weekly...

[click to enlarge]

Next zoom in for a closer look at the presumed base...

[click to enlarge]

Almost three (3) months have elapsed since its all time high. In that time, WBSN has twice tested its 200 day sma (simple moving average), thus forming a potential double bottom. The confirmation of this pattern would occur with a trade and, preferably, close above $54, the critical threshold. (The delineated trend line of declining tops is important but not critical, because it is incorrectly identified. It is, however, the trend line most amateur chartists would draw.) An explosive increase in volume should accompany the breakout above $54.

The pattern and set-up are in, so I am in (long) as well. (Who needs to wait for the market to ratify one's analysis? I know how this pattern will fulfill itself.)
Stop @ ~$49,
critical breakout @ $54,
initial objective ~$70.

This all means that you can buy, for a pattern of this type, the first or second test of the 200 day sma, and/or the breakout above the threshold number, in this instance, $54. My tactic for this setup is to purchase the initial investment lot on the second test of the 200 day sma (which I did on 17 May at $50, in anticipation of the resumption of the LT uptrend), and then the second lot on the (upcoming) breakout. There is little net difference in this tactic; i.e., the difference between $50 and $54 is less than 10% vs a potential greater than 30% return based on the initial trading objective after crossing the breakout.

Abide by any one of these (or other) tactics - albeit one that resonates for you - and success typically follows.

25 May 2005

Google/GOOG - stretched valuation...?

In a series of comments, Ron questions buying Google/GOOG at current prices and valuation. Harry Wilker, a regular visitor to the Deipnosophist's table, has this to say re Google's valuation...
The funny thing about GOOG is that by some measures it is actually cheap relative to it's peers, eBay/EBAY and Yahoo/YHOO. Here are some numbers; (using Yahoo Finance figures):

Current Year's PE:
GOOG - 50.54
EBAY - 48.16
YHOO - 63.63

Next Year's PE:
GOOG - 39.7
EBAY - 37.6
YHOO - 49.68

On such measures as these, the three stocks are about equally valued. GOOG, however, is growing much faster than either EBAY or YHOO.

Year over Year growth in sales::
GOOG - 41.4%
EBAY - 27.1%
YHOO - 26.9%

So, applying the widely used ratio of EPS to growth rate (Growth Rate *100/EPS) you get:
GOOG - 1.22
EBAY - 1.78
YHOO - 2.37

Clearly on this basis the nod (for best value) goes to GOOG by a mile. And this ignores the fact that GOOG is considered much more likely to exceed their estimates by a wide margin than either EBAY or YHOO.

I will have more to say about Google/GOOG's valuation, and other matters, in my coming mega-post about Google, Googleplex.

Phillips Van Heusen/PVH

Phillips Van Heusen/PVH reports Q1 (Apr) earnings of $0.46 per share, $0.04 better than the Reuters estimates consensus of $0.42; revenues rose 24.8% year/year to $472.1 million vs. the $462.1 million consensus.

The company issues upside guidance for Q2, sees EPS of $0.38-0.39 vs. $0.33 consensus; sees Q2 revs of $420-425 million vs. $397.24 million consensus. Also issues upside guidance for FY06, sees EPS of $1.68-1.73 vs. $1.61 consensus; sees FY06 revs of $1.8-1.82 billion vs. 1.76 billion consensus. The company states, "Our 2005 guidance continues to be based on a conservative view of the second half of the year and we have not raised, at this time, our earnings estimates for the third and fourth quarters." Also states that if the current trends continue they would expect to exceed present Q3, Q4 guidance. The company continues to expect "at least 15-20%" growth per year." The company states that the they do not expect to be impacted by the potential Chinese tariffs, as they already have adjusted sourcing to protect themselves. (At present, roughly 20-25% of company's sourcing comes from China.)

[click to enlarge]

The chart looks great -- 6 month base with an obvious breakout at ~$30 (occurring today, with a high trade of $30.75 and volume that is already ~250% of average daily volume). So I asked Trader Dan. He responded with, "... looks good! What's going on in this sector? Could it be that business casual died with .com and pent-up demand is just now coming in?"

With the successes of MW, JOSB, and others in this group, I understand his comments. I am long.

Google/GOOG - dueling banjos

According to the WSJ, Bill Gates is still, first and foremost, about clobbering Microsoft's competition. And his current obsession is Google. "Google is still, you know, perfect," he told the crowd of technology executives attending the WSJ's 3rd annual "D" conference. "The bubble is still floating. They can do everything. You should buy their stock at any price." The world's richest man said those words with a wry irony that suggested ridicule of the Google craze, but also resentment. There may be hot air in Google's highflying stock price, but Mr. Gates clearly takes the co seriously. "We had a 10-year period like that," he said, equating Google's current standing in the computer world to that of Microsoft from 1986 to 1996. Mr. Gates's fear is that the increasingly ubiquitous Google search will become everyone's gateway into the digital world, a role he has always fought to preserve for Microsoft's Windows OS. The search is an elegant starting point, after all, why go anywhere before you have indicated what you are looking for? And Google has proved it is also a lucrative one, enabling the co to match advertisers with the specific interests of customers. As a result, Microsoft is determined to get into the game. "If anything touches on search," Mr. Gates said, "we're going to do it."

JP Morgan believes that Google's US business is outperforming in 2Q, driven by better than expected RPS and query volume. Additionally, the firm believes the international segment continues to perform well. As such, they are raising their 2Q rev/EPS ests to $870 million/$1.20 from $845 million/$1.14 (consensus $831.7 million/$1.19). Firm believes that monetization enhancements have increased GOOG's sponsored click-through rates dramatically, and will likely continue to contribute to higher click-through rates in 2Q. However, they are conservatively modeling no financial gain from those measures in Q2. Reiterates Overweight.

24 May 2005

Google/GOOG - on the move

Google/GOOG shares shot up $13.84 yesterday to close at $255.45, and another $9 today (only one hour into the session, no less!), as rumors circulated that the company might be added to the Standard & Poor's 500-stock index. This event, as you know, would require many mutual funds to purchase its shares.

And is an item I mentioned specifically months ago as probable, not merely possible. I also said then that Google/GOOG will repeatedly surprise Wall St -- to the upside. Of course, never forget the axiom, "Buy the rumor, sell the fact" which fact augurs for price oscillations -- albeit in the short term. There is nothing in this chart that indicates this primary move higher in price is (anywhere near) complete. (Hmm, I wonder what the bears think now...? Yeah, yeah, I know, "A better short sale now at $275 than at $175...")

Bill Miller on Competitive Advantage

In April, Bill Miller (Legg Mason) spoke before a Security Analysis class (at the Columbia Business School) taught by his colleague at Legg Mason, Michael Mauboussin. Below is an excerpt from the notes student, John Chew, prepared following the talk.

Your Competitive Advantages in Choosing Investments

These slides are to give you illustrations of what you need to know when operating in capital markets. Mostly examples, things you shouldn't be doing or examples of how people go wrong in capital markets. If you eliminate these errors you will have a far better probability of being successful. If you think about it, the only way to earn excess returns in capital markets is if you are exploiting some anomaly that is present, whether it is systemic or temporary. You have to exploit some error the market is then making.

Coming at it differently, before you decide to make an investment to buy a company, you better have some sort of competitive advantage. And you have to figure out your competitive advantage. If you can't identify your competitive advantage in figuring it out, then you probably don't have one.

I would say to you that there are probably three types of competitive advantagesthat you can bring to bear on the market:

1. An informational advantage
2. An analytical advantage
3. A psychological advantage

Here are examples of those. (By the way, most of the ones you are likely to exploit are psychological.)

We happen to manage money for several Middle Eastern governments. If I happen to go over to the Middle East and I sit down with the head honcho over there and he says, "You know we are going to increase oil production by a factor of three in the next six months. We have all these fields coming on line in the next six months. Nobody knows it, but it is going to happen. I thought you should know that since you manage our money." I have an informational advantage. You know something that the market doesn't know. Now the market is pretty good, so this doesn't happen very often, but sometimes it does happen.

Then there is an analytical advantage. This means that you don't know anything that the market doesn't know, but you organize the information in a different way. The market says we know the following five things and roughly speaking you can disaggregate it. OK, you can say the market thinks this is most important, this is second most important, etc. Then you can shuffle these things around because there is a different thing going on here. That was the case, for example, mostly with and the other Internet names that we owned. We didn't know anything that anybody else didn't know. The company is very upfront - on every conference call they will say the same thing. In the new annual report that they just released, the first line is "We manage for the present value of the future free cash flow per share." Sentence number one. They say that in every quarterly release. They say we are managing towards a triple-digit return on capital. We are managing towards a double-digit operating margin. OK, so we now have a long term economic model of their business, roughly speaking, and a little bit about what capital needs they have, but they will tell you that. Then you create a simple model which all comes down to sales growth and you can figure out what this thing is worth. Fact is, most people don't care about that, they care about what next quarter's operating margin direction will be - up or down and by what percentage points. So the market has a totally different focus in Amazon and most Internet names from what an investor does. Why? Because these are momentum names, with a fast-turnover shareholder base. The interest is in trading, not investing; they are interested in stock price, not in value. As a long-term investors, we can exploit this with an analytical advantage. As a long term investor, we believe we know what they are worth.

One piece of advice for you, get to know the smartest people in your class, because their future cash flows will be really high. What I have tried to do over the twenty-five years or so of doing this, is to talk to the smartest people I know. You get to know the people over time. You can sit down with a smart analyst or CFO and learn. For example, last week I sat down with the CFO of a company and after an hour's conversation I learned that they believe their stock is underpriced and I figured what their shares are worth and what their share buyback is going to do. And not because she told me anything she didn't say publicly the next day in a presentation. Because I know exactly how she thinks. I can triangulate that stuff. I have an analytical advantage in using that information.

Lastly, the psychological advantages. In 1983, Bill Ruane was giving a talk at a value investing conference. They asked him about what advice he would give to someone who wanted to learn about investing. He replied, "If you read Ben Graham's Security Analysis, that was everything you needed to know about investing up until the late 1950s, early 1960s. Then you read Warren Buffett's annual shareholder letters. And if you understand those two things, then you understand everything you need to know about investing." I would say if you get to know what Michael [Mauboussin] teaches you, you will know everything you need to know about investing. Or if you understand the quote that I am going to give you...

"When we think about the future of the world we always have in mind where it would be if it continues to move as we see it moving now. We do not realize that it does not move in a straight line and that its direction changes constantly." -- Ludwig Wittgenstein
This quote is at the top of every annual report of our fund. If you take this quote to heart, then your default position in the market is that whatever you are currently experiencing in the market - high prices, low prices, making money or losing money - is going to change. You can count on it. This is one of the few close to certainties that you can find. Because the market looks forward, because the market discounts, and because market prices reflect, in essence, the data refracted through the decision procedures and emotions of investors, and then the market will change as the world changes because it is incorporating new information.

There are two things that I tell our analysts. First, 100% of the information that we have about any company or any investment reflects the past. 100% of the value of that investment depends on the future. The real question is how the past data connects with the future. Think of how the future will be different than the past.

Most people default to the directions and trends that they are currently observing or have been recently observing. When those things change dramatically, they say, oh, things have changed. If they change subtly then it takes them a long time to recognize the new trend. The important thing is that most things change. The world changes. In longer-term projections, Peter Bernstein says, that cone of uncertainty gets wider as time goes out. An illustration of that is what if I say to you, "What are the chances that IBM will be bankrupt tomorrow morning?" Probably none. A year from now? Five years from now? Or what about 100 years from now? The point being is that the possibilities increase as the time horizon extends out.

So what you are trying to do as an investor is to exploit the fact that fewer] things will happen than can happen. You are trying to figure out how that probability distribution works and stay in the middle of what will happen. The market has to worry about all the things that can happen.

21 May 2005

Dear George (Lucas),

A friend convinced me that your new movie, Star Wars III - The Revenge of the Sith, not only is entertaining and exciting, but a good film, and that I should hurry to see it. So, in defiance of prior experience (your seeming inability to write good, meaningful dialogue or even to direct people rather than sequences of special effects), I plunked down the $9 to enjoy this movie.

Alas, what a dud; neither entertaining, nor exciting. The light saber duels were boring, and the set pieces of special effects merely droned on. Motion does not imply action, just as telling us something is not the same thing as showing us.

And your failure to abide by that last admonition is what really angers me. You chose to make as the linchpin of this movie the conversion of Anakin Skywalker to Darth Vader, and yet you were true neither to the story, nor its characters, and certainly not to your audience. To wit:

*Anakin's love for Padme: Sorry, but you failed to show their mutual, all-consuming love. Yes, you told us, but you didn't show us. The actors struggled to breathe life into these characters but failed; they were provided with neither the writing nor the direction to rise above the material;
*Anakin's hotheadedness, which leads to poor decisions: Really, he comes across more as a dolt than menacing. (Menace requires more than looking out of the tops of one's eyes...) How stupid is Anakin? Well, he has tested his dual 'loyalties' to the Jedis and the Chancellor; each want him to spy on the other. Rather than have this situation tear him asunder, to add gravitas to his character and the film by, perhaps, his discussing the matter with the one person he trusts - his wife, Padme, which would deepen the story based on who she is - you instead have the character do... what, precisely? Anakin's decisions come from the writer (you), not the character.

And what is with Anakin's nightmares? They never come true, so isn't everything Anakin does and will do predicated on a self-told lie? And yet you fail to investigate that inconsistency, which deprives the character of added complexity. And why the hell did you not have Obi wan Kenobi and Darth Vader cum Anakin talk to each other during their duel? Their relationship is purportedly one of mentor/student, friends, even brothers, and not until duel's ends do their arms stop flailing and their mouths start flapping. ('Tis but another wasted opportunity to provide deeper layers of character, complexity, and meaning.)

This is all so stupid. When Mace Windu battles Darth Siduous, you have Mace utter, "You will be tried before the Senate!" but when Anakin is in the room, this changes to 'I will kill you now!' What prompts this change? I can only guess that it provides motivation for Anakin to cross over to the Dark Side but nothing that comes before this moment prompts the characters (nor us, the viewers), to know this change is coming. The term for this is deux ex machina - the machinery of the gods; in this instance, the god is you, and you make this inorganic change in character for the sake of dramatic expediency. Except it is anything but dramatic or expedient. And a mistake you foist repeatedly on us, the viewers.

Fiction (especially fantastic fiction), requires the willing suspension of disbelief. I am willing to suspend my disbelief but you must provide the reason; which reason, in this movie, is characters who make decisions, good or bad, because those decisions are consistent with their motivations and the tale's own sense of internal logic. You defy this logic (a logic, btw, that you created) whenever it suits your whim. Like how the hell are those humans breathing on that molten world without the aid of any apparatus -- wouldn't the atmosphere be noxious, if not toxic?

This movie got made due to your wanting to complete your vision, and with the best of intentions. And yet you seemingly are surrounded by nothing other than 'Yes men' who cannot deny the glories of your vision, and thus were reluctant if not afraid to say, "No! This is stupid and needs work!" In turn, we all become complicit as your 'yes men' by paying to see this movie, thereby enriching you at the cost of impoverishing our wallets -- and our minds.

I do not wish to be another 'yes man'. Therefore, I request you refund the cost of my admission ticket. I will forward privately my mailing address.

Thank you,

David M Gordon

19 May 2005

Chicken cyclicals, redux

Throughout the months of March and April, I took care to explain what was then occurring in the markets:
1) That the market was transitioning from its former leadership (materials, resources - energy, metals, etc) to its new leadership, the chicken cyclicals (retail, restaurants, tech, health care, etc);

2) That the market had failed, since 1 January 2005, to follow its typical seasonal pattern. Thus, the market likely would complete its sell-off during late-April or early-May, and then rally; still against the typical seasonal pattern. (Please review the archives for more commentary re items #1 and 2.)

And these are precisely what has occurred -- which goes to show you that market moves are not always random, that short selling often is folly, especially in the hands of the inexperienced ("Uh-oh, death cross on the NASDAQ!" and "Short Google/GOOG!"), and that investments can be purchased in the face of ugly market conditions. Price is not, nor should it be, the sole arbiter of value. All one need do is exercise discipline, and follow the rules.

The rules I laid out, for one set. I note with glee that Google/GOOG screams higher, that the chicken cyclicals do indeed lead this rally: AMHC, RTSX, SBUX, JBX, RRGB, CAKE, PFCB, PNRA, DPZ, DRI, MIK, JOSB, JWN, WFMI, and URBN, with BEBE and others not (too) far behind. In fact, MW is indicated to gap higher by ~10%! I said then but repeat now to reify the point, leaders lead, and thus are the market's engine not its caboose. During declining markets, the new leaders decline begrudgingly, if at all, that when the selling pressure abates, these leaders rise with alacrity, and when the market in fact rallies (for more than a mere day or two), these stocks spring forth, hopping and skipping higher gaily, daily...

My portfolio has increased its value by 30% in a month only 2/3 complete. And this occurs in a purportedly "bad" market. So color me happy. If you were paying attention and had taken the appropriate actions, then you too would be smiling at your portfolio's profits.

18 May 2005

In or out...?

Readers write, wondering whether I have re-purchased American Healthways/AMHC, and if yes, on what basis...

The answer is yes; AMHC is once again long in my portfolio. Although it did appear dicey for a brief while early-morning Monday, the shares held precisely where they ought. See chart below...

[click to enlarge]

I had mentioned that AMHC likely has become the province of traders and speculators, thus it responds more to chart-based clues. The trend line of rising bottoms shows clearly why the shares reversed where they did. However, my objective with this post is not to teach the methodology for correctly identifying trend lines and channels, and especially not short term channels; all are too limiting in perspective and outlook. (The boundaries + most traders are too mechanical rather than intuitive.) So let us instead gaze upon this next chart...

[click to enlarge]

... which shows the stair-step progression in price from the southwest to northeast, the northeast quadrant (NWQ). Who knows how high is finally too high? The intermediate term channel line (of resistance) shows ~$50 as problematic; resistance is dependent upon when price tags that channel line. Dorsey Wright identifies a price objective of ~$55 based on its count. Perhaps AMHC will lollygag its way to $55 over the course of the coming three months, when that trend line and DW's objective intersect.

Who knows, indeed. I do know that Monday's high volume reversal is classic, and all but guarantees higher prices soon.

17 May 2005


I have waged a private struggle the past week re whether I should mention this incident.

Admittedly, this story deserves wide notice, and yet I dislike publicizing violence, especially an act as 'evil' as is this one.
Truthfully, I do not understand how one person does this to another, how a man does this to a woman (or girl), and (arguably) worst, how a father does this to his daughter.

So the quest to understand wins over discretion. Please help me to understand how horrible, horrifying incidents of this type can, and do, occur...

16 May 2005

Support Your Local Blogger

The Internet is a fascinating medium, as it somehow confers credibility to any person willing to while away their free time typing their thoughts and opinions on any topic. Before the Internet were employers such as newspapers and magazines that, before providing a venue or bully pulpit for these people, would 'vet' their qualifications. As a result, we could take some measure of comfort that these opinion staters and opinion makers knew something whereof their topics.

Now we have nothing more than our own sense and sensibility. We each must determine and then judge the qualifications of those who attempt to dissuade and persuade via their facility with words. This includes me, as both buyer (reader) and seller (writer).

Aye, but that is the rub. What, precisely, do I sell? In a different epoch, I could expect a paycheck from my employer; now, however, I seek...
1) Interactivity: You share your comments, thoughts, compliments, and questions, which helps you to determine my worth - but also, in turn, increases my value to all;
2) Referrals: This site either grows its readership, or dies. Do not keep this blog as your secret. Please refer everybody here - allow them to determine whether this site provides value for their needs;
3) Recommendations: Those items in the sidebar (to the left). Click on each link to discover more about that recommendation, and then purchase from Amazon the selected item. You doing so helps fund my time and effort for this blog, as I receive payment. The same reality applies to the Google ads that are, you will note, specific to this site's topic. Thus, the Amazon links and Google ads amount to my paycheck. This site and I both require this support...
4) Visit "Friends" or "Sites I Like" etc, where you will discover comments from me that at times illumine discussions here. And where you can close the circle, and reenact items 1-3.

In brief, each of you should consider yourself as a modern-day Medici, or Patron of the Arts. Thank you, one and all, for your past and future support.

Your local gunfighter... er, blogger,

14 May 2005


"As far as your short term trading, how do you deal with being stopped out on a regular basis? Personally, I found it very frustating and one of the reasons I gravitated to a longer time horizon."

Because you are not specific, Ron, I must assume you refer to the always-present emotional anguish of trading. Of course, I understand your preference for the long term perspective:

the greater the time frame = fewer bars on the chart = less signals = less noise = less frustration... Which, in the end, means less likelihood to make wrong decisions.

However, to me, no decision still = a decision. It does not matter whether you buy and are wrong, sell and are wrong, or stop out and are wrong. What does matter is whether you adhere to your guidelines. Otherwise your portfolio, and you, amount to little more than a weather vane...

The following comments are from Price Headley:

If you identify that you are not yet performing at a level necessary to reach your trading goal, then you must take a "No Excuses" attitude to solve the problem. Once you tackle the issue, an immense growth and self-satisfaction tends to occur.

When you go through a trading slump, do you ever find yourself blaming something outside yourself? One of my favorites used to be blaming "the system" - "the system is rigged against me: the brokers are the only ones getting rich, the market makers are killing me on these bid/asked spreads, the guys getting in pre-IPO are getting the best prices," etc. When you blame an external situation, you give up control, and instead let yourself be controlled by outside events. This converts you from a proactive trader into a reactive trader. If you are reacting after the fact in the markets, you are in turn letting your emotions start to rule you, instead of planning how you will react to any set of circumstances. You know how letting emotions control you typically turns out in the markets -- badly.

Justifications and excuses are the hallmark of traders who consistently lose. Excuses seek to diminish the trader's responsibility for a losing trade, creating what psychologists call an "External Locus of Control." This means that the trader believes he is acted upon by events beyond his control. In comparison, a trader with a strong "Internal Locus of Control" believes he is responsible for every reaction that happens to each action he takes. When the trader feels external circumstances control his results, he will not tend to set goals (why should he? - the market will create the result for him), and the controlled trader will not apply as much effort to prepare or trade. This makes it nearly impossible for a trader to build self-confidence. How can you believe that your actions will succeed when events are totally out of your control?

Great traders take total responsibility for each action they take. They do not carelessly take actions to buy or sell. Such impulsive moves can destroy the trader's confidence. The successful trader knows that every action taken will produce a reaction, and actions taken with the probabilities on the trader's side will increase the odds of favorable reactions over time. You must believe that you control your own destiny. If you are not getting the results you expect of yourself, look inside yourself. Start analyzing your actions and behaviors: are you hanging on to losers too long? Are you cutting profits too soon? Are you not able to pull the trigger and then you watch helplessly as the stock roars on without you? These or other frustrations should clue you in that you need to fix some element of your trading plan, and you should make decisions and act immediately to find a proactive solution after evaluating your situation.

I do not suggest that you, or anyone, fails at these specific items, or any others. But these items apply in general because we each are human. So how do I deal with the exigencies of trading?

1) I acknowledge in advance that no matter the action I take, I will be wrong;
2) I take ownership for all [of] my decisions.

I shared previously a variation of this chart study:

[click to enlarge]

It is an overlay of the US$, NASDAQ COMP, and S&P 500. Note that the typical relationship changed in late-February 2003; as the US$ continued its decline, stocks instead traded up! This move was not limited to only the multi-national companies that would profit from the weaker $; perhaps it was a result of the horrendous broad market sell-off for the three years prior to Feb 2003.

Whatever the prior relationship, I point out both the recent surprising strength in the US$ of late (well, a surprise to all but a handful of market seers) and the new intermarket dynamics. As the US$ gathers upside momentum, especially last week, the SnP trades down -- expected -- but now the NASDAQ trades up! Unexpected by most, there does exist a handful of market participants for whom seemingly random oscillations are anything but that, as these few recognize the market's continuum. This activity is part and parcel with a transitioning phase, something I have been alerting you to for months...

The understanding I share is manifold:
1) The market's dynamics always change;
2) That viewing a specific stock's chart in isolation of the market's continuum is limiting;
3) That the market's own trend can add wind to the sails of your individual stock selection;
4) To bolster your trading efforts requires the work of strategizing your trades; trades do not succeed in a vacuum
5) Always keep in mind the Holy Trinity of investing: vision, strategy, and tactics.

If, as occurs now in at least several specific periodicities, the market trends sideways to down, then the failure to include the market's trend in your trading efforts will lead to trading activity (or portfolio) failure. Consider, for example, Radiation Therapy/RTSX, a chart that I perceive as quite comely...

[click to enlarge]

The breakout above resistance at $20 (4 April) resulted in a quick move up to $25. Subsequent to this powerful breakout was the concomitant test of the breakout, followed by the expected test of the high, etc. (See area 1 in chart.) This testing in each direction results in a congestion pattern, or another base, and is to be expected. In fact, it builds as a particularly powerful ascending triangle -- note the higher high and higher low within the pattern. (See area 2.) This pattern builds because the market itself restrains RTSX from making bigger, quicker moves up in price. Depending upon your time frame, risk tolerances, and objectives, you can trade the pattern as it oscillates between ~$20 and ~$25; I do. It is helpful to know area patterns so as to know when to enter and exit, etc. (BTW, I purchased more RTSX this week at $21, because the data points are now in for a breakout from this pattern to... say, ~$30.)

In this same mode, I sold this week my shares in Telewest/TLWT. (And others; see this week's Portfolio Update.) Can you examine the chart below, and determine at what price I sold, and at what I price I will re-enter...?

[click to enlarge]

Successful trading represents an admixture of external and internal understanding. An understanding of market forces without an understanding of the internal ensures ultimate failure. Vice versa ensures limited success. The two together represent excelsior.

I hope this answer proves helpful. Please know that, as much as I welcome compliments, I thrive on questions, as they prove of particular help in achieving the objectives of this blog.

Portfolio Update #2

Long term (investments):
1) Google/GOOG - sui generis or ne plus ultra.

Intermediate Term (speculations):
2) Cheescake Factory/CAKE
3) Corning/GLW
4) Johnson & Johnson/JNJ - obviously beginning to trend (and break) down; this moment is a good time to ask oneself, "What are my reasons for owning this stock?" Mine are long term investment, so petty stock oscillations matter little.
5) Radiation Therapy/RTSX (see Excelsior! post below)
6) Starbucks/SBUX
7) Urban Outfitters/URBN (See earlier post, this page, and archives)
8) Whole Foods/WFMI

Short Term (trades):
9) Dominos Pizza/DPZ - purchased Tuesday, 10 May @ $19.25

American Healthways/AMHC - sold at $38.62 on 9 May (It should have gone higher, definitely should not have gone so low)
Immucor/BLUD -
sold at ~$31 on 11 May (Odd price action)
Men's Wearhouse/MW -
sold at $43 (might breach 50 day sma)
- sold at $20 (possibly building small area pattern)


American Healthways/AMHC (held where it must, but now builds a short term pattern of lower highs and lower lows)
Apple Computer/AAPL
Caremark Rx/CMX

Many items in this update require more analysis; that analysis, however, is beyond the purpose of this update.

13 May 2005

"It's a GoogleWorld..."

No, it is a Google universe, a perception that Robert Cringely begins to share, as he shows in this essay (forwarded by DEIPNOSOPHIST friend, Jack Cory).

"... The second inflection point this week was made by Google with its Google Web Accelerator. The company has generally downplayed the Accelerator as simple research -- a test that required a few thousand users. But it is much more than that. First, Google hasn't yet announced a beta, and then changed its mind about what it's beta testing. Every Google service that has begun as a beta turns eventually into an official extension of the Googleplex. Froogle, their comparison buying service, isn't going away, nor are image and video search or GMail. The same goes for this Google Web Accelerator.

"The application itself isn't anything new. It is precisely like the Web Page Accelerator (WPA) application that was the key component of the old Starband satellite broadband service I used for awhile when I lived out in the wilds of Sonoma County. WPA was intended to overcome the inevitable latency of that 89,200 mile double round trip required to fetch any web page over the geosynchronous satellite connection. It did this by anticipating the user's next page request and delivering that in advance in a compressed form. For every Starband (and DirecWay) user, there is a proxy session at the satellite downlink location utilizing more computing power than the Starband or DirecWay user probably has on the desktop being served.

"The only differences between WPA and Google's Accelerator is the lack of a satellite, and Google's willingness to offer the service ultimately to any Internet user. This is an absolutely brilliant strategy -- brilliant both because of the staggering technology effort it represents and brilliant because it promises -- as does any inflection point -- to change things forever.

"Think about the scale of Google's eventual effort here. With efficient caching, let's say that Google can get away with devoting half the power of the average home computer to each active user. In the U.S. that's 200 million users, though of course they aren't all active at once. But there will be worst-case moments every week when a lot of them are active at once, so I'd plan for 60 million simultaneous users, which means 30 million desktop equivalents, which has to be vastly more than Google's present 200,000+ servers offer. No wonder there has been all this talk about Google buying-up dark fiber. They are going to need it.

"But why? Why spend all this money, make this heroic effort, just to make web surfing twice as fast? The first reason is because Google can do it. The company likes big stretches like this. The second reason is because everybody else CAN'T do it. The technology required is so breathtaking and audacious that even a Microsoft or IBM wouldn't dare to try it and certainly Yahoo won't. The best Yahoo can hope for is that Google fails, which they probably won't. And the final reason for doing this is because it co-opts every ISP and web page owner. If surfing can be doubled in speed for nothing, of course nearly everyone will go for it. But that means every AOL customer becomes a de facto Google customer and this page becomes a de facto Google service that costs them nothing to produce.

"The big question is where Google will go with this? Will they put ads on this page? Will they eventually put AOL and MSN and Earthlink out of business? Only Google knows. But what I DO know is that the Google Web Accelerator effectively turns every user into a thin client, whether they know it or not. Consider the obvious upshots of this. If Google adds power to its part of the Accelerator, you don't have to add power to your end, meaning your old PC can last longer. Part of that has to come from Google assuming a larger role over time, taking responsibility for rendering Flash, for example. And they'll do it. And we'll let them. At some point, Google might even offer its own hardware device, optimized for the Accelerator. At that point, you'll buy your PC from Google, use Google as your ISP, surf an Internet that is really the Google cache, be fed ads and sold content from Google servers. Its a GoogleWorld that requires no AOL, no Microsoft, no Intel, no HP or Dell -- only Google, cable companies, telephone companies, users, and of course advertisers and web page producers.

"There is no going back..."
"To change things forever." Please tell me that with this article you at last begin to understand the opportunity inherent in Google/GOOG...

12 May 2005

At all time highs AND at resistance

Yes, 'tis possible. And when one is able to discern trends, oscillations are no longer random. See, for example, the trend line of resistance (now, at ~$234) delineated in the chart (below) of Google/GOOG...

[click to enlarge]

Please do not misunderstand this trend line, nor me. If this trend line continues to prove valid, I expect it merely to restrain GOOG's upside, if it does even that. It could even allow GOOG to 'fill the chart' with a base or other consolidation/congestion type of pattern. I do not expect the shares to turn down suddenly, materially. In fact, contrary to the claims of the bears (who are really getting it handed to them) there is nary a sign of a reversal anywhere to be found. And how sad it is for them: to be on the wrong side of such a historic opportunity.

How urbane...

I previously recommended Urban Outfitters/URBN as an addition to the "chicken cyclicals" portfolio. (Please review archives.) Now it appears the shares are ready to go higher -- and on schedule, as the intermediate term base nears the 6-month mark (Sunday).

[click to enlarge]

"Urban Outfitters/URBN reported its Q1 (Apr) earnings of $0.32 per share, 2¢ better than the Reuters Estimates consensus of $0.30; revenues rose 35.8% year/year to $231.3 million vs the $230.1 million consensus."

URBN today rapidly accumulates the volume necessary for a good breakout (already ~65% of average daily volume less than one hour into the session), it nears its price breakout ($49; or $50 on the PnF), and it has the calendar working in its favor. URBN should go (higher) now.

I am long. Are you...?

11 May 2005

Apple Computer/AAPL

During the waning days of January 2005, I was asked (elsewhere) for my thoughts re Apple Computer/AAPL.

[click to enlarge]

I said that based on its then-current setup (see area 1 in the chart above), one of two scenarios would unfold:
1) It would break down first, and then build a new intermediate term base in the mid- to upper-20s, or
2) It would continue to rise but unsustainably so, and soon thereafter would fail. This failure could prove to be either
a) another intermediate term base, or
b) a shelf before a more serious decline ensued.

Having taken the time to study the chart, I repeatedly issued warnings here (see archives, and areas 2, 3, and 4 above) based on the characteristics of those individual setups. It turns out that, in the end, #2 was AAPL's future.

Today's high volume reversal, however, augurs that scenario 2a will prevail. The low failed to achieve what I long ago perceived as the low of the base or shelf, ~$30. This failure to meet an objective, in addition to the nature of the reversal itself, has me kindly disposed to the shares as a new long side opportunity. However, I think sufficiently little of Apple/AAPL that it qualifies - for me - more as a trade than investment.

I do not recommend AAPL right here and right now at today's closing price - today's low area likely will be tested tomorrow, etc - so much as suggest you add it to your monitor as a bourgeoning upside opportunity. This pattern has more work to do and time to pass before it completes itself; especially now, in its new likely sideways trend, as it transitions from downside to upside. Of course, your perception of opportunities differs from mine. AAPL's high beta (volatility) equals to opportunities for all time frames, long or short -- for the nonce, at least.

10 May 2005

Trading vs investing

I have been pondering since yesterday the excellent question from Ron. (It can be found in the comments area of the post immediately beneath this post.)
Hi, Ron,

Thank you for an excellent question. I will provide an answer, which of course is not necessarily the answer. If it proves insufficiently helpful, please ask again...

I believe most traders fail because their objectives lack coherence. Yes, the objective is to select winning stocks, at least in part, but it is not to divine somehow their ultimate high (contra for short sellers) and then sell. The true objective is to make money.

As mentioned in the original post, my trading efforts supplant a zero level of income from no gainful employment. As each calendar year ends, I determine the level of income I require for the coming year to live life (pay bills, travel, etc). Then I [attempt to] envision how the coming year will unfold in the markets. If, for example, I foresee a market that trades flat to down, then I determine the amount of money I am willing to risk in that type of environment. Once I have these two figures -- desired income, risk capital -- I determine the needed rate of return to achieve the objective. For example, let's assume I stipulate hypothetically that I require $50,000/year to live, and let's further stipulate I am willing to risk $50,000. These figures dictate the result of my trading activity generate a ROI (or even ROE) of 100%. Knowing all this, I then recapitalize my trading account for the new year...

Each new trading opportunity must provide a certain level of possibility within the guidelines I set (and broken down into its constituent parts); in the goal above (100%/year) this can be perceived either as 8.5% or $4,167/month. If I share-weight my portfolio into position sizes of 1,000 share lots, I seek only those opportunities whose setups argue for $4 or more of upside points within 1 month. A purchased position then is sold upon achieving its objective. This dynamic equals purchasing 1,000 shares at $20 (or whatever), and then selling at $24+; this does not equal purchasing 1,000 shares at $20, watching it trade up to $24 or $25, and then trying to divine where it finally will stop rising. That effort is inefficacious, I believe. It allows the market to yank your chain rather than vice-versa, and to cause problems (financial losses, emotional anguish, etc), as it creates a grey area most traders are not suited to navigate. At least successfully.

Please recall that my sole mission when trading is to make money -- to displace non-existent income from a non-existent job -- not (to) be correct. (I leave that folly to others.) So I care little what the stock has done before I purchase it (excepting, of course, that it must build a specific setup) or what it does after I sell it. It is this area where most traders get into trouble. IOW, goals and objectives are internally generated; they are not a result of external factors. It is not how high is high, but what satisfies you. (Your decision to seek long term value opportunities is such a decision.)

Because I am human, I am as prone to this failing as the next person. Knowing this about myself, I do not add more impediments to my trading success but instead remove as many as possible. For example, I trade only those stocks for which I have zero long term interest; I find this helps to ease the burden of fretting about the continued success of a stock after I sold it. Who cares?

Indeed, who cares long term about Men's Wearhouse/MW and Telewest/TLWT? Certainly not me. When I first noted months ago the bourgeoning pattern in MW, I asked myself, "Why -- what is so special about MW?" I checked out several stores, and saw little of long term interest to me. (The same truth applies for TLWT.) Really, who can explain the whims and ephemeral infatuations of Wall Street? There comes the moment when the trader shrugs his or her shoulders, and buys. For the trader, the item of sole importance is the profit: buy here and sell there (and stop out there). Note that the professional trader has made these calculations in advance of purchasing the position; he or she does not scurry after the latest recommendation on CNBC, a breakout of a previously non-monitored position, etc. So these two specific trades are ideal for me: the stocks will arrive at a higher price, and then I will sell.

I realize this seems to defy a maxim I just shared -- knowing in advance your objective -- but as the trader graduates through the varying levels of proficiency (tyro to professional) he or she learns the rules. And the professional knows when to ignore them. Just as I do now (real time) with Google/GOOG. I see both through and past the fundamentals (the seemingly stretched valuation) and the technicals (the seemingly funky pattern --"broadening wedge"), etc. I have learned the rules during my decades in the markets, and thus (I) know when to ignore them. Google/GOOG right here, right now is such a 'violation'. Rather than to belabor again Google/GOOG, let's examine instead another opportunity, American Healthways/AMHC...

BI Research (thanks, Allan!) has this to say re the company...
"American Healthways, arguably the leader in the field of disease management, climbed more than $6 since our last Update in a weak market until it banged its head on the $40 level and recoiled a bit to $38.47. There are no company developments that I am aware of and the stock is not rising due to increasing full year FY8/05 estimates as these have remained unchanged for the past 3 months at a consensus of $1.01. By the way, this compares to $.76 last year, so represents 33% growth. The PE on those earnings is 39. It is worth noting that the $1.32 expected for FY8/06 (which has not changed either) equates to a PE of 29 times earnings 16 months out. Perhaps the rise is simply due to new investors flocking to the story of Disease Management and American Healthways, the leader in this field (as evidenced in part by it being the only company to win TWO of the Medicare test projects). However on that front, the Company speculates that some part of the rise may have been the result of new Medicare Advantage rates which recently came out and were attractive in hopes that more HMO plans would have incentive to take on Medicare beneficiaries… and then AMHC could help those plans with disease management. I also wonder if American Healthways, a pure play in Disease Management, benefited from the upbeat nature of Matria’s 4/20 conference call. The Company also continues to win its share of new contracts and contract extensions/expansions. AMHC has the wind at its back and I think if any stock deserves an above PE, American Healthways, which has a PE of 40 on FY8/05 EPS, is worthy. Continue to Hold."

Isolating one specific comment ("There are no company developments that I am aware of and the stock is not rising due to increasing full year FY8/05 estimates as these have remained unchanged for the past 3 months..."), I propound two items:
1) The difference between a company and its stock; and that
2) Different constituencies have primacy at different times.

[click to enlarge]

This moment could be that transitioning of constituencies: from investors - who purchase based on fundamentals including earnings momentum, and which offers one type of collar on valuation and thus price - to traders - who purchase in the hope of continuing price momentum (and which offers its own set of collars on price action, thus opening the door to extreme valuation). Thus, the price move for AMHC from $5 to $40 over the past 4 years could be equalled or bettered in less time while traders become the constituency with primacy. Investors seek (and care about) value, traders seek (and care about) price momentum. Savvy investors do not sell until well after the momentum traders come aboard knowing the price gains theretofore will prove as nothing to what is about to occur. (Shrewd investors, however, will - and can - create the environment that brings forth the momentum traders.)

When considering possible opportunities, I study the charts from the greatest periodicity to the smallest unit of intra-day; while holding positions, the reverse is true. I do this seeking the slightest clue of a reversal. Each long term investment begins, in general, as an intermediate term speculation, which, more often than not, begins its life in my portfolio as a short term trade. The sole exception ever to this rubicon is Google/GOOG, but then Google/GOOG is a singular opportunity.

The investor or trader (the denotation for me is a difference of time) knows why he or she buys and sells. Amiguous comments such as "Buy XYZ, it's going up!" are not merely unhelpful but misleading as well to the investor. The immediately-stated rejoinder should be, "Okay, so XYZ is going higher. But what is the objective stated in price, and what is the stop stated as a price or pattern...?" This type of analysis will usher in material changes in your portfolio's ROI.

Vision without action is a day dream,
Action without vision is a nightmare.

I hope this lengthy post cum reply provides a better answer to your questions. And thank you for your kind compliment re this site. If so inclined, please refer as many people as possible; the more here the merrier for all!

07 May 2005

Portfolio Update

In a new feature, I will publicly and regularly (weekly) update my portfolio holdings. A link in the sidebar (under FAQ) will always point to the most recent update. For this first update, I distinquish holdings by time frame, with comments.

Long term:
1) Cheesecake Factory/CAKE: Speculators miss the quality of this story (look at the daily chart) but prescient investors do not (look at the weekly and/or monthly chart);
2) Google/GOOG: Never before have we been 'offered' an opportunity of this magnitude. I have been recommending since pre-IPO, buying post-IPO, and yes, I continue to buy now - even at current prices;
3) Immucor/BLUD: Owned for several years. BLUD broke out this past Thursday from an intermediate term base within a continuing long term up trend. My favorite type of breakout;
4) Johnson & Johnson/JNJ: The poster child for long term investing;
5) Starbucks/SBUX: See Friday's blog entry;
6) Whole Foods Markets/WFMI: I stated it earlier, "The crème de la crème...";

Intermediate Term:
7) American Healthways/AMHC: Please review blog archives for reasons why I like this opportunity;
8) Corning/GLW: What can I say, I always have had a soft spot in my heart for Corning. Broke out Friday from a 16 months base;
9) Radiation Therapy/RTSX: Again, please review archives for reasons;

Short Term:
10) Men's Wearhouse/MW: Purchased 1 February at $34/share, my objective is a nebulous 'higher high' until it reverses, but my stop is a specific sequence of closes beneath the 50 day simple moving average (sma);
11) Telewest/TLWT: Purchased in April at $18/share, my objective [again] is a "nebulous higher high until it reverses". My stop however is specific: a close beneath ~$17.75 (although this number changes with each higher high).

As a professional investor, I generate (needed) income from my trading activity. Thus, I create a mix between long term investments (wealth-building) and short term trading (income). I never chase stocks, nor do I seek just any good pattern or breakout that might come along. I trade only those opportunities that I deem as long term investments.

It has been statistically proven that, for a variety of reasons, no portfolio should exceed nine investments. My current holdings of eleven stocks pushes the envelope, exceeding the preferred number by two. These two are my short term trades which I typically hold days to weeks; sufficiently insignificant as to not fret. It is a form of discipline to restrain your purchases to a boundary; any new opportunity must displace one of the existing nine (well, eleven) before I purchase it. So I must present a compelling argument to the investment committee (me) to displace something I know, and like. An opportunity such as Google/GOOG I foresee as being within my portfolios for years, perhaps ten years or more. I can foresee no argument to rid me of the vision the company executives have for it, and I have for its stock.

Hmm, I begin to venture into writing a 'profile' rather than update my portfolio holdings! I will stop here. Questions...?

Liz Cummings

Liz Cummings (see sidebar, left) and I have been friends for a long time, ~15 years. And during that time, I have watched as her vision changed, her art morphed, and her talent grew.

Like a butterfly emerging from its chrysalis, Liz shrugs off the representational style that has earned her beaucoup bucks in favor of this new abstract perspective, at times showing a Diebenkorn-like influence.

I like Liz's new direction. What do you think...?

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