Dow Jones Neck Snapping - 4 / 7 / 2009

Daily Market watchers beware. Do not get caught by the talking heads providing clever prose like "Bear Market Rally", "Value Shopping", "Lack of Bull Market Conviction", "by historical measures, standards", "Backing and Filling". These folks are not expert in the market because they have yet to recognize that the Dow Jones Index is ruled by day traders. And day traders trade the index against news announcements. Today for example, Alcoa announced bad earnings. This was used as the rational for the Dow Jones futures being down. Bad earnings in this market are a surprise? Definitely not.

So ask yourself why the markets are moving lower. Its the emotional response by traders who are Bearish and sell the index into bad news. They are not selling Alcoa, they are selling the index. Volatility exists in an uncertain market. But volatility is amplified by index day traders who have more interest in liquidity and volatility and virtually no interest in individual companies. There are no downside earnings surprises during a recession. There are only upside earnings surprises in this market.

My latest "expert" bashing surrounds the amazing banking analysts who have begun releasing (finally) downgrades in bank stocks. WOW, brilliant. It just shocks me that after 6 months of the greatest financial crisis of the last 50 years analysts are still comming to the table with bank down grades or initiating coverage with a "sell" or "underperform". Where people is the value here? And what should we be doing ourselves.

First, enjoy the entertainment. Second, seek the best quality large caps trading at a discount to their peers on the simple P/E standard. Yesterday began my new value based portfolio with GE at $10.60, and Dell Computer at $10.00. GE has a 20% downside stop loss given its inclusion in the Dow Jones Index. Dell has a downside stop loss of 15%. I expect these companies operations and profitability to perform modestly better than their publicly listed competition.

So unfortunately we can not use equity indexes, the Dow, the S & P, NASDAQ as anything more than entertainment purposes right now. When the market is up 100 points, "experts" and the media make statements like "all the bad information, and bad earnings have been built into the current market levels". When the market is down 100 points, suddenly bad banking sector information is a reason for the slide of the market. But in truth none of this information is new and it is all, again, simply an excuse to sell or buy the indexes.

Pick shares in companies with proven value that have been unfairly beaten down over the last few months. They will have the best principal downside protection built into their long term investor base, and they will have be the first to move fundamentally when fund managers think its safe to put money back into the market.

GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $11.19
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $10.33

Build Value Every Day

Brad van Siclen