What to Expect this Week - 4 / 13 / 2009

The business world remains in flux. Having read many of the financial sections this weekend and listening to the financial networks and radio hosts this morning no one can agree on the path for the US economy for the next 3 months. Will it worsen, plateau, improve? I heard all three this morning.

One thing is for certain, volatility will remain in the medium to high range because we have extremely liquid markets and large amounts of uncertainty. Our best defense to this volatility remains large cap, industry leaders that are purchased at a relative value discount to their overpriced peers. And do not forget a 15% - 20% stop loss down side protection which moves up when your investment moves up. Sure your broker may complain, but its your money, right?

And when he's done complaining, ask where he or she is invested personally. Then watch those positions / issues carefully. It will give you some real insight into their value to you. You need to determine whether your broker is good at managing their firm's infrastructure (trade disputes, executions, clearing), research selection (discussing with you new ideas they believe in as well as new ideas they do not), and actual investment selections that match up to your investment profile. Anyone of these broker profiles is good enough. The key is knowing which one you are working with and remember the vast majority react to momentum in the markets and their tone on a specific day will correlate strongly to the Dow Jones Index daily trend.

This week should be more volatile yet again. We have a slew of earnings to be announced in this market combined with a overly cautious regulatory and reporting environment. We will see huge misses (because a small miss and a large miss is the same in a bear market), and smart public company executives who know they will miss their projected earnings or show a loss will use this opportunity to clean house. That is they will write down and expense everything they can from their balance sheet. These write downs will flow through the income statement and push earnings down further. The result for earnings misses is that we will hear 2 numbers from many reporting companies that miss their projected earnings, one will be earnings from operations, the other will be earnings from operations and one time charges.

The second type of earnings announcement we will hear is beating estimates by a large margin. This will be due to frightened financial and research analysts who would rather underestimate company earnings than due real research and economic application in the industry they are being paid to be "expert" in. I ask anyone with half a brain who paid attention to last week's huge beat of earnings expectations by Wells Fargo how this can ever happen? How is it that banking analysts can miss by that much? Does it not occur to them that Wells Fargo wrote off much of its bad debts already, reduced its variable costs dramatically (wages primarily), and has been operating on a virtual cost free basis (on capital) thanks to the government may actually show a real profit? Being fluent in research and industry speak and writing thick reports in support and poorly researched and analyzed information does not make anyone a good analyst.

Too many research analysts are making a living discounting the financial information provided them by self serving CEO's and CFO's of public companies. And this should be your perspective when surprises up or down on earnings occur.

Readers, corporate performance and results should not trend upward like a 20 degree angle. They should move about that trend line at least, sometimes higher, sometimes lower. Its when we see 2 deviations from that trend line we know that there is an issue. That's also when we as investors need to do our own investigation for value.

GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $10.76
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $11.33


Build Value Every Day

Brad van Siclen