New Year's Resolution: Make more money!

December 28th, 2006: Today was the next to last day of trading this year, and for the second day in a row the Dow closed above $12,500. The market was slightly lower today, with the Dow shedding $9, the Nasdaq losing $6, and the S&P 500 dropping $2. Most of the movement in the market this week has been on very low volume. This means there has been a lack of liquidity driving stock prices. If you look at most of your portfolio, I'll bet you see that all of your stocks were trading at half their normal volume.

This has some consequences for all of us little guys. It means, that stocks that dropped on this low volume probably dropped a little too much, and stocks that went up, probably climbed a little too high. So, don't worry if the start of 2007 is a little bumpy.

This year was a good one. All of the major indexes were up. The Dow up 15%, the S&P500 up nearly 14%, and the Nasdaq up about 6% after being down nearly 15% by the end of the year. All in all, this was a ridiculous year. For me personally, I was flat until August. I had a couple of bad trades early with large caps. However, assuming no major market move tomorrow, I am going to end the year up 12% in my 401k, and 28% in my trading/investing account. I'm not going to pretend that I can duplicate these gains every year, but I think all of us can beat the market if we think about it. That's why I'm going to lay down some rules.

Jim Cramer has put out two books; one with 25 rules, the other with 20 rules. I'm not going to pretend to understand the market as well as Cramer, but I am going to lay down some "rules."

(1) Don't be afraid to be all cash or all stock - if you are confused and don't know which way the market is going, and don't have any good ideas, don't be afraid to sit on the sidelines for a little while. If you're not comfortable shorting a falling bear market, be happy while sitting in a bank CD making 5%. Conversely, if you have several good ideas, don't be afraid to move it all in and be stock heavy... just don't get overconfident.

(2)Diversify! - Never have less than 5 stocks in your portfolio, and never have more than 40% in one stock. If you only have one good idea, put 60% in a mutual fund and invest the other 40% in your extremely great idea (if it's less than extremely great, don't be that far in!!!).

(3) Know when to walk away - I like to use trailing stops. Use stop limits if you want. One of the biggest mistakes any of us will ever make is to hold onto a loser too long. There are some positions I don't worry about too much. For example, when Pfizer (PFE) dropped 11% in one day on the torcetrapib bomb, I didn't pull out? Why not? I knew PFE would bounce back, and they nearly have. However, if you are invested in let's say Cepheid (CPHD), which I advised earlier, and you see it drop 5%, get the heck out! For example, I rode CPHD to $9.50, and set my trailing stop at 3%. This meant when it dropped to $9.20, I was stopped out. Good thing, because it ended updropping to $8.40, which would have meant a loss. So, for large caps? Maybe you can wait out pain... especially with big dividend companies. However, with these little guys, be prepared to jump ship in a hurry if need be.

(4) Don't buy stocks less than $5 - That is, don't buy them unless you have a really good reason to. For example I bought Jed Oil (JDO) recently because I have a good reason to believe they are going to go back to $10/share. However, stocks that are less than $5 are often ones that tank the fastest.

(5) Don't avoid risk - Just know how much you can take! If you can stand a moderate amount of risk, don't hesitate putting up to 20% of your portfolio in riskier stocks. On average, you may make 7-8% a year with index funds, but your opportunity to double or even triple your money comes from more speculative plays.

(6) Don't buy too little - Even the cheapest trading platforms cost you $7/buy and another $7/sell... this means $14 to get in an out. So, if you buy let's say $200 dollars worth, you have to make 7% to break even! This in not tolerable! I personally believe that you have to put at least $1000 into any position to avoid getting killed on commissions. The only time you can put in less is with a very risky stock. If you think one of your position might jump by 50% (up or down), then sure, you can go with less, to limit risk. However, I would still buy more and just set very tight limits to avoid big losses.

(7) Watch earnings closely - When earnings season comes around, you should listen to the conference calls of every company you own. This will give you a feel for how the company is going to do in the future. Also, know what the analysts are predicting... is one analyst skewing the average with an obscenely high or low earnings prediction?

(8) Know the Fed - I don't know of anyone who invests heavily and reads the news who doesn't know what the Fed is likely to do (I say likely b/c we're never positive). I haven't missed a prediction since 2003 on what the Fed was going to do. Lucky? Maybe, but I think this is easy to guess at. They now make their intentions and meeting notes fairly public. We're going to come upon some tricky times here shortly. With the dollar dropping, inflation over 2%, and the economy still posting good earnings and decent growth, look for rates to hold steady until the EU central bank cuts rates for 2-3 times, oil steadies at $58-60/barrel, and the deficit drops a little bit more.

(9) obey rules 1-8!

The Doctor is In!

December 20th:

This is a quick before work, pre-market posting. The market has been fighting to hold on to record levels and many stocks have been all over the place. Here are three ways to make money before the end of the year.

FedEx: They are going to drop about 5 points today. I think you can score some quick rebound cash at the bottom.

IDCC: I've still got faith in this company. They've rebounded well from surprise news, and will continue to make us some money.

APC: Anadarko is down about 10% from a week ago, which is going to make them more attractive when they start dumping all their properties. This company will be a takeover target within a year. In which case they'll probably receive a 20% premium. If they don't? You'll be invested in a very "hot" company, because their new portfolio will be a great one.

Happy Trading!

The Bulls keep on Marching

December 14th, 2006:

Today was an excellent day for the market; The Dow was up $99, the Nasdaq up $21, and the S&P 500 was up $12. Today's moves were largely driven by strong retail sales numbers and merger and acquisition talks (United and Continental might marry). All this growth came in spite of OPEC threatening to cut production again.

Mergers and Acquisitions: Right now there is so much money that is designated to be spent by private equity firms, the market is getting a buoying effect. The amazing thing is that only the largest companies are excluded from the discussion... names even as large as Nike have been thrown out there! Amazing to think that there could be several companies in the $10-50 billion range that could be bought.

Continuing with the trend of discussing big oil, here are some thoughts and a list of possible takeovers. I have positions in several of these companies, so take what I say with caution.

The majors, are not, and will not be, takeover targets for some time. That means takeovers by majors and leveraged buyouts by private equity will focus on small to medium sized companies. I think everyone is a possible target, and here's my list.

Anadarko (APC): Right now this company is holding $15 billion in debt, but in about 6 months they'll only have about $5 billion in debt, and a very attractive portfolio. Maybe even only $2 Billion in debt. This will make them a big time takeover target.

Devon (DVN): This company has been announcing several high profile deepwater discoveries, and has an attractive international portfolio. The thing about the deepwater discoveries is that they won't see a penny from that for a few years. This means they will basically be sitting on oil (aka money), and will be a relatively "cheap" target considering their assets.

Sunoco (SUN): Look for this one to be a LBO target. They are a cash cow, low debt, and make money quick. I like them both as a stock (now that they've come down from mid-summer highs) and as a company.

Apache (APA): This one would be a stretch, but I've seen the name thrown out there. This would definitely be a LBO play as their portfolio would not be attractive to majors. This company focuses on high rate of return assets, which means they are always awash in cash. This, combined with the fact that the company could become incredibly profitable if it's portfolio were rearranged, could make it a LBO target. However, this one is a stretch in my opinion.

Oil plays and the Fed

December 12, 2006: The market was generally down today with the Fed voting to hold rates steady at 5.25%. The Dow was down $13, the Nasdaq was down $11, and the S&P 500 was down a point and a half. I personally consider this a fairly reasonable market response to rates being held steady, given that it was a near unanimous vote (one lone holdout who keeps voting for a rate increase).

Today, I have 3 long term oil plays for you:

1. Anadarko (APC) is positioning themselves as a takeover target, and I think you stand to gain about $10/share. This may not happen overnight, but I think it will happen within 1-1.5 years. If nothing else, I think once they eliminate much of their debt through divestitures you'll make money on this stock either way. They also just announced a nice little discovery in the deepwater GOM, where they were partnered with Devon (DVN)
2. Chevron (CVX) is a company that has good people on the technical side, and the leadership up top to really take it places. They remain, in my opinion, the silent major. They haven't posted the profits of Exxon, the negative headlines of BP, nor the noise of Shell, but they have built a solid portfolio that will likely yield big gains in the future if prices stay strong.
3. Shell (RDS/A and RDS/B) is the company that I think will buy APC. I think this will knock their stock down a notch, and I think if they can't win their problems in Russia, they might stand to be a good pickup AFTER THE PRICE DROPS.

Since this is an oil play piece, I'll put my two cents in on where the price of oil is going to go. I think we'll see prices hover in the upper 50's to low 60's for another year. The long run is harder to predict, but I think we'll see $80 before $40, and $100 before $20.

Market Recap and Petro-thoughts

December 11th, 2006: The market was generally positive today with all three major indexes making gains. The Dow was up $21, the Nasqaq up $5.5, and the S&P 500 was up $3.20. The market was largely driven by mergers and acquisitions last week, but today's gains came with very little big news... at least very little mainstream news.

I spend nearly all my time in the oil patch, and therefore spend way too much time tracking developments associated with the petroleum industry, and there were some big under the radar goings on today.

1. Oil trades in US dollars; hence, OPEC countries are awash in dollars. However, they've been panicky over the fall in the dollar and have been diversifying the currency baskets. This could lead to a slide in the dollar and could lead to several Middle Eastern currencies that are pegged to the dollar relatively undervalued. This could definitely hurt the US in the long run. If petroleum starts trading in another currency (Euros?), then watch out for major problems in the US.
2. Shell and Sahkalin-1: Shell is really close to getting kicked out of Russia and losing their $20 Billion dollar stake in the Sahkalin-1 project unless they agree to cede a vast stake to Gazprom (state-owned). Nationalization is a growing trend in Russia. Losing this deal would really hurt Shell, and they are close to losing their permits because of falling behind schedule - look for a big drop in stock if they can't pull a deal. Exxon is safe with the Sahkalin-2 project because Rosneft has about a 20% stake... that will likely keep the Kremlin at bay.
3. Anadarko Firesale: It was announced internally today that Anadarko (APC) is going to start selling off several of their properties. I would look for them to dump everything but their deepwater Gulf of Mexico and Rocky Mountain tight-gas plays. This means they will probably sell of all the mid-continent, Texas, shallow gulf, Brazil, and yes, even Algerian holdings. Thiw will do two things: It will get them out of debt (they hold about $15 billion in debt from buying Kerr-McGee and Western Resources), and it will position them for a takeover. So, if you like to play for oil field takeovers, go with Anadarko (I think Shell will buy them up within 2 years).
4. Nationalization: Back to Anadarko -- they will have trouble dumping Algeria for a premium because Algeria is going to nationalize their petroleum in 3 months. Russia is trending toward nationalization, which is scary because they are the world's biggest producer on an energy equivalent basis. I predict that in 15-20 years there will only be 2 majors. Exxon and a Shell-BP combo. This will probably be a necessity if these companies are to survive in an ever nationalizing world. Their role will be drastically changed and competing with the likes of Gazprom, Saudi Aramco, and CNOOC/Sinopec will be very difficult.

Catching Flak, Eating Crow, and Holding Ground

Sunday, December 10th:

First, as a reminder to all my readers, I am not a professional analyst or investor. Any decisions you make to buy or sell should be your own after you've done your own research. I have received a lot of email lately pointing out what a bonehead I was for recommending IDCC and PFE. Yeah, I took two big hits there, but surprisingly have still made money on both these stocks.

As, one reader pointed out, the IDCC change in earnings guidance caused a precipitous drop in share price down from about $32.70/share to $29/share. Ouch, that's 10%... however, remember that I first recommended the stock at $32/share, and it's now only at $31.69/share. Only a .31/share loss. However, first thing on December 6th when most people were dumping IDCC, I used it as a buying opportunity and scooped up shares as low as $29.50/share, which I sold (to free up capital) at $31.50/share. This means that I am up since my original Nov. 6th recommendation. For those of you that bought on Dec. 4th, last time I recommended it, I'm sorry for your short term loss, and hope you didn't dump shares on the drop. Sometimes you have to feel some pain before the gain. Personally, I'm going to hold on to the shares I have, and will probably do so for about 6 months or more. Although many people like to flip stocks over short time scales, given the current market environment I'm not afraid to hold them, do homework, and wait (see comment on Dec. 5th post "Drug Sector Play" for explanation of IDCC price drop).

Pfizer: PFE dropped big time when they canned Torcetrapib, it's drug designed to be taken with Lipitor, which was supposed to raise HDL levels in people at risk because of high cholesterol. This drug was supposed to be revolutionary. Unfortunately, it raised the chance of death. Thank you PFE for being honest about this and pulling it now instead of at a later date. This was a surprise that took everyone in the market by surprise: the CEO was apparently in the shower when he answered the phone and found out about the Torcetrapib problems... so, this was a complete shock to everyone. I also treated the PFE dip as a buying opportunity, and was able to recover half my losses that way. Combine that with the recovery and I'm now about even.

I'm rambling a bit here, but want to make two points:

1. There always exists the possibility for market surprises. The PFE news caught everyone, even the CEO by surprise. The IDCC earnings guidance caught about 90% of the market by surprise. No one in the history or future of the market will be right all the time or will predict every move.
2. Always keep money on the sidelines to capitalize on big news, one day drops. I always try to have about 10-20% cash in my portfolio exclusively to buy on weakness. People nearly always panic on bad news, and drive the stock below what it's new value should be. This often results in a significant rebound, which you can capitalize on to recover some of your losses. Any good money manager will tell you with a good underlying business, the stock will come back.

Remember, we all way to buy low and sell high. Sometimes however, you have to be patient and buy low, stock takes hit, but lower, stock rebounds, sell that bought lower to recoup some short-term loss, wait patiently as stock price increases, and then sell high.

Drug sector play

Tuesday December, 5th:

I'm still waiting for my laptop to come back from the "Geek Squad", so until then no video posts. The Market was up again today: The Dow gained $48, the Nasdaq gained $4, and the S&P 500 gained $6.

I've been listening to the "market gurus" lately, and there are a lot of mixed opinions out there. I'm not making up my mind until I see the next round of core inflation numbers. However, one thing is for sure in my opinion: The Fed is NOT going to lower rates for at least 6 months. They can't because even though it will help the economy, it will sink the dollar, which will lead to inflation. It's really a Catch-22 for Bernanke and friends.

Now, time for the stock tips: Savient Pharmaceuticals (SVNT), Cepheid (CPHD), and Cerus (CERS). I think two of these 3 will double in 2007. All three have good product lines and I think CPHD may actually be profitable sometime in the near future. I've covered all these in detail before, so I'm not going to harp on them now. However, this is what I call a sector play. Buy all three, and you'll probably win big with one or two, and the other will stay flat to slightly positive.

Don't Cut and Run! Stay the Course!

Today was a mixed day for many investors, including myself. The Dow was up 90, the Nasdaq up 35, and the S&P500 closed up 12. So, it was a positive day for the market in general. However, if you were heavy in Pfizer (PFE), you got burned today. I was personally holding a few thousand shares of my long time favorite Big Pharma (PFE), and felt the pain from it's $2.96 drop.

However, DO NOT PANIC! Yes, it's very bad that Torcetrapib got cut. This will definitely hurt PFE in the long term. The fact that the drug made it to phase III clinical trials before it got weeded out is going to hurt; however, it's better that it get chopped now, than 6 months from now or even a year from now. PFE will now probably try to scoop up a handful of smaller companies, and maybe even go for a mega-merger to shore itself up for the long term. I have confidence in their new CEO, and think he'll pull them through this. So, if you are holding a position in PFE, stay the course, do not cut and run! The stock already bounced $1.40 from today's low, and will likely slowly crawl back up towards the $26 mark over the next 2-3 months. Also, it's unlikely that PFE will drop any farther than todays intraday low because of it's robust dividend.

So, final word on PFE: Hold it if you have it, and maybe consider adding to your position if you don't mind taking a little extra risk. If you're a big gambler, go after some small biotechs that have cholesterol drug lines as they may now be a PFE target.

An oddball buy: FUND, Royce Focus Trust Inc., just dropped 10.25% today to 10.51/share. They dropped this much because they have an annual dividend of $4.80/share. This is about 45%. So, if you hold this play for about 2.5 years, than you are at a 100% profit level. The only problem is, you'll have tons of volatility in this position at every ex-dividend date, but in truth, you can make bank on it in the long term. Another play along these lines, but which might actually make you some capital gains as well is FRO (Frontier Ltd.)

A strong reiteration!

I own Interdigital Communication Corporation (IDCC) stock. I've been buying as much as I can afford. This is a company that makes a great product line (wireless is going to be king), and trades at a ridiculous low P/E ratio. I think one more year or two and this stock will double in value. All the pieces are there. The fundamentals are great, the product line is great, the underlying company is great, and the growth potential is huge. I'm looking to at least double my money on this company, and I think you should look to do the same. I know I've been thowing this name out a lot lately, but that's only because I think it's so good.

I used to day trade when I was in college. I made mucho dinero being a buy-and-sell stock flipper, and still do day trade when I have free time, but I've found out that buy, make your money, and sell is the way to go. That's why I'm holding on to this one until I've made big money on it.

If you want a new name, how about Level 3 communications (LVLT) the recently bought Broadwing (BWNG), and are a really great company. I've made about 10-15% on them this year, and I think they will also double in about a year. However, fundamentally they are nowhere near as good as IDCC.

Weekend Overview

Hello All! Sorry for the spotty posting, but I was out of town on business for a week and didn't have a reliable internet connection in the hotel... to top that off, my personal laptop is still crashed.

This was a tough week on the street. The DJIA lost about 60 points, The Nasdaq shed about $40, and the S&P 500 was down about about 4 points. This may not sound too bad, but the issue is that the market was incredibly volatile. At one point the S&P 500 was down more than 20 and up 5-6. I think we were luck not to have lost a lot more on the week...

I've been very bullish for almost a year now. Things have been going great, I can't seem to pick a loser (except for Xethanol (XNL) my worst trade ever). This week I made gains of about 2.5%, which isn't too bad when the market is going down (I wasn't shorting anything this week because I was out of town). However, it appears that things might be getting worse...

Things might be getting worse because (1) The dollar is plummeting; (2) inflation is still a worry; (3) earnings were big last quarter; (4) energy costs; and (5) signs of economic downturn.

Dropping dollar: This is both a plus and a minus. It is a possible blessing for U.S. exporters who ship to Europe and Japan, although I still don't know if they can compete with China and other countries that can abuse workers. The minus should be obvious. It means companies that import goods will have to pay more in dollars. This means customers will have to pay more and consumer sales will slow. This could be the start of the end. The government had a "strong dollar" policy for decades for a good reason. It protected us from rampant inflation. Congressional spending is killing our money and our low household savings rate doesn't help any. The Fed will have to raise rates to protect the dollar from falling too hard.

Inflation worries: Although core inflation seemed to be holding steady and then the dollar dropped by nearly 10% against the pound and euro. This means all those gains were nearly erased. Inflation is now a legit concern again and the Fed may have to raise rates to reign it in. This, combined with a dropping dollar, means we could see interest rates actually increase again in the first half of next year instead of stay steady (like I predicted) or drop like many analysts are predicting. This would protect the nation against inflation, but may squash the market.

Earnings: These were so big last quarter that I think we're getting ready to see a real disappointment in the fourth quarter. Next time earnings roll around I'm going to be scared... very scared. I might even go 50-60% cash to protect myself for that month and try to make money on the backside of disappointing returns. Normally, things balance out for a year to what was predicted. If you boom in the 3rd, you normally fade a little in the fourth. It's not because things are getting worse, it's because maybe a big deal came in earlier than expected...

Energy costs: Believe it or not, OPEC actually seems to be following through. This has got oil back up to $62, and I think we might see it peak back up to $65. This depends on how Iraq goes and what happens with Iran. But with Angola joining OPEC, I think the cartel is gaining strength. Furthermore, with more countries nationalizing resources, we may see prodcution efficiency drop, which means price will go up. Furthermore, gas prices are related to weather, and this fall is looking like it might be abnormally cold. Follow up a cold winter with a hot summer and a Democrat repeal of oil company tax breaks and you've ot $10/MCF natural gas and $68-70/barrell oil. Bad news for everyone but energy companies.

Economic downturn: All the signs of the economy slowing are starting to fall into place. This is a no brainer... economic downturn means companies get battered. Normally this is when you can make some money on the market by planning for a Fed rate cut, but when you have inflation and a dropping dollar, that is not going to happen. I think we're about to go into a recession come February or March, maybe sooner.

My suggestion to all of you is to be careful, only invest in best of breed companies, and companies that are trading at a real discount. There's still alot of money to be made, but you have to be careful doing it. I'm not ready to start shorting the market yet like I was when the tech bubble was about to burst (I shorted that market down for months after riding it up for months), but I'm trying to get my economic gauges fine tuned so I'll know when to pull the trigger.

One final note: Xethanol (XNL, formerly XTHN) are in a class action lawsuit. If you bought their shares between January and August, 2006 please consider joining the suit. They are corrupt, and deserve to pay. This, unbelievably, was the only trade (out of more than 200) that I've lost money on all year (lots of neutrals, and several that are only profitable because of the dividend), but this one was a real stinker. They intentionally misled investors, made false statements, forged records, and affiliated themselves with known criminals through shell corporations. They should go to jail. If that doesn't happen, maybe we can at least recoup some of our losses.