The uptick rule prevents a short seller from initiating a sale until a stocks last move was upward.

The uptick rule had been in place since the 1930’s, but was repealed in 2007.

Many investment professionals believe that market volatility in the last year would have been reduced had the uptick rule still been in place.

Originally posted on pfhacks.com: Return of the Uptick Rule

In past missives we have suggested that the equity markets have been in a bottoming process since the October 10th capitulation “low.” We have given numerous metrics for that view, but in this week’s Barron’s the always insightful Stephanie Pomboy makes our prose pale in comparison when she states:

“In the very near-term, there are a variety of reasons to anticipate a rally in risk. First is the massive destruction witnessed to date. Our dogmatic [insistence] that markets needed to give back all the gains built on the housing-bubble lie have largely come to pass. Virtually every market is at or near pre-bubble lows, from stocks to bonds to commodities . . . [so] the financial deleveraging may largely be complete (see the nearby crude oil chart). Most notably, yields on corporate credits have climbed to multidecade (and in the case of junk, record) extremes. At the same time, cash [must be] burning a hole in investors’ pockets with 0% yields before inflation and dollar debasement.”

Obviously we agree with our friend Stephanie, which is why we have been recommending the scale buying of distressed debt situations like BlackRock MuniHoldings Insured (MUE/$9.36) and Nuveen Insured Dividend Advantage (NVG/$10.75), both of which sell at discounts to their net asset value and have over 6% tax free yields. We also have been recommending Lord Abbett Bond Debenture Fund (LBNDX/$5.70) with a near 9% yield. Moreover, even though we have avoided the financial complex for years, for those wanting exposure to said complex our vehicle of choice remains the iShares S&P U.S. Preferred Shares (PFF/$28.12), which is yielding over 10% and has a 78% exposure to the financial complex’s preferred shares (see the attendant chart). Additionally, during the past few weeks we have added the iShares MSCI Japan (EWJ/$9.17) and iShares FTSE China (FXI/$28.06) to the ETF portfolio.

Originally posted on pfhacks.com: Jeffrey Saut Sees Markets Bottoming

The six reasons to buy stocks now from the article:

1. Stocks are battered and cheap.
2. Stocks are overdue for a rally.
3. The low risk alternatives are pathetic.
4. It’s not the 1930s.
5. The market shows signs that the worst is over.
6. If not now, when?

Each point is detailed in the full article.

I agree with each point, but it is always stressful to put more into a market that has done nothing but go down for a year. But, I follow Warren Buffett’s philosophy: “We try to be fearful when others are greedy, and greedy when others are fearful.”

Given the level of fear displayed by virtually everything I read, it is clearly a time to be greedy.

Originally posted on pfhacks.com: Kiplinger’s: “Six Reasons to Buy Stocks Now”

This was on no real news.

Nvidia has fallen from its 52 week high of $39.67 to a recent $8.80. It closed today at $10.00. Can it be inferred from this strong counter trend move that they are “in play?”

Maybe. Nvidia has had its share of problems lately. They have had issues with some of their chipsets, which required them to take large charges; are facing increased competition from AMD and Intel; and economic conditions are not favorable.

That being said, Nvidia has no debt, a strong cash position, and a history of producing innovative and desirable products.

This could be a case where a number of investors are recognizing an apparent value, but it seems odd to push the price up on a day when virtually everything is going down. More likely, news of a potential merger has leaked out.

Stay tuned.

Originally posted on pfhacks.com: What’s Up With Nvidia?

As oil continues to drop, the airline stocks have been on an absolute tear. This is in contrast to the overall market which has been generally miserable.

At the time of this writing:

• Delta Airlines (NYSE:DAL) is up 24% today and up 79% in the last three months.
• Northwest Airlines Corporation (NYSE:NWA) is up 22% today and up 80% in the last three months.
• US Airways Group (NYSE:LCC) is up 17% today and up 195% in the last three months.
• AMR Corporation (NYSE:AMR) is up 17% and up 132% in the last three months.

Here is a chart comparing the airlines listed above to

Very impressive, however one must consider what happened to the airlines in the months before oil began its fall.

Here is the same group, except the chart shows a one year time frame.

As you can see, most of these stocks are still way down on a 52 week basis. An important investment skill to learn is to not kick yourself for missing a huge upward move in a group of stocks. Unless you have a detailed knowledge of both the supply and demand dynamics of the oil and airline industries, investing in these stocks at any point in the last year could only be labeled a speculation (read gambling).

Remember the Warren Buffett maxim “There are no called strikes in investing.”

Originally posted on pfhacks.com: Airlines Are Up Huge Today

History

The Dow Jones Industrial Average (DJIA) was originally, as its name implies, an index of twelve of the largest industrial stocks trading on the New York Stock Exchange.  The list was compiled by Charles Dow, an editor at the Wall Street Journal, and was first published on May 26, 1896. 

The first list contained such venerable names as: American Cotton Oil Company, Distilling & Cattle Feeding Company, and National Lead Company.  Of the original twelve, only one, General Electric, is still a member of the DJIA.  The rest were either later dropped from the list, acquired, or split up.

The average was originally computed by totaling its constituent stock prices and dividing by the number of companies in the index.  Incidentally, the first day closing Dow Average was 40.94.

The average was increased to twenty stock in 1916, and was again increased to thirty stocks in 1928, which is the number of stocks that make up the average today.  A quick note on the debilitating effect the great depression had on stocks:  The DJIA peaked at 381.17 on September 3, 1929.  Three years later, it bottomed on an intra-day low of 40.56 – less than where it started 36 years before!

Structure

As mentioned, the DJIA now consists of 30 stocks, many of which cannot be termed “industrial”.  Here are the 30 Dow stocks as of February 19, 2008:

3M
Alcoa
American Express
American International Group
AT&T
Bank of America
Boeing
Caterpillar
Chevron Corporation
Citigroup
Coca-Cola
DuPont
ExxonMobil
General Electric
General Motors
Hewlett-Packard
Home Depot
Intel
IBM
Johnson & Johnson
JPMorgan Chase
McDonald’s
Merck
Microsoft
Pfizer
Procter & Gamble
United Technologies Corporation
Verizon Communications
Wal-Mart
Walt Disney

Although these are large US corporations, many feel that a broader average – such as the S&P 500, is more representative of the US Stock market.

Component Weightings

The DJIA is a price-weighted average, meaning that stocks with a higher share price have a much greater influence on the overall average than a lower priced component.  For instance, a move in IBM, at $106 per share has a much greater influence on the DJIA than a move in Microsoft at $28 per share, even if Microsoft were to move a greater percentage basis.  Contrast this with the S&P 500 which is weighted by market capitalization.

Average Calculation

The DJIA is calculated by summing the prices of all of its components, then dividing the total by a divisor.  The divisor changes periodically as companies are replaced, shares of components split, or dividends are paid.  This divisor is designed to “smooth out” events, so that the average has continuity over time.  As of today – February 19, 2008 – the divisor is 0.123017848. 

Originally posted on pfhacks.com: What is the Dow Jones Industrial Average?

I heard something very interesting on CNBC last night: 2008 has been the worst beginning for stock markets ever. That’s right, according to CNBC, stocks have never declined more through the first eight days of a new year than in 2008.

Through January 8, 2008, the Dow is down 211.77, or -7.98%, the S&P 500 is down 78.17, or -5.32%, and the NASDAQ is down 211.77, or -7.98%.

I have found the writings of Warren Buffett to be invaluable in my education as an investor over the years. He doesn’t look at stocks as pieces of paper to be traded, he sees the underlying proportional ownership of a business that the stock represents. As long as you have a good feeling about the prospects of the business, you should welcome declines in the price as an opportunity to buy more of a good thing at a better price.

To illustrate his point, Buffett included this story of “Mr. Market” in his 1987, Berkshire Hathaway Letter to Shareholders:

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic- depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.

Please pay special attention to that last paragraph. If you can’t reasonably form an opinion of value on a company, you have no business owning it’s stock. Buying shares in Google, because you think they will go up is not investing, it’s speculating. I’m not saying the speculation is a sinful practice, but you should never confuse it with investing.

That being said, when broad sell offs occur, they provide excellent opportunities to add money to index funds. Over time, even with recessions, American business will grow. You are better off if you can purchase that growth at a better price. By that logic, you should hope for extended bear markets while you are investing your capital, and a great bull market as you sell stocks and rotate into fixed income securities for retirement.

Originally posted on pfhacks.com: When Mr. Market Offers You A Deal, Take It

The Dow Jones industrials ended the year up 6.4% while the NASDAQ was up 9.8%. The S&P 500 was up only 3.5% due to the index being heavily weighted with financial stocks, which took steep losses in the last four months.

Originally posted on pfhacks.com: All Major Stock Indexes End the Year Positive