Random Thoughts On 25 October 2006

According to Cramer all the uncertainty for the next two weeks revolves around the election.

Defense is drifting down in anticipation of a Dem win. If they take Congress defense will fall out of bed, I'm saving some cash for that. BA especially if they iron out those 787 wrinkles before the election.

I think Cramer has done a lot of good by educating investors. But he does do a lot of hip shooting too, so you have do your own homework and come to your own conclusions. Read Adam's blog referenced above. Adam does a superb job at describing the action in options, which is often at odds at Cramer's advice.

With regard to the election, yes, I am sure it is a factor. My stance is more to wait until the results are out and watch the reactions of the market. I am not going to prejudge. It should be interesting.

>>>Read Adam's blog...

Actually I put the link on my list when I first read it above, thanks.

I just finished Cramer's latest book and am going to reread it immediately--I can't remember ever doing that before. And yes, homework is something he stresses throught the book, one hour per week per position.

>>>I am not going to prejudge.

Sure you are, you're just not going to talk about it. Prejudging all the contingencies is the only way you can be prepared to act (or not act, which also requires a conscious decision).

I don't think the world's ten smartest people combined could understand the markets, you just have to be right more often than you're wrong.

Sure you are, you're just not going to talk about it. Prejudging all the contingencies is the only way you can be prepared to act (or not act, which also requires a conscious decision).

Actually, I am not going to prejudge. I would rather wait to see the reaction. Often it is not the news, per se, that is important. But rather it is how the markets react to the news that is important.

Let us take your position for a moment. If the Democrats do better than expected, then that should be bad for the markets, no? But what happens if the Democrats do better than expected and the markets go up?

Often the markets will go their own independent direction, and only after the fact will people ascribe a reason or rationale.

For example, housing is weakening, so interest rates should stop going up, possibly even go down in the near future. If rates go down, that is great for the markets.

If housing continues to stabilize, then we have seen the worst of the excess building and inventory, and resilience of the markets have been once again affirmed.

So whatever, whatever your position or bias, you can usually spin any sort of facts or circumstance to suit your desired outcome.

I really do want to simply see how the markets react. If the Democrats do take Congress, as you suggest above, I would not be surprised to see the markets rally on the belief that gridlock is a good thing.

Sometimes it is better to sit back and wait.

>>>If the Democrats do take Congress, as you suggest above, I would not be surprised to see the markets rally on the belief that gridlock is a good thing.

That's actually what I expect in that event, though I think the dems peaked too early and the momentum is now with the GOP. Certain sectors will fall out of bed with a dem victory, prime among them defense and health care. But the sellers that panic are the nervous nellies, defense will recover. Especially since a dem victory will embolden our enemies.

Yes, I am sitting and waiting. But I won't stop thinking. :) If defense falls out of bed I will buy, maybe buying put options now would be better. But then that's not sitting and waiting is it...

My bias is toward making money. I have opinions of conscience about events but they are irrelevant to my money-making bias. I do balk at buying tobacco and gaming stocks, but not much else. The creation of wealth as an overriding imperative (wealth in general, not my wealth) will cover a multitude of sins.

Stopping illegal immigration would be bad for the housing market, no?

With regard to put options, you have to be careful that the premuim—that is, the implied volatility—has not already been bid up in advance of the election for the names you are considering. You might find that the stock goes down but so does the put option's implied volatility resulting an overall net loss.

One excellent site is iVolatility.com. You can see how the implied volatilities for your put options have changed recently.

iVolatility.com looks like a lot of fun. So does day trading...

I need more experience before I plunge into options or day trading. On the other hand the experience(s) gained after a plunge stay with you better. Thanks for this. :)

Hi Andi, whether you want to become a more active trader or simply a better investor, I strongly recommend reading Adam's blog. You'll learn a lot about investing, trading, and options. Adam often provides more insight to Cramer's comments.

For example, if you think defense stocks might be pummeled with a democratic win, should you buy puts, as you suggest? Should you short the stock instead? Or should you sell out-of-the-money calls instead? If you chose the latter method, you get paid for the daily decay of the option. So if the stock stays still or falls, you win. But if the stock rallies hard after the election, you are at great risk. Adam discusses various strategies for various situations and shows his reader the pros and cons.

I do not have a strong position either way with regard to the election. And I am not sure of the markets' reactions to a victory by either party. So I simply prefer to wait. I am not an active investor or trader, probably to my detriment. That said, I still learn a lot by reading Adam's blog.

Thanks for that Kevin, I will be checking in on Adam. I maintain a small trading account which is a "learning account." Nothing drives a lesson home like real cash, even small amounts. My specialty at the moment is buying stock depressed by inaccurate news. The best was GOOG which fell on Yahoo's bad numbers and I absolutely knew that GOOG was different. The worst is WAG which fell on WMT's announcement but has yet to recover--being impatient I dumped it for AAPL which has been pleasant. I also have some very speculative chip stocks, one of which is doing extremely well on LBO rumors... All in all I'm having a blast... :)

Yes, real cold hard cash is the best way to learn. And if it is a speculative account, so much the better.

I am glad you did well on GOOG. Had I taken a position, I would have betted against GOOG and would have been wrong. I read Blodget's blog Internet Outsider and agreed with his logic—what is bad for Yahoo is more than likely bad for GOOG.

>>>I would have betted against GOOG and would have been wrong.

My AdSense income is in fact funding my trading account--I know from AdSense forums/blogs that AdSense is blazing hot while Yahoo's contextual ads are going down the tubes. Sometimes you don't actually have to be inside to have inside info. :)

Diversification is my next project, I'm all in tech, oil and a little health care. Odd because my expertise should be retail. After reading David Levy I'm thinking JNJ, PG, KR, GIS, UN...

Yes, diversification, to an extent, is a smart thing to do. It protects against unpleasant surprises in one or a few of your stocks.

That said, too much diversification almost ensures mediocrity. And when you want the benefits of diversication most—during a sudden market meltdown—most often all asset classes become correlated. Put differently, most everything crashes. A great example is that investors often diversify across geographic boundaries to protect against a localized market meltdown. But when the U.S. markets experience a crash, other markets around the world fall in sympathy.

Since you are striving for some added diversification, I will point you to Standard & Poor's S&P 500 Index, where you can download a spreadsheet of the 500 stocks with their industry classification. You should also visit Barry Ritholtz's blog The Big Picture, a very worthwhile blog, and pick-up his spreadsheet given in his article Apprenticed Investor: "How My Doin?".

In this information is new ground to you, this should keep you busy for a while. :-)

My goal is best of breed in each of 7-10 sectors while remaining hedged between consumer stocks, oil, cyclicals and non-cyclicals.

Thanks for the links.

The Best of Breed sounds like a Cramer aphorism. Best of breed often helps to ensure that the company will not implode because best of breed stocks are usually well managed. The flip side is that these stocks are often comparatively highly valued because they are priced to perfection.

If you look at Dell and HP a few years ago, HP could not do anything correct. Dell was the annoited leader and forecasted to increase its lead over HP and others. Today, it seems as though Dell cannot find its way, and HP is the annoited leader.

Just remember that things tend to revert to the mean. That said, there are inflection points where things go on a different tangent from the prior historical pattern. For example, I think commodities will do well for a while because the global economy has grown beyond the commodity overhang.

Glad the links are helpful.