Thursday, November 18, 2010

18 November 2010 Government Motors Day


18 November 2010 Government Motors Day

Thank you all for the feedback about my little experiment with xtranormal. While almost everyone thought it was cute and creative, there were many who had buffering problems and imagined our typical blog turning into a 90 minutes media event. I will use Salve and Lucrum sparingly and keep an eye on the technology as it improves.

I had the opportunity to talk with a young lady today who has entered the working world and is now setting up her 401 K plan. We mentioned her a few months ago and now it is time to “Get In The Game”. Hopefully she will be a regular reader of the blog which will make her the 44th reader. Welcome Lauren.

Also, welcome Frank and Aunt Kay. From their replies it appears they too will be regular readers. Frank is a knowledgeable investor and is very familiar with Asian and European Markets. I hope he corrects me when I mis-speak about those markets. Some of you really enjoyed the xtranomal piece about QE II from last week. I gave credit to "a reader" and did not mention their name. Ben, thank you for forwarding the QE II piece. (He is so needy.)

Today we saw the market reaction to the successful IPO of GM, some stability in the Ireland sovereign debt issue, and a very positive report from the Philadelphia Federal Reserve, which might put an end or at least a curtailment to the latest round of Quantitative Easing. This buoyed (not to be confused with booyahed) the market up 1.5-2% all day long. Volume was light especially if you back out all the GM pin action. (Ok I know a few of you want to know what that means. There are three things I look for to determine where the market might be going. First I look for the direction. Is it up? Is it down? Or is it sideways? Then I look at how many people were actually playing in the game on that day. That is determined by the number of shares traded compared to its 50 day and/or 200 day average. If the shares traded are well above the average-regardless of the direction- than that implies we have institutional investors-banks, insurance companies, hedge fund managers- in the game. Then I track those trends over the last seven trading session to find a trend. Remember 70% of your stocks price fluctuation is driven by the overall market and its sector.) So we had a quiet positive day. Give me 4 more of those over the next 6 days and we might be using the R word again. RALLY. Here is the 30 day chart with my notations.

See the little arrow on today’s volume? Then compare it to the big arrows on the 3 nasty days we saw in the last 7 trading sessions.  You can see the down and right arrow at the top was when the rally clearly ended. That little brown line on the bottom is the 50 day average. As you can see today’s volume was light and when you back out the GM volume, it was quiet out there today.

Baby You Can Drive My Car

Bloomberg on line had one of the best articles about the GM IPO. It was titled "General Motors Shares Climb After $20 Billion IPO". I’ll admit, not real creative, but David Welch, Lee Spears, and Craig Trudell did a great job of explaining the nuts and bolts of the GM IPO. I suggest reading the article in its entirety. Tim Guitner and the Treasury will have to be very patient as GM will need to get 53 bucks a share for the rest of the GM stock they hold in order to break even on the bail out.

A bad week for MELA Sciences

If you remember, on Monday I suggested you consider a very speculative play on MELA, a company developing a screening technique for Melanoma, the nasty skin cancer. A lot was riding on the FDA review on Tuesday. It came back negative and as suggested here the stock dropped 54%. We read the FDA analysis yesterday ZZZZZZZZZZZ, oops sorry it was a gripping read. And while The FDA did not approve the test and apparatus, it did not close the door on the device. So I was thinking you buy it when it’s in the dirt and even make more money when they resubmit and possibly pass. Risky but fun. Well this morning I got an alert (have not bought the stock yet but flagged it.) and they, MELA, are being sued in what appears to be a class action law suit for security fraud about statements made prior to the FDA release. So the stock was down even more today. My guess is this attorney lost his ass on the drop and is just lashing out. Some people just can’t take a joke. Anyway, I am trying to get a hold of the complaint filing to see if there is a smoking gun or just some upset shareholders.

Can you buy me now?

This is a quickie, but I got a heads up from UBS research (I think, if so thanks Tim) that Qualcom might be back in play. DO YOUR HOMEWORK, but at quick glance, I liked what I saw. It has a nice margin of safety (remedial reminder-that means its current price is comfortably below the average analysts target prices.) as recent target prices are in the 60 range and it is trading for 47.98. Its debt is non existent, its net and operating margins are really sexy (financial term for way above industry averages), its ROE, return on equity is healthy, its free cash flow is exploding, (but I want to tear apart the cash flow and balance sheet reports for Tom Trickery), and its forward looking PE is in line with industry levels. (About 16 a little richer than the S & P 500 PE of 14). Check it out. We DO NOT OWN QCOM

Dividend + ETF = Profit Maybe

We get several notes a month asking if chasing dividends is a good thing. We usually explain that dividends are just on leg of the three legged chair of shareholders yield. You have dividends, paying down long term debt, and stock buy backs. So yah, it’s a good thing to chase dividends. Then we get asked how much of a dividend yield is a good return. We usually explain that if you shoot for the 10 Year Treasury Yield in a dividend yield it will serve you well. Today that would have been 2.4 oops sorry, 2.7 no sorry it was 2.9 ooops anyway you get the point its kinda a moving target right now. (I thought QE II was going to make the 10 year go down?) Anyway, we would suggest looking for about 3%. Now you can get out any one of a dozen stock screeners and screen for stocks that have a 3% or better dividend yield. For kicks I just did that on FinViz and got 1,483 stocks. Easy enough. BUT we want to make sure those dividends are sustainable. So we screen those stocks by their payout ratio. I chose to use a payout ratio of less than 40%. (The higher the percent, the more they are burning up assets to keep their shareholders happy with the dividends and the less they have to spend on advertising or holiday parties.) With that screen in place we are now down to 133 stocks. Anyway you get the point. Once you get a manageable list you still have to do the tedious homework that only geeks like me like to do. (Sorry fellow geeksters.) Another way to do this is to buy a bucket of prescreened stocks via an ETF.

I have done some homework for you and suggest you look at DLN and FVD. DLN the Wisdom Tree Large Cap Dividend Fund has had a decent performance of late with an annual return of 9+%. Here is a snapshot of their top holdings.

FVD the First Trust Value Line Dividend Index Fund has had a recent return of 11+% and here is a shot of its performance for you to look at.

If you like dividends, but don’t like the homework necessary to find the great gems out there, these ETFs just might be the answer. If you were wondering if this came from one of the 382 articles I get everyday, it did not. This came to me as I was swimming laps yesterday morning. Then we had to see if there were ETFs based solely on dividend yield. There are not many but these two seem to be best of breed. If you are not a fan of ETFs, look at them anyway and see their top holdings. There are some great value buys on the list.

Gobble Gobble

We leave for Utah tomorrow at O Dark Thirty, but I will be on line and probably posting with sporadic frequency.  If I get lazy, enjoy the weekend and the Thanksgiving Week.  I will also have my cell if you need me. 

Salve Lucrum


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