Wednesday, January 26, 2011

26 January 2011 Stop it some more, It hurts so good!


26 January 2011 Stop it some more, It hurts so good!

We were stimulating the economy today as we had contractors tell us they need to measure appliances before they can build walls and stuff. So we used a line from the State of The Union Address last night and “froze domestic spending” while spending much more money than we should furnishing our kitchen. Mr. President did a great job with the rhetoric, but even some of the left leaning media outlets (CNN and NBC) we confused how you freeze spending while double the $780 Billion already spent on certain domestic programs. In the rebuttal, Rep Paul Ryan from Wisconsin got decent grades from almost all media outlets who chose to cover it, in taking the administration to task about the irresponsible spending. (Ryan did not point out and possibly should have that we currently spent 921 Billion at all levels toward education, more than China and India combined. But they are out educating us? Interesting. Perhaps we should out source education to the Chinese)

Ok down off my pedestal.

We got the consumer confidence number right on Tuesday. Well we said it would be a beat, but it was a much bigger beat than even we suggested. However the experts say the beat was for the reasons we cited on Sunday. (Feeling insecure Brian?) Any today we totally blew the new home sales number. We expected a sizeable miss. It came in really strong. It was the lowest high December, but an improving number. Median prices improved about $30,000 as well.

In reaction to the confusing rhetoric of the SOTU Address the market start up from the get go, then it boot scooted boogied sideways through most of the day. As we suggested the Feds no news was good news. There were some interesting company news fro SLE Sara Lee, BTU Peabody, and ROK Rockwell, but what caught my eye was ATI Allegheny Technologies. It caught my eye because it reported well, had some nice forward looking comments, and used to be one of my dad’s first employers when it was Allegheny Ludlum Steel in Albany in the 1940s.

In the portfolio Today

As we said, between the office, contractors and stimulating the economy, we did not get much of chance to check in, but we did take a briefly held call off the table. We took some 30 dollar May calls for SWKS Skyworks Solutions off the books at a 41.6% gain after 5 sessions. Sorry as I do not see where I posted that. It could have been a late night limit order I put up and did not share. Sorry.

People must be making money.

I have had one reader and one acquaintance ask me how do I know when to sell? That is a great question. More thought is put into deciding to buy a stock and what stock to buy than when to sell. There are a lot of strategies out there. Here are a few of mine. First off we have an overall portfolio goal. It is four times the 10 year Treasury Yield. Now I know a few of you that we help with your money say my goal is two times the 10 year yield and that is true. Two times the ten year yield allows for some decent growth at relative low risk points. We can afford to be a bit riskier with our money because it is our money. That risk tolerance allows us to shoot for a higher return.

Anyway our over all goal, as we said is four times the 10 year yield. That puts our number in the neighborhood of 13.6%. Obviously that number changes everyday, so to round it off in 2011 we are looking for a 14-15% return. When we evaluate a stock (not options as we consider those differently) we decide what we think the stock is valued at, where it is priced and what we expect the stock to do for the next 3, 6, and 12 months. Before we buy the stock, we already know where we will get out on the upside and the down side.

We do, for the most part use the IBD CAN SLIM rule of getting out after an 8% drop from our entry point. These rules take a lot of the emotion and pensiveness out of the decision. Just set the rule and stock to it. (If you are not sitting in front of a computer screen all day, consider automatically setting a stop or a trailing stop order at 8% below you entry.)

Now most of you have some stocks that are up and that might be why you are wondering when to sell. Again, IBD has some great guide lines, but they suggest selling (in most situations) when your stock has gained 20-25%. There are several exceptions to their rule, but it is worth talking a look at. Our feelings are if you did a great deal of homework and are 25% up in a stock, how does that 25% compare to the 3, 6, and 12 month expectations you had of the stock. If you are exceeding those goals, consider selling it or some if it. Walk away a winner. Just do it.

If, on the other hand (and I know who you are) you read an article, liked the idea had no goals for the stock and you are up 20-25%, consider yourself as lucky as a KENO player in a stinky Las Vegas Hotel, run to the cashier and get your money NOW.

Now why do we sell at 8% down and sell at 25% up? Do the math. We only have to be right one out of four time to break even. If you do the proper homework, choose the proper entry point, we assure you, you will be right more than one out of four times.

Pick of the day

TER Teradyne, Inc., together with its subsidiaries, provides automatic test equipment products and services worldwide. It operates in two segments, Semiconductor Test and Systems Test Group. A lot of nice things were said about the company today. Rightly so. Even with the 3.5% increase today the P\E ratio is only 11.17, ROE is a sexy 39.87, sales and earnings gains quarter on quarter are huge.

It has a very provocative chart that shows a nice cup and handle back in the August thorough later September which created the first wave of buyers. You can see the dip in volume in the end of September. Now look at the recent new cup starting in mid December to mid January and again a regrouping of the volume (Warning wife does not see the cup in the second adjustment, it could be the glass of wine I had for dinner, OK two glasses of Federalist Zin at Hanna’s.) The adjustment is making us think this will see another 30-35% run over the next 8-12 weeks.

This is how we are going to play this. Take a look at the July $14.00 calls for 2.00 or under. There is a lot of after hour action on the options and the stock. A lot of folk must have spotted what I did which means we are probably wrong. We put in the order and will hope for the best.

Salve Lucrum


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