Back to Basics

March 1, 2007

Back to Basics

It’s raining hard in Washington, D.C. tonight. On top of the melting snow of this past weekend, there’s a lot of water with no place to go. Preparations for emergency calls are taking place in anticipation for widespread flooding. Hopefully, tomorrow will be uneventful, and we’ll be left with nothing but the metaphor created by a good rain washing away the dirty snow.

The past few days have been that good rain. So what if the Dow was down 30 points today. Look what it did to get there, It didn’t succumb. Take away that little 2 minute and 200 point glitch on Tuesday, and we’re not in bad shape, at all.

So far, the market resiliency continues to re-assure. The same on-air experts that warned that Wednesday’s trading would follow a familiar pattern were wrong. No, the market did not have early gains and then watch it all evaporate into large losses for a second day in a row. And how did those “experts” assess the day’s performance, after finishing the day up 50+ points? They expressed disappointment in the market, since the gains were only modest. This was, in their eyes, a harbinger of more doom to come.

Oh come on. Did you see Adam Sandler’s film, 50 First Dates? Remember the character that had a short term memory that lasted only 10 seconds? Do these people really believe that the entire investor nation is filled with such short term memory deficited people. Talk about putting a spin on things. Futurists. You know how I feel about them (if not, read “Rage with the Machine”). They know as much as I do, and I know nothing !!!!

Talk about chutzpah, or “hootspar”, as it is known in middle America. You’d think they would be exalting the resiliency of this market. Imagine, it didn’t follow the established pattern. Can they at least acknowledge that?

The next call, near universal, is for a “return to basics” in investing. But where is the evidence that investor behavior has been irrational? What resembles the dot com hysteria of the past decade. Where is the reckless speculation? Alright, granted that a once left for dead Blockbuster (BBI – NYSE) has doubled in the past year, but just because it was a sub $5 stock doesn’t mean that it’s a speculative play. It’s a turnaround, with a real business strategy for the digital world.

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Believe it or not, there is a world outside of investing. In real life, when is there a need to return to basics? You return to basics when you’ve wandered off your path. You have to have some degree of past success before you can return to the basics. You return to the basics when you have to rediscover your path to success. Usually, your digression is a slow one, marked by mediocrity. At some point, someone with vision senses a fear of reaching a nadir and calls for a return to the path that took you to success.

When exactly did we wander off? Was it Monday evening? Things seemed to be going fine for the past 4 years, or so. Maybe it was late Monday afternoon. Or maybe we never wandered off course. Maybe for just a brief moment we were lemmings and followed the Chinese off a cliff.

So what is the evidence of our digression from the basics? So where is the universe of overpriced stocks? Have you seen any $500 or 600 stocks lately, with not even the slightest hope for earnings? No. It’s very different now. Bernanke was right, Greenspan was wrong, or at least what we think he said, is wrong, although as always, it’s hard to know what exactly he said or meant.

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Anyway, you have to love this market. This short term volatility makes so many stocks good plays. Not investments. Good plays. Sometimes there’s a time to invest and sometimes there’s a time to play. This is, surely, not a time to return to basics. There is no safety in investing during periods of marked volatility unless you can spot the companies with enough cash to re-purchase their own stock, at bargain prices. Look for the companies with announced buybacks. What better time to make their purchases on the cheap.

Oh, and by the way, who believes that lower stock prices are going to scare off private equity investment? So add that to price support. Oh yeah, dividends that are competitive with T-Bills. Add another. What else is there? Earnings that won’t quit no matter what the gloomy prophesy. And another.

Look, there’s no doubt that stalwarts like Altria and P&G should be part of any balanced portfolio, but they, and their cohorts should not constitute your entire portfolio, not even for a nanosecond. If that’s a return to basics, it’s also a giant step backward. The market hasn’t come this far by only playing it safe. The market has recognized innovation and growth potential . Put those together with execution and earnings, well, you’ve got a stock, maybe even an investment.

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Speaking of which, yesterday’s Blog discussed the possibility of a play in The New York Stock Exchange and its associated call options. Well, that opportunity never materialized, because NYX came out of the gate with a $3 decline. But given the depths of the early decline, there should be some optimism associated with the relatively tame drop in NYX and its price recovery during the session.

Which brings us to a change in strategy for NYX. I think it’s gone going down and will now find its way back to 100, even with the lifting of restrictions on stock sales by insiders. But don’t buy the stock. If you have some money to lose, buy deep options. Based on an $81.70 close this afternoon, you can pick up $70 June 2007 call options, for about a $2.20 time premium.

Instead of spending $8,170 to own 100 shares, fork out $1,400 to control the right to 100 shares for the next 3 ½ months. And don’t be a pig. If you can make a little money on trading the options, wait for the next opportunity, because there will be others. NYX has been volatile and has had options premiums that reflect that volatility.

Actually, I take it back. You should return to the basics. That is making money. How basic is that?

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