Journal of Common Stock

By Jerry W. Atwood

PENSACOLA (July 2, 2010) (Supreme LLC Staff)

This article is being written at the very bottom (so far) of the 2010 stock market.  The market can go lower, but it is doubtful it will because we are entering the time of the traditional summer rally.  We may have less in our accounts, but we also have more bargain stocks to chose from.

If an investor is experienced and has been in the market for a while, all of this article will be familiar.  If an investor just started in the market on April 26th, the top of the 2010 market (so far), then  here is some information that we hope will be helpful in understanding what has  happened to your stock account (what’s left of it).

The common stock market is in a cycle that no one can predict. On one extreme, some believe we are headed for another “great depression” which will be worse than the one of the 30’s. On the other extreme, some believe we are just pausing while the world economy begins to generate transactions which will make anyone who is willing to buy stock, wealthy beyond their dreams.

In a graphic form, here is what the top and the bottom look like:

If we, as investors or traders, look at our portfolios after two months of turmoil and now six days of down markets we might be inclined to get out of the market or we might be considering that the stock market is just not for us.  However, remember that Warren Buffet had the viewpoint, “Buy when others are fearful, and sell when others are greedy.” Maybe the most famous old saying is from Baron Rothschild who said, “Buy when the blood is running in the street”. This was also emphasized by Sir John Templeton, one of the most famous investors of all time.

It is time to find the bargains, but if an account is full of purchases of stocks that  can only be sold at a large loss and has little cash, you have what is called a “frozen” account. All of your holdings are waiting for the market to come back up, but there is no cash to buy any of the bargains that are available from the downturn.

When you spot a bargain that you would like to take advantage of, try to find a position that you hold that is about the same value and sell it and then buy the new bargain. An investor is simply evaluating whether they would rather hold the new stock on the way up instead of  the old stock that was sold at a loss.  This method does not change the value of  the account.

Here at the Journal of Common Stock we see a global economy where over six billion people have to be fed, clothed, housed, transported and financed. There is little possibility that the investors who provide these needs will not be rewarded.  When we watch those who are selling stocks and not seeing the possibilities of the future economy we believe we are looking at the investors who love to be fully invested as the market is on the upturn and then want to sell out at the bottom.  This, of course, is the opposite of what should be done.

Here is some advice from some of the greatest investors:

New opportunities appear from time to time.  They should be examined and compared with what you already own.   Gerald Loeb

Some people boast of selling at the top of the market and buying at the bottom–I don’t believe this can be done…     Bernard Baruch

Basically, price fluctuations have only one significant meaning for the true investor.  They provide him with with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.    Benjamin Graham

However you view it, we are going to be in the summer upturn soon.  Everything will be fine.

Just start selling before September.

By Jerry W. Atwood

PENSACOLA (June 21, 2010) (Supreme LLC Staff)

Today, June 21, 2010, is the first day of summer.  The corn and the soybeans have been planted, to grow, and then to be harvested in the fall.  A definite seasonal trend.  Most of us did not like the snow, ice and cold air of the winter, but now it is mostly forgotten so we can now complain about the heat of the summer.  A definite seasonal trend.

Is there a seasonal trend in the stock markets?  There seems to be several trends that an investor should know about.  The worst month in the market is September, although October probably has the worst reputation because of the many market crashes recorded in October.  But October is a positive month, maybe it is because the market is brought down so much by September, it has nowhere to go but up by October.  The only other month that is negative is February, but the average downturn is so small that it can be disregarded.

By historical records we have ten months to trade that will be positive and only two months that will be negative.  A definite seasonal trend and a good one for those that are buying and selling common stocks.

But, of course, stocks are not like corn or soybeans and will not have a “time to plant, and a time to reap.”  Maybe the seasons of the market are just developed tradition.  That is, a couple of bad years in September made traders avoid September in the future.  No one can exactly explain why the seasonal trend exists, but it is statistical fact that it does exist.

This first chart is a general overview of the seasons of the market.

Here at the Journal of Common Stock we believe in the fundamentals of individual stocks much more than we believe in chart patterns, or seasons, or any kind of market timing; however, we also believe in the old saying, “Don’t Fight the Trend”.

This next chart is what we are going to do with a couple of selected accounts. The S and P 500 is blank and that is where we will record the outcome of following the market seasons.  This will be reported (after we have tried this approach) on the first day of summer 2011.

We realize that everyone has there own method of buying and selling common stock and we are not suggesting that you follow this chart or the seasons that are represented.  This is an experiment, not a proven method. Print this out and follow along with us by filling in the S and P 500 blanks.

There are many places to get more information.  We recommend Ron Insana’s book Trend Watching, which has a complete history of the markets.

Gerald Loeb the author of The Battle for Investment Survival probably had the closest idea to a proven method when he wrote:

You will soon began to find out if you are right or wrong on the trend. If you seem to be wrong, quit as cheaply as you can, of course.  If you seem to be right, you will want to enlarge your position.

Using the 200-day moving average Mark Hulbert - MarketWatch

Posted using ShareThis

By Jerry W. Atwood

PENSACOLA (February 1, 2010) (Supreme LLC Staff)

There are many quotes about the Stock Market but probably the most true is “Stocks will go up and Stocks will go down”.  Another that applies today is “Nothing (Stocks or Market) will go up forever”.

If an investor is going to prepare for a downturn in the market then it would be wise to know when there is a downturn.  Many stock investors use the 52 week highs and lows.  If there are more stocks making highs than lows then the market is moving up.  If more stocks are making lows then that is a signal that the market is in a downturn.

Here at the Journal of Common Stock we use the 100 day moving average and the 200 day moving average to verify the market is in a downturn.   These are easily obtained from any chart at a brokerage website or a financial website.

At the website www.google.com/finance anyone can type in SPY, click on at least a six month view, then at the bottom of the chart click Technicals and then request the simple moving average (SMA) and finally type 100 in the box for Period.

The S and P 500 index (SPY) crossed down over the 100 day moving average on January 29, 2010.  This is not the end of the market, but it is a time to be more cautious and less speculative.  Sometimes the market will move back up almost immediately and the downturn signal will be over.  Sometimes the market will move down and up, crossing the 100 day moving average so many times that many investors will get tired of keeping up with it.  Please do not take this lightly because great damage can be done to portfolios if these signals are ignored.

Just as there is a method for buying (see How to Determine if a Stock is a Strong Buy) there is also a method for a market downturn.

Here is what we do and we have found that it works for us.   The main objective is preservation of capital because when the market changes the investor will want to have cash to buy new bargains made available by the downturn.

Checklist for 100 day moving average (the SPY is below its 100 day moving average):

1. _______Take profit in all positions where there is even the smallest profit.  Turn all of this investment and the profit into cash.

2. _______Quit Buying into new positions.

3. _______Get rid of Margin.  Sell enough so that there is no margin used in your account.  Better yet, contact your broker and take the margin feature off of your account.

4._______Do not sell short or buy any ETF’s that are short.  The investor that is short is in the same position as they were in before they sold short because they do not know when the market will move back up.  (See Market neutral at the end of this article)

Checklist for 200 day moving average (the SPY is below its 200 day moving average):

Let us hope that we do not need this checklist.

1.______Clean house.  Look at every position in the portfolio.  Sell every position that is marginal.  That is, we will keep only those that have great fundamentals and that we really believe in.  We will strive to have as much cash as possible.

2. ______Do not use options.  Many investors will want to buy puts to protect the position.  This ties up cash and it is like saying “I know when the market will turn”.  No one really knows when the market will turn.  Many investors believe that selling covered calls will give them some income during the down turn, but a call will only protect for a few points. What sense does it make to obtain $300 for a call when the stock has lost $2000?

3. ______Wait for the upturn.  If you sense a turnaround in the market, perhaps the SPY has crossed the 200 day moving average on its way up, then some buying is appropriate. Buy with caution and only buy those stocks with the best fundamentals.

Most downturns will last only a few weeks or less.  There is no reason to believe that this is the start of a bear market.  Historically, bear markets only start when there is a rise in interest rates and that has not happened.

If an investor wants to stay active there is an exception to the rule “Do not short” and the rule “wait for the upturn” and that is to be Market Neutral.  This means you have a short position and a long position in similar items at approximately the same price.  We are going to buy the SPY and buy the PSQ.  The SPY will put us long on the largest and strongest 500 companies.  The PSQ will put us short the 100 stocks that make up the NASDAQ index.  The theory is that the NASDAQ stock prices will decrease more than the S and P 500 stocks.

If an investor is in this position, there is no need to be concerned about the market.  The only objective is to have the “spread” or the difference widen in our favor.  Because the price of these ETF’s are not equal we will approximately even them out by buying two PSQ’s for each share of SPY.

Remember that this is only for the event that the SPY drops below the 200 day moving average.

In summary, there are almost no actions that will be profitable during a market downturn.   It is a time for waiting, and accumulating as much cash as possible to use when the market turns.   If an investor must have an activity (some action) then look into commodities or the commodity ETF’s.   Jim Rogers, the author of the book Hot Commodities, stated that:  “Historically, there has been a negative correlation between the price movement of stocks and commodities.  On any chart of bull markets in stocks and commodities, they are parallel lines going in separate directions.”  He further notes that this data has been true all the way back to 1871.

Remember that this is only for the event that the SPY drops below the 200 day moving average.

It will be great if we never need any of the information in this article, but someday we will.  Print this out and keep it in a safe place.

By Jerry W. Atwood

PENSACOLA (November 7, 2009) (Supreme LLC Staff)

The big problem in trying to determine which small cap, speculative mining stocks to buy is that there is almost no fundamental data available.  There will usually be no significant earnings, no analyst that follow the companies, no estimated income, no P/E, no ROE, no Debt to Equity Ratio, no Price to Book Ratio and unless you want to do a lot of work you may not even find a description of the company or its business objectives.

It is certainly enough to make most investors want to stay away from small company mining stocks, especially start ups.  However, the other side of this problem is that tremendous profits can be made and much significant wealth created by investing in mining stocks. There are also many followers of mining stocks that will state that if you just pick one out of ten small mining companies that develops a large gold, silver, copper or any other kind of mining business it will more than make up for the nine that that fold up and go away.

Before we state one possible solution to investing in mining stocks, it will be easier to understand this solution if the development of a mining company is presented.  In the most basic terms, here is a mining company:

1.  Exploring. A company has been formed and is going to attempt to locate mineral deposits that can be extracted economically.  This is the time that there is very little information that an investor can use to base a decision to buy the stock.  Almost all Profit and Loss Statements will show losses because the company has no revenue and is spending large amounts for land leases, personnel, equipment, fuel, etc.

2.  Extracting. If something is located and geologists and mining engineers agree that it can be mined with a profit, the company will bring in equipment and miners and begin to produce whatever they have located.  This can be rough ore or if they have a mill it will be some type of concentrate.  This is the time that revenue will be coming in and the Profit and Loss Statement may begin to show profit instead of a loss.

3.  Producing. If all of this is successful and maybe a few more mines have been developed, after a few years the company will no longer be considered a speculative mining company.  Investors will have all the information they need to make an informed and intelligent decision to purchase or not purchase the stock.

Here is the mining company in a graphical form:

Exploring                           Extracting                            Producing

________________________________________________________________

Right at the end of the word “Extracting” at the “g” is where the company changes from no revenue to having revenue.  In silver mining this is called “First Pour”, that is, the first silver that is obtained from the mine is melted and poured into a silver bar.  In gold mining, this is called a “Dore”.  In copper mining this is called “Concentrate”.

Here at the Journal of Common Stock, we have been trading in mining stocks for many years, almost all of them in the producing area because that is where we could get evaluation data.  The mining stocks that we have bought in the last year are posted in our archives at the Journal of Common Stock. We even had a rule that we would “buy no stock priced under a dollar.”   However, a closer look at mining companies that had finished exploring and were beginning to produce, made us cancel this rule.  But we had no hard evidence that this was a good decision.

An experiment was set up.  It is listed in steps,  so if other investors want to evaluate this method, they can follow the same steps:

A.  In a search engine (we used Google), we put in the words “2009 First Pour”.  It is important to put in the current year or the search engine will give “First Pours” from four or five years ago.

B.  On August 6, 2009 we assembled this list from our search:

C.   On November 5, 2009, approximately three months later, we found the prices for these stocks and listed the price increase or the decrease.  We added the S & P 500 for comparison.

Average increase         +50.7%

At first glance, it seems that the experiment was a success.  All of the seven stocks beat the S & P 500 increase and all of them were profitable in the short span of three months.

However, there is a need to purchase these stocks in the thousands instead of the hundreds.  For example, a trader who bought a 100 shares of ETRUF  (the stock with the most increase in price) would have spent  $21.00 and would have had $50.00 in three months. This is a true 138% increase, but it is also only $29.00.  Take away $14.00 for brokers commission and the trader has $15.00, which is not much for all this work.  Do some calculations on buying 5,000 shares or 10,000 shares and it will be clear that with speculative mining stocks the investor must think “thousands” not “hundreds”.  Also, there is a need to buy the entire list if you are going to obtain the benefit of the average increase.  If the investor had bought just ATNAF, there would only be a 7% increase in the stock.

In summary, the experiment has convinced us that there is a valid strategy in timing purchases of stock in mining companies at the time the company is moving from explorer to producer.  We will be obtaining some more lists and purchasing that entire list in the near future.  It is also possible that we might try a search on “first gold Dore”, “first copper concentrate” and how about “first oil well”.

Disclaimer:  Everyone at the Journal of Common Stock (www.jocstock.com) owns mining stock.  Since this was an experiment, we did not purchase the stocks listed in this article.  We do own 700 shares of  AGT that were bought about a year before this experiment.

The Journal of Common Stock does not receive any compensation for listing or not listing any company.  We are a money management company.  We are not a promotion company.

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By Jerry W. Atwood.

PENSACOLA (March 29, 2009) (Supreme LLC Staff)

If an investor looked at a sheet of numbers for commercial real estate, on March 9, 2009, the investor would see in the column for Price/Book:

hotels, 5 cents on the dollar.

home builders, 4 cents.

shopping centers, 7 cents.

office buildings, 15 cents.

apartment complexes, 14 cents.

warehouses, 11 cents.

This is what it would cost you to buy one dollar of the book value of these companies. (Book Value is Assets minus Liabilities, but intangible assets, such as, goodwill, are not counted.)

We are not stating that you should start buying commercial real estate, but with valuations like these it is time to put real estate companies on the watch list.

Here are the companies that the valuation data above came from: (These are not buy recommendations, the possible buys are at the end of this post).

hotels, 5 cents, Interstate Hotels (IHRI).

home builders, 4 cents, Beazer Homes (BZH).

shopping centers, 7 cents, General Growth (GGP).

office buildings, 15 cents, S L Green (SLG).

apartment complexes, 14 cents, Colonial Properties (CLP).

warehouses, 11 cents, First Industrial (FR).

Commercial real estate has always had its up and down cycles and real estate cycles can be quite long.   When the savings and loan crisis of the late 80’s began and when the government formed the Resolution Trust Corporation (RTC)  many pieces of real estate were sold for 50% of value, but nothing like some of the values listed above. Most real estate professionals believe it will be at least until 2011 before commercial real estate begins to get back to normal and that depends upon when the credit markets get back to normal.

Most investors do not even want to hear the word “real estate” because they believe it was the real estate mania of 2005 and 2006, along with the financing of that mania, that was the cause of  this recession.   However, real estate is an asset similar to gold.  Its value may go up and down, but it will not become worthless; as a piece of paper or a business model can become when a recession begins.

As common stock investors or traders what should we do about stock in real estate companies?   The situation seems almost classic in the sense that it is a contrary situation, it fits many of the old sayings “buy when blood is running in the streets”, “buy, when everyone else is selling,” but we do not suggest that you buy or even hold.

Here is what the professional real estate investors suggest.  There is a direct proven correlation between hotels and the health of the real estate industry.  The Revenue Per Available Room (Rev Par) is directly tied to consumer and business sentiment.  If Rev Par is down, the consumer is not confident in taking holidays and spending on vacations, and businessmen are holding back on travel as much as they can.  Rev Par is expected to be down about 7% this year when compared to last year.  When Rev Par gets even, that is, when this quarter’s Rev Par is equal to the same quarter’s Rev Par of last year then that is the bottom of the Hotel cycle and signals the bottom of the entire real estate cycle.  Rev Par would be 0%, or a small increase.  This has been true of the last three real estate cycles. For further reference, see Real Estate Forum (www.reforum.com).

This will probably occur in 2010.  When it does The Journal of Common Stock (www.jocstock.com) will probably have commercial real estate Strong Buys on the front page. In the meantime, those that can not wait to take advantage of some real estate stock investments, we have checked the numbers in our data base of 100 real estate public companies.  None of these companies can be considered Strong Buys, mostly because earnings are trending down instead of up, and rising earnings are one of the requirements of a Strong Buy. However, there are two stocks worth considering:

IRS     IRSA Investments.

WRI   Weingarten Realty.

IRS is an Argentine real estate company with land holdings and interest in banks, hotels and shopping centers.  There is only one analyst that covers the company but they have estimated earnings will go from .32 a share to 2.78.   IRS sells for 45 cents of book and revenue has been growing at a 46% a year rate.

WRI owns over 300 shopping centers mostly in the Southwest U. S.   There are three analyst that cover the company and the consensus is that earnings will rise from .51 to 1.32 a share.   It sells for 59 cents of book.  In normal times, WRI would be a $40.00 stock, but it is selling now for about $10.00. We believe IRSA will rise to $24.00 a share as the economy improves and WRI will get to $15.00.

They are both worth putting on a watch list but are not yet Strong Buys.  Remember, when Rev Par is 0% when compared to last year, that is the time to buy.  As long as Rev Par is negative compared to last year, it is too soon to buy.

If you are going to buy some real estate stocks because they are so cheap, consider that when we were putting this article together about three weeks ago it was called, “Hotels, 9 cents”.  Since then the price to book of IHR has dropped to where we now call it “Hotels, 5 cents”.

(Disclaimer:  No one at the Journal of Common Stock (www.jocstock.com) has purchased or is holding IRS or WRI.  We do own a small amount (less than 100 shares) of IHR that was purchased several years ago.