I don’t want to bore you to death with wedding updates, but I had one more story/lesson to share with you before I move on to the current tumultuous market environment. My fiancée was out of town last weekend, as she headed back home to Michigan for her wedding shower. I was not obligated to go (thankfully), but I got the details earlier this week.
Don’t worry--I’m not going to tell you what everyone wore (everybody bought a new dress for the occasion) or about every one of the gifts we received, my favorite was a lobster apron I can wear, complete with a new set of lobster claw oven mitts. (No, we didn’t register for that one.)
Wedding as Poker Game
But I did want to pass along an idea I had--the more I deal with our wedding, the more I envision a poker game. You see, the players at the table include everyone involved in our wedding, including my fiancée and me. But the dealer isn’t one person at all ... he’s really a compilation of every wedding service provider at our wedding, photographer, DJ, reception, even the stores where we’re registered.
In this vision, I see all sorts of poker chips (money) being passed back and forth between the players. That’s how it is in the wedding process--we’re spending a ton of money on others, whether it’s for dinner and an open bar at the reception, or flights home for the shower, or out-of-town gift bags, or even gifts for the mothers and aunts who are throwing the shower.
And others are dishing out plenty of money on us: buying dresses for the wedding and shower, buying gifts, renting hotel rooms and the like. So, in a weird way, there’s just a bunch of money sloshing back and forth between the bride and groom, and the various guests.
But, of course, there’s still the dealer ... and he’s effectively taking 30% (more?) of the ante for every hand! In a way, with such a huge “commission” going to the dealer, the odds of you ending with much less money than you started with is huge. It’s more like playing craps than poker!
Don’t Play With Odds Against You
Now, when it comes to a wedding, there is no choice--it’s a once-in-a-lifetime event, so even though you know everything is being marked up by a ridiculous amount, you willingly pay up. (Maybe willingly is too strong a word ... but you know what I mean.)
But in the stock market, you do have a choice. You can sit out, or fold, on any hand you like. Yet many investors have an urge to always be at the table, even during bear markets, when the odds are stacked against them. Many people, in fact, are thrifty when it comes to buying everyday items such as groceries, but when they turn to their investments, they recklessly put money to work even when the odds are against them.
So, to wrap up this little lesson, always think of the odds of winning--and how much you could win--before buying a stock. It might be worth it for me to gouge myself on wedding expenses, but there’s no reason for you to “play” the market in any big way when the odds are against you.
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Don’t Jump into Visa IPO
Now back to the current market. I’ve received a bunch of questions regarding the Visa IPO this week. Many believe, because MasterCard (MA) turned out to be such a good investment, that Visa is probably a good buy. My answer to that is ... maybe.
You see, in my view, it’s never a great idea to simply jump in to a new issue, no matter how good the story is supposed to be. Why? Because I’ve seen charts of many of history’s greatest IPO winners, and the vast majority of them form some sort of launching pad before rising in a big way.
Unlike more seasoned stocks, these consolidation periods can be brief--sometimes just two or three weeks long--but they tell you that institutional investors are accumulating shares in a given price zone. That’s a key piece of evidence you need to have confidence to go into a stock in a big way.
Examples: Google (GOOG) formed a three-week zone between 98 and 113 in 2004 before breaking out and rising 77% in eight weeks.
VMware (VMW) took a couple of weeks to pause between 64 and 74 before breaking out and rising 69% in nine weeks.
MasterCard (MA) stood around for seven weeks between 44 and 51 before breaking out and doubling in four months.
There are dozens of examples like this throughout history, but these are the most recent success stories. The good news is that these consolidations tend to happen quickly - i.e., the stocks begin a basing structure soon after coming public. So it’s not as if you have to wait six months while the stock marches higher.
Thus, from a technical perspective, the game plan is obvious: Do not buy the Visa IPO, but do keep an eye on the stock. If it can form a relatively tight consolidation and if the market can show real signs of turning up, then you could consider taking a position on a breakout. It takes some work, but as you see above, the rewards can be worth it.
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Ushering in New Bull Market Leaders
The economic crisis took a turn for the worse this week when Wall Street giant Bear Stearns unraveled, but the market began heading up after other banks reported better than expected profits.
The old winners are out, but there are new leaders poised to take over.
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Past winners include: AK Steel - up 70% in three months DryShips - up 95% in three months GameStop - up 62% in seven months Goodyear Tire - up 50% in six months SunPower - up 78% in five months
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Get Ready for Bulls to Take Control
As for the market as a whole, we’ve certainly seen some of the most volatile action of all-time. And for good reason: the only time I can remember the news being worse than today was after Sept. 11, when investors were literally fearing for their lives. The Bear Stearns and the continuing subprime mortgage debacle isn’t life-or-death business, but there’s no doubt it’s crystallized most investors’ opinions on the bearish side of the fence.
Last Saturday, noticing this, I wrote in this publication that “I’m optimistic we’re close to a bottom, if not the bottom, to this bear phase.” And I still feel that way today. But let me clarify something--the reason I wrote those words wasn’t to look smart and “call the bottom.” I’m not “calling” anything; I have yet to recommend any new stocks in, say, the Cabot Market Letter’s Model Portfolio during the past couple of weeks. I’m optimistic, not bullish.
However, my experience tells me the vast majority of investors right now are thinking all bad thoughts--recessions, financial meltdown, etc. If people are thinking those thoughts, then they won’t be prepared to buy when the turn comes. And I want you to be prepared!
Said another way, I’m trying to get you to ignore the headlines, as difficult as that is these days. If you just pulled out a chart of the Dow, and didn’t know anything about the goings-on in the financial world, you would say, “It’s a bear market, but the Dow is re-testing its January low, and the internal market is actually healthier than it was back then. So there’s a chance a bottom is being formed.”
Thus, I want you to spend some extra time this weekend working on your watch list, and on your game plan for buying. If the bear market continues, fine, just continue to sit in cash. (You do have plenty of cash on the sideline, right?) But if this terrible news does create some type of bottom, you’ll be ready to act and make money.
Admittedly, I’m not yet seeing a bunch of great-looking stocks to buy--many of the leading commodity stocks came under pressure on Wednesday, and few growth stocks are primed to pick up the slack. That’s reason enough to give the market more time to bang out a low. But, from a big-picture perspective, for the first time since this whole bear phase began back in mid-October, I think the bulls have a legitimate shot to take control ... even if it is just a shot.
All the best,
Michael Cintolo
Editor’s Note: Michael Cintolo is Cabot’s Vice President of Investments and editor of the Cabot Market Letter. While everyone has a sales pitch to get you hooked on their product, the Cabot Market Letter’s pitch is all about performance--Hulbert (the keeper of the keys for newsletter performance) has the publication ranked #5 in the country over the past 12 months, up 32% versus a loss of 2% for the market. And during the past five years, it’s up 16.4% annually, double the 8.2% average return for the S&P 500. Mike does it by sticking to sound, time-tested market timing and stock selection rules that help him recommend the market’s leading stocks during the strongest bull markets. If you want to better your own performance, I highly suggest you give the Cabot Market Letter a try.
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